Climate Change Capital 1 Anthony White Head of Research Climate Change Capital Basque Parliament 24...

1

Climate Change Capital

Anthony WhiteHead of Research


Basque Parliament

24th February, 2005

UK Energy Policy

Opening Pandora’s Box?

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Agenda

• Outline of UK Energy Policy

• Do markets work?

• The outlook for emissions trading

• Conclusions

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UK Energy Policy

• Poor performance of public monopolies

• Market liberalised from mid 1980s– Pandora’s box?

• Energy White Paper of 2003– Low carbon economy– Security of supply – Market mechanisms– Affordable prices

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But will they work?

Spot Energy Prices in England & Wales

0

5

10

15

20

25

30

35

40

45

J an-99 J uly J an-00 J uly J an-01 J uly J an-02 J uly J an-03 J uly J an-04

£/M

Wh

Power

Coal

Gas

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Prices will be volatile!!

time

pri

ce

periodT2

time to shortageT1

spike lengthT3

peakh

new entrant costs

marginal costs

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Competitive or “stable” markets?

• UK market totally liberalised - volatile

• Spain– CTCs & Tariff caps disrupt the market– Between Iberdrola and Endesa have 70% of

the market– But prices stable, investment happening

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…and green power

• EU set up Renewables Directive

• UK let “market” set price - ROCs

• Spain – feed-in tariffs & market forces?

• Spanish Government “set” price

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Using the market - renewables

0

10

20

30

40

50

60

70

80

90

£/MWh

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GREEN PRICE

Brown power

Buy-out

Smear

•UK suppliers MUST buy 5% power from green sources (15% in 2015)

•Pay “penalty” for any shortfall

•Technology blind – and optional

•New technologies difficult to finance

•Target not achievable?

UK ROC SYSTEM

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So which is “better”?

Spain: ~8,000 MW

UK: 821MW

Why?Investors do not like market uncertain prices

Spanish system provides a stable prices –expensive?

Investors happy with political risk

Wind Capacity installed in Spain vs UK

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1986 1990 1994 1998 2004

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

MW

% Of world capacity in Spain

Capacity Installed in UK

Capacity installed in Spain

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Do markets work?

• Avoid more obvious mistakes

• Release innovation, reduce costs

• De-politicise investment?

• Difficult to “control” – especially if very competitive – but not if “managed”

• …..So emissions trading??

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Emissions Trading: Background

• Business as Usual Europe misses Kyoto by 7%

• Additional measures could reduce overshoot to 1%

• Trading

should close the gap

European Greenhouse Gas Emissions

Source: European Environment Agency, November, 2003

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European Emissions Trading Scheme• 18,000 sites covered, 5 sectors

• Allocations– “free” allowances given to incumbents– >95% of allowances created for 1st period; 90%

for second– up to member states to set method of allocation

• Fines if emissions > allowances– €40/tCO2 for 2005-2007; – €100/tCO2e for 2008-2012

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EU-25 Abatement Targets for EU ETS

-10

0

10

20

30

40

50

60

Germ

any

Greec

e

Irela

ndIta

ly

Lux

Holland

Portugal

Spain

Sweden UK

EU 15

Total

Czech

Estonia

Cypru

s

Latvi

a

Lithuan

ia

Hungary

Mal

ta

Poland

Slove

nia

Slova

k

Total:

MtC

O2

Allocations

BAU – a bit for power.

“Bit”=

~50-60 mtCO2pa.

2006

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Climate Change Capital Price drivers

Current prices suggest a price of under €10/tCO2e

Value of allowances will move to ensure coal consumption is reduced.

EU - 25 Abatement Cost Curve

0

2

4

6

8

10

12

14

16

18

20

13 23 33 43 58 73 88 103 118

Abatement in mt CO2e

€/tC

O2e

Gas @€3.77/GJ

Coal $60/t

likely price range

abatement

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EU abatement curve

0

5

10

15

20

25

13 23 33 43 58 73 88 103 118

MtCO2 abated against BAU

Eu

ro/t

CO

2

Gas €3.12/GJ Coal $35/t





Gas 3.77€/GJ Coal $60/t


?

Will EU prices be sensible?

Allowance price driven by coal and gas prices

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EU15 for Phase II

4117Mt2001

3877MtKyoto

Excess

4223Mt2010e

350MtAdd’l measures292Mt

CDM supply?

45Mt?

50? Mt

ETS Phase I

ETS Phase IIJI?

6532Mt2002

5905MtKyoto

6660Mt2010e

755MtDTTe

Add’l measures

473Mt

114MtDomesticsinks

800-1200Mt

Russian hot air

200-400Mt

Ukrainianhot air

Current CDM supply30Mt (expected 200Mt)

JI supply?144Mt

EU15, Japan, Canada, Norway, NZ, Switzerland - buyers

EU accession countrieshot air

Kyoto demand and supply

Large shortfall in EU 15 etc

Flexibility unlikely to be sufficient

But Hot Air will!

Expect Russia to determine price

All figures in annual CO2e

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Conclusions

• British love for free markets? Naïve?

• Markets can work, if incentives aligned

• Do not always work as politicians wish

• Need to understand how to design

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… is it more like this…..?

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Climate Change Capital 1 Anthony White Head of Research Climate Change Capital Basque Parliament 24...

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