The interaction between electricity and emissions trading markets, with a specific view on demand re

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The interaction between electricity- and
emissions trading markets, with a specific view
on demand response. IEA Symposium New
York September 10th 2003 Arne Jakobsen
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The Energy Dimension

• Power generation is in a particularly sensitive
  position on CO2 emissions!
• Fossil fuel combustion in power plants accounts
  for more than a third of industrial countries
  CO2 emissions!
• Power generation is a simpler target for
  government action than other CO2 sources!
• Thus emissions trading will most likely
  represent a central tool for a majority of actors
  in the energy sector!

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The Market and the Environment

• Economic efficiency theory suggests that the
  polluter pays the full cost of environmental
  damage caused by its activity.
• A generator of electricity will thus be
  introduced to an added production cost!
• Will trigger some response due to added cost
  from electricity generator. Increased market
  price for el!
• Will trigger some response from electricity
  consumers! Decreased consumption?

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What are CO2e Certificates?

• According to Kyoto Protocol, Greenhouse gases
  (GHG) are carbon dioxide (CO2), methane (CH4),
  nitrous oxide (N2O), hydrofluoro-carbons (HFCs),
  perfluorocarbons (PFCs) and sulphur hexafluoride
  (SF6). Greenhouse gas emissions are calculated in
  CO2-equivalent metric tons (CO2e).
• CO2e Certificate is either a GHG emission
  allowance (cap-and-trade system) or verified GHG
  emission reductions (baseline-and-credit system).
  
• CO2e Certificates are traded in various
  international and national schemes. Trading may
  be either voluntary or based on a mandatory
  regime.

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Generator Response to Emission Trading Schemes

• Given a market price of emission allowances of 12
  USD/ton
• A typical coal fired generation plant would be
  faced with an additional cost of appr. 10 USD/MWh
• Atypical natural gas fired generation plant
  would similarly see half of that as additional
  cost
• Response
• In short term Increased cost for marginal
  generation will increase market price equivalent
  and provide windfall profits for typically hydro
  and nuclear generation!
• In long term Structural changes in electricity
  generation portfolio will gradually introduce
  renewable generation

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Demand Response to Emission Trading Schemes 1 (2)

• For consumers, emission trading markets will
  introduce increased market price!
• Emission Trading schemes
• Driven by Kyoto process (US/Russian roles?)
• Obligation start in 2008
• Obligation on all industrialised countries
• Allowances trading and project credits (JI/CDM)
• EU Emission Trading Directive adopted
• Obligation start in 2005
• Companies in the energy supply sector key players
• EU allowances only
• National allocation plans critical to companies
  behaviour

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Demand Response to Emission Trading Schemes 2 (2)

• Response
• What about price elasticity/price response?
• A high price elasticity will trigger an
  acceleration of structural changes within the
  electricity generation area!
• Similarly, such high price elasticity will
  trigger structural changes within the demand side
  (long term)!
• In short term response will have to be through
  the use of fuel switch and/or energy savings
• What if such demand response activities are
  represented by applying dirty fuels, eg
  locally?

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The regional/national vs global context

• Electricity markets are either national or
  regional
• Area prices for el. based on transmission
  constraints, structural differences etc
• CO2 markets are global (regional)
• A regional/global price for allowances
• As far as harmonisation of electricity
  markets/areas (prices) is concerned, an emissions
  trading market may lead to the opposite! (eg if
  two or more areas with dissimilar degree of
  fossil el.generation capacity also have bottle
  necks inbetween them)

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Basrec electricity/emissions trading simulation

• 10 countries
• Simulating 2003 - 2012
• Two years simulated every week
• Electricity market on Mondays and Tuesdays
• CO2 allowances market on Wednesdays

SourceNord Pool ASA
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Basrec electricity/emissions trading simulation -
Electricity market

• A simulation of a common electricity market for
  the region (10 countries) from 2003 to
  (including) 2012
• In line with the operation of the Nordic, German
  and French electricity markets
• Based on real(existing) transmission cap. between
  the countries, and demand/supply
• The simulation simplified calculations to
  represent seasons (three in a year)

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• Winter 2012
• Russia and the Baltic
• countries in one price area
• Sweden and Finland in one
• price area
• Norway is one price area
• Denmark and Germany one
• price area
• Poland is one price area

Basrec el/CO2 trading simulation

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SourceNord Pool ASA
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Basrec electricity/emissions trading simulation -
CO2 allowances market

• A simulation of a common market within the region
  from 2003 to (including) 2013
• Operated as a continuous trading marketplace
• 1,5 hours opening time every (trading session)
  week to simulate 2 years trade
• Turnover per session varied from less than 20
  million tn in the first session, raising to over
  1 billion tn in the last two sessions

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Basrec electricity/emissions trading simulation
Results

• Simulation indicated a more critical
  supply/demand balance as time passes by. As the
  sim. did not reflect peak periods, (simpl.), this
  indication is strengthened!
• The interaction between the two markets was
  expected to be seen at both markets
• Primarily a one-way impact (from the CO2- to the
  electricity market)
• Hence the electricity market acted as a
  follower or price-taker

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Examples of Greenhouse Gas Trading Schemes

• National/State level Schemes
• UK Emissions Trading Scheme 2002-2006
• Danish Emissions Trading Scheme 2001-2003
• New Hampshire, Massachusetts, Oregon, New South
  Wales
• Intra-Company Schemes
• Shell Tradable Emission Permit System (STEP)
• BP Emissions Trading System
• Voluntary Schemes
• Chicago Climate Exchange (CCX)
• Canada Greenhouse Gas Emission Reduction Trading
  (GERT)
• International Schemes
• Kyoto Protocol
• EU Emissions Trading Scheme

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Emissions trading volume
1996-2002 known transactions, 2003 estimate
(tCO2e)
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EU Emissions Trading Market

• Market already operative
• Price level of 8-10Euro/Tonnes
• GSN brokered first Nordic deal this week!!!
• Means companies need competence
• Work shops
• Feasibility studies
• Allocation scenarios
• Strategies
• Portfolio management

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Conclusive remark/observation

• Given an open economy, the introduction of
  (global) emission trading markets will support
  the process of globalisation of the electricity
  markets through demand (and supply) response in a
  long term perspective!
• This is substantiated by eg the relatively
  heavy one way effect on el. markets and the
  (long term) high elasticity in electricity markets

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GreenStream Network Ltd.

• First Nordic Company building its business
  around
• Brokerage of Green and CO2e Certificates
• Preparation of JI, CDM and other GHG Offset
  Projects
• Channelling financing for renewable energy
• Founded in July 2001
• Offices in Helsinki, Stockholm and Oslo
• Turnover 1,4 MEUR in 2001-2002, staff 10
• Owned by
• Management
• PCA Corporate Finance, LB Kiel and
  Electrowatt-Ekono (Jaakko Pöyry Group)
• Services are customised to cover contract
  negotiations, plant registration, invoicing,
  account management and required reporting
• Registered in RECS, Dutch GCB and UK ETS

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