THE IMPACT OF THE EU ETS ON THE NORDIC ENERGY MARKETS Experiences from the year 2005 and results of

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THE IMPACT OF THE EU ETS ON THE NORDIC ENERGY
MARKETSExperiences from the year 2005 and
results of the model analysis

• Tiina Koljonen, VTT
• Nordic Energy Policy Perspectives, Helsinki
  24.1.2006

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OUTLINE

• EXPERIENCES FROM THE YEAR 2005
• Evolution of the European emissions trading
  system and carbon markets
• Impacts of the EU ETS on the Nordic electricity
  markets
• RESULTS OF THE MODEL ANALYSIS OF THE NEP
  MODELLING GROUP
• Overview of the NEP models
• Future scenarios for the Nordic electricity system

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CARBON MARKET IN 2005

• EU ETS started on time 1 January 2005
• 11.2.2005 Nord Pool market place was opened for
  forward trading
• 20 June 2005 the Commission had made decisions on
  all 25 National Allocation Plans (NAPs)
• By the end of 2005
• 18 national registers were up and running (not
  operating Cyprys, Greece, Hungary, Italy,
  Luxembourg, Malta, Poland)
• More than 70 of the 2005 allowances were
  distributed to the operators (tot. amount 6572 Mt
  for 2005-07)
• 6 market places for forward and/or spot trading

Source ECX
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CARBON PRICES VARIED BETWEEN 7 AND 29 /t IN
2005-Due to low trading volumes in 2005
individual actors could have increased allowance
prices by making small transactions -
Data source www.pointcarbon.com
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FOSSIL FUEL PRICES DRIVE CARBON PRICES- The
volatility of CO2 price was much grater than the
volatilities of fuel and electricity prices in
2005 -
Source Shell
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THE MONTHLY TRADING VOLUMES ARE INCREASING- Most
of the cleared trading was done with dec-05
allowances in 2005-
2.1-17.1.-06
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CO2 ALLOWANCE PRICE IS A NEW FACTOR INFLUENCING
NORDIC ELECTRICITY PRICE - CO2 price drives
electricity forward prices -
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PRICE DURATION OF NORD POOL SYSTEM PRICE- In
2005, emissions trading and high fossil fuel
prices rose the electricity prices in the Nordic
area -
Dry year without EU ETS
Normal year with EU ETS
Wet year without EU ETS
Data source www.nordpool.no
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NORD POOL TERMIN PRICES FORECAST 35-40 /MWh
PRICE LEVELS FOR THE NEXT YEARS- The impact of
the carbon price could be more than 10 /MWh -
Data source www.nordpool.no
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THE COMPETITIVENESS OF CONDENSING POWER
PRODUCTION HAS DECREASED CONSIDERABLY- In
Finland, condensing power plants were initially
built for base load purposes, now they are used
only to cover peak load demand -

• Shift in electricity market merit order, coal
  condensing is more cost-effective than peat.
• Finnish condensing power units are still needed
  when precipitation is low.
• Imported electricity has replaced domestic
  condensing power production in Finland

Max-min 15 TWh
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STATE OF FINNISH POWER SYSTEM IN
16.1.-22.1.-06Record consumption (14 776 MW),
condensing power plants were not operating,
Russia restricted power export, no free
transmission capacity from Sweden Power balance
was under considerable strain in Finland
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THE IMPACT OF CO2-PERMIT PRICES ON ENERGY MARKETS
IN THE NORDIC COUNTRIESResults of the model
analysis of NEP modelling group

• Hans Ravn, Ram-løse EDB
• Lasse Torgersen, ECON
• Thomas Engberg Pedersen, COWI
• Per Erik Springfeldt, EME Analys
• Thomas Unger, Profu
• Juha Honkatukia, VATT
• Tiina Koljonen, VTT

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THE NEP MODELS BASIC FEATURES
Model Geography Market Investments Balmorel T
he Baltic Electricity and Generally endogenized
(exog in Sea Area distr heating the present
analysis) PoMo The Nordic Electricity Exogeno
us countries (excl Den) ECON-Classic Northern
Europe Electricity Partly endogenous VTT-EMM The
Nordic Electricity Exogenous countries MARKA
L-NORDIC The Nordic Stationary Endogenized coun
tries energy system GTUP Global Oil, coal,
gas, Exogenous electricity
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WHOLESALE ELECTRICITY PRICES- Synchronized
inputs for fuel prices, Swedish nuclear
phase-out, discount rate (7) -
Gas 19 /MWh, HFO 24 /MWh, Coal 6,0 /MWh,
Biomass (upper limit) 19 /MWh
Gas 17 /MWh, HFO 22 /MWh, Coal 5,9 /MWh,
Biomass (upper limit) 19 /MWh
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NORDIC ELECTRICITY SUPPLY- Differences in
investments for renewables and cross-border el.
transmission capacities, phasing-out of old coal
and oil fired plants, electricity demands-
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CONCLUSIONS AND FUTURE PROSPECTS

• Allowance markets are immature due to short
  history
• Daily trading volumes have been low, prices high
  and volatile, non-operational registries in 8 EU
  countries
• Due to high carbon price level, the impacts of
  the EU ETS have been greater than expected
• The allowance markets have changed the
  competitiveness of coal and peat fired condensing
  power
• Leads to weakened security of supply
• CO2 emissions will decrease due to increased
  imports and lower specific emissions in
  electricity production
• Electricity price and volatility would increase
  in the future in the Nordic area
• Uncertainty about future CO2 prices and
  regulation policy
• In the continental Europe the price of
  electricity is higher price differences even
  out as physical interconnections improve