1. Climate Change Capital 1 Anthony White Head of Research Climate Change Capital Basque Parliament 24 th February, 2005 UK Energy Policy Opening Pandoras Box?

2. Climate Change Capital 2 Agenda Outline of UK Energy Policy Do markets work? The outlook for emissions trading Conclusions

3. Climate Change Capital 3 UK Energy Policy Poor performance of public monopolies Market liberalised from mid 1980s –Pandoras box? Energy White Paper of 2003 –Low carbon economy –Security of supply – Market mechanisms –Affordable prices

4. Climate Change Capital 4 But will they work?

5. Climate Change Capital 5 Prices will be volatile!!

6. Climate Change Capital 6 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

7. Climate Change Capital 7 …and green power EU set up Renewables Directive UK let market set price - ROCs Spain – feed-in tariffs & market forces? Spanish Government set price

8. Climate Change Capital 8 Using the market - renewables 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

9. Climate Change Capital 9 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

10. Climate Change Capital 10 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??

11. Climate Change Capital 11 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

12. Climate Change Capital 12 European Emissions Trading Scheme 18,000 sites covered, 5 sectors Allocations –free allowances given to incumbents –>95% of allowances created for 1 st period; 90% for second –up to member states to set method of allocation Fines if emissions > allowances –40/tCO 2 for 2005-2007; –100/tCO 2 e for 2008-2012

13. Climate Change Capital 13 EU-25 Abatement Targets for EU ETS Allocations BAU – a bit for power. Bit= ~50-60 mtCO 2 pa. 2006

14. Climate Change Capital 14 Price drivers Current prices suggest a price of under 10/tCO 2 e Value of allowances will move to ensure coal consumption is reduced.

15. Climate Change Capital 15 Will EU prices be sensible? Allowance price driven by coal and gas prices

16. Climate Change Capital 16 EU15 for Phase II 4117Mt 2001 3877Mt Kyoto Excess 4223Mt 2010e 350Mt Addl measures 292Mt CDM supply? 45Mt? 50? Mt ETS Phase I ETS Phase II JI?

17. 6532Mt 2002 5905Mt Kyoto 6660Mt 2010e 755Mt DTTe Addl measures 473Mt 114Mt Domestic sinks 800- 1200Mt Russian hot air 200- 400Mt Ukrainian hot air Current CDM supply 30Mt (expected 200Mt) JI supply? 144Mt EU15, Japan, Canada, Norway, NZ, Switzerland - buyers EU accession countries hot 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 CO 2 e

18. Climate Change Capital 18 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

19. Climate Change Capital 19 … is it more like this…..?

20. Climate Change Capital 20 For further information, please contact: The financial services outlined in this presentation constitute regulated activities as defined by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; as such these activities can only be undertaken by an authorised person. Climate Change Advisory Limited ("CCA"), a wholly owned subsidiary of Climate Change Capital Limited ("CCC"), is authorised and regulated by the Financial Services Authority. Consequently the regulated activities of the CCC Group are carried out by CCA rather than directly by CCC. Some of the information, and in particular the financial services described within this presentation, are intended exclusively for persons who qualify as an intermediate customer or market counterparty. Please refer to the disclaimer on the Climate Change Capital Group website www.climatechangecapital.com for further details.www.climatechangecapital.com Climate Change Capital Ltd Bond Street House 14 Clifford Street London W1S 4BX Telephone:+44 (0)207 290 7040 Facsimile:+44 (0)207 290 7041 ccc@c-c-capital.com