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1 Heikki Niininen, FortumDecember 1, 2004 BALTREL Report on the consequences of Emissions Trading and different allocation methods to the functioning of.

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Presentation on theme: "1 Heikki Niininen, FortumDecember 1, 2004 BALTREL Report on the consequences of Emissions Trading and different allocation methods to the functioning of."— Presentation transcript:

1 1 Heikki Niininen, FortumDecember 1, 2004 BALTREL Report on the consequences of Emissions Trading and different allocation methods to the functioning of the power market BASREC Conference, Nov Dec. 1, 2004, Tallinn, Estonia BALTREL Report on the consequences of Emissions Trading and different allocation methods to the functioning of the power market By Heikki Niininen Fortum Chairman of BALTREL's Task Force on Emissions Trading

2 2 Heikki Niininen, FortumDecember 1, 2004 Content BALTREL Task Force on Emissions Trading Emissions trading as a driver of the energy sector Emissions Trading Directive and National Allocation Plans (NAP) - situation Analyses to compare different NAPs Findings and conclusions

3 3 Heikki Niininen, FortumDecember 1, 2004 Content BALTREL Task Force on Emissions Trading Emissions trading as a driver Emissions Trading Directive and National Allocation Plans (NAP) - situation Analyses to compare different NAPs Findings and conclusions

4 4 Heikki Niininen, FortumDecember 1, 2004 BALTREL Cooperation forum of the electricity supply industry in the Baltic Sea Region The vision of BALTREL is... "To create a Common Open Electricity Market in the Baltic Sea Region"

5 5 Heikki Niininen, FortumDecember 1, 2004 "BALTREL countries" Belarus Denmark Estonia Finland Germany Latvia Lithuania Norway Poland Russia Sweden EU ETS Linking to EU ETS? EU ETS Kyoto FlexMex Kyoto FlexMex

6 6 Heikki Niininen, FortumDecember 1, 2004 BALTREL companies Belenergo Energi E2 A/S Elkraft System Eesti Energia Fingrid Oyj Fortum Corporation JSC Latvenergo DC Baltija Energibedriftenes landsforening JSC Lietuvos Energija Lenenergo PSE SA - Polskie Sieci Elektroenergetyczne SA JSC Yantarenergo RAO UESR Vattenfall AB Svenska Kraftnät

7 7 Heikki Niininen, FortumDecember 1, 2004 BALTREL Founded in 1998 by electricity supply industry in the Baltic Sea Region Work periods of 3 years with a rotating chairmanship (presently Fortum in chair) Committee, Networks, Task Forces as needed Focuses on issues connected to –market development –transmission grid –emissions trading work period: Task Forces for these three issues

8 8 Heikki Niininen, FortumDecember 1, 2004 Content BALTREL Task Force on Emissions Trading Emissions trading as a driver Emissions Trading Directive and National Allocation Plans (NAP) - situation Analyses to compare different NAPs Findings and conclusions

9 9 Heikki Niininen, FortumDecember 1, 2004 Emissions Trading Task Force Terms of Reference: Report and propose positions on the consequences of emissions trading and different allocation methods to the functioning of the power market The report approved by the BALTREL Committee on Nov. 4, 2004 covers reviews and analyses of –Climate instruments –Implications of the Emissions Trading Directive, esp. allocation of emission allowances –Implications of the Link Directive –Testing Ground idea/Facility Position paper to be prepared for the BALTREL Conference June 1-2, 2005 in St. Petersburg

10 10 Heikki Niininen, FortumDecember 1, 2004 Emissions Trading Task Force Terms of Reference: … to report and propose positions on the consequences of emissions trading and different allocation methods to the functioning of the power market The report approved by the BALTREL Committee on Nov. 4, 2004 covers reviews and analyses of –Climate instruments: ONLY CONCLUSIONS –Implications of the Emissions Trading Directive, esp. allocation of emission allowances: FOCUS OF THE PRESENTATION! –Implications of the Link Directive: ONLY CONCLUSIONS –Testing Ground idea/Facility: ONLY CONCLUSIONS Position paper to be prepared for the BALTREL Conference June 1-2, 2005 in St. Petersburg

11 11 Heikki Niininen, FortumDecember 1, 2004 Content BALTREL Task Force on Emissions Trading Emissions trading as a driver Emissions Trading Directive and National Allocation Plans (NAP) - situation Analyses to compare different NAPs Findings and conclusions

12 12 Heikki Niininen, FortumDecember 1, 2004 Emissions trading – a major driver Example of the economic importance CO2 cost added on fuel cost (at different CO2 price levels) Base price: Fuel prices without taxes in Finland, summer 2003 (Note: wood = local fuel) Reflection to the power prices dependent on the system – in any case remarkable The CO2 price estimates vary, but for Kyoto period €/t most often referred to

13 13 Heikki Niininen, FortumDecember 1, 2004 Varying fuel and emissions prices reflected into variable costs of thermal power Average variable costs of coal condense Impact of emissions trading Coal price, market quotations Emissions price, market quatations Source: EURELECTRIC, The Impact of Emissions Trading on Power Prices, June 2004

14 14 Heikki Niininen, FortumDecember 1, 2004 Content BALTREL Task Force on Emissions Trading Emissions trading as a driver Emissions Trading Directive and National Allocation Plans (NAP) - situation Analyses to compare different NAPs Findings and conclusions

15 15 Heikki Niininen, FortumDecember 1, 2004 Emissions Trading Directive (ETD) ETD covers nearly half of the EU’s CO2 emissions, big emitters (e.g. energy production over 20 MW thermal ) An emission cap is defined for each installation inside the scope of the ETD Emission allowances allocated to each installation for emissions equal to the cap For each year the operator of the installation must leave for cancellation allowances the same amount as the emissions during that year Surplus allowances can be sold, deficit must be bought from the market (sanctions!)

16 16 Heikki Niininen, FortumDecember 1, 2004 National Allocation Plan (NAP) The key issue of the ETD –A plan how to allocate the mainly free-of-charge emission allowances, for each trading period, the first being –If the supply of allowance (allocation) is less than the demand of allowances (emissions) => shortage creates price on CO2 All EU-25 countries except Greece have submitted their NAPs to the Commission The Commission has reviewed and approved 16 of those, either fully or conditionally The expectation is that the market will not be very short

17 17 Heikki Niininen, FortumDecember 1, 2004 Allowance forward prices 2005 Source: Point Carbon, Carbon Market Europe (2003-4)

18 18 Heikki Niininen, FortumDecember 1, 2004 Content BALTREL Task Force on Emissions Trading Emissions trading as a driver Emissions Trading Directive and National Allocation Plans (NAP) - situation Analyses to compare different NAPs Findings and conclusions

19 19 Heikki Niininen, FortumDecember 1, 2004 FuelTechnologyPower efficiency Heat efficiency Hard coalCondensing46 %- GasCondensing, CCGT58 %- Hard coalCHP35 %55 % GasCHP38 %52 % Model plant for analyses New installation (new entrant), with fuel input 100 MW and with annual operating time 6000 h, other features below

20 20 Heikki Niininen, FortumDecember 1, 2004 Allocation to new gas CHP Solid blue = allocation based on final NAP Actual emission level

21 21 Heikki Niininen, FortumDecember 1, 2004 Allocation to new coal CHP Solid blue = allocation based on final NAP Actual emission level

22 22 Heikki Niininen, FortumDecember 1, 2004 Allocation to new gas condensing, CCGT Solid blue = allocation based on final NAP Actual emission level

23 23 Heikki Niininen, FortumDecember 1, 2004 Allocation to new coal condensing Solid blue = allocation based on final NAP Actual emission level

24 24 Heikki Niininen, FortumDecember 1, 2004 Harmony? Allocation to new entrants in eight Baltic Sea Countries Model plant: A new installation of 100 MW fuel input (gas-CHP, Gas-CCGT, coal-CHP, coal condensing) The graph shows the actual emissions of the plant and the variation (hi-lo) of allocation in different countries: a certain country may allocate more than the actual emissions, the other one nothing The maximum differences in monetary terms: –at 5 €/tCO2: 1 M€/a –at 20 €/tCO2: 4 M€/a BUT: One important parameter fully harmonised, that is the price of CO 2

25 25 Heikki Niininen, FortumDecember 1, 2004 Content BALTREL Task Force on Emissions Trading Emissions trading as a driver Emissions Trading Directive and National Allocation Plans (NAP) - situation Analyses to compare different NAPs Findings and conclusions

26 26 Heikki Niininen, FortumDecember 1, 2004 Findings and conclusions (1) Risk of double climate steering and burden In many countries ET comes on top of other climate instruments, like CO2 taxation. => Double steering and double burden should be avoided by reducing and removing the existing CO2 taxation schemes.

27 27 Heikki Niininen, FortumDecember 1, 2004 Findings and conclusions (2) Uncertainties do not favour investments The incentive for emission reduction investments remains low Only a few indications exist in the present NAPs for the Kyoto period ( ) allocation The pay-back times of the energy sector are long => In order to permanently reduce the emissions, companies would need clear long-term view about the climate policies

28 28 Heikki Niininen, FortumDecember 1, 2004 Findings an conclusions (3) Poor harmonisation - coordination is needed Big variations in the allocation to new entrants may result in market distortions and impact on the location of new plants For existing plants an observation: free of charge allocation combined with grandfathering includes the risk of uneven bottom line impacts. However, ET harmonises one key parameter, the price for carbon (CO2) Energy sector the main, if not the only contributor, to the required emission reductions - a more fair burden sharing in future?

29 29 Heikki Niininen, FortumDecember 1, 2004 Findings and conclusions (4) Linking: a possibility - faces uncertainties The Link Directive is a useful instrument for the European companies - there are, however, still obstacles to overcome The activity of the investing companies towards the utilisation has been low and likely remain, if no longer term climate policy can be ensured Doubts exist in potential JI host countries concerning the "double counting rules" that these will lead to unnecessary limitations - the Link Directive throws a “psychological shadow” over the JI

30 30 Heikki Niininen, FortumDecember 1, 2004 Findings and conclusions (5) Challenges of the JI Testing Ground The TF welcomes the achievements reached with the TGA and TGF and the invitation of private money to join the TGF activities The ground rules for private investments should be fixed as soon as possible TGF should focus also on the development of the host countries' JI administrations. This is needed in order to achieve a “level playing field between JI and CDM”

31 31 Heikki Niininen, FortumDecember 1, 2004 Recommendations to Baltrel Committee Conclusions by the TF should be refined to a Position Paper of Baltrel by the coming Baltrel Conference (June 1-2, 2005) Baltrel should give its views about the Emissions Trading Directive review, which the Commission is to perform by June 30, 2006 (esp. the issue of “further harmonisation of the allocation method”) Baltrel’s production/supply expertise should be invited to study further the investment locations and market functioning issues

32 32 Heikki Niininen, FortumDecember 1, 2004 Thank you for your attention! See:


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