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Weather and its’ impact on the Emissions Markets.

Weather and its’ impact on the Emissions Markets. 2006 WRMA Annual Meeting Andrew Ertel, President & CEO. Many factors influence EUA prices in the short and long run. Putin’s pro-Kyoto comments. Unexpected cold, dry weather forecast; New Buyers; Polish NAP news; UK NAP.

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Weather and its’ impact on the Emissions Markets.

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  1. Weather and its’ impact on the Emissions Markets. 2006 WRMA Annual Meeting Andrew Ertel, President & CEO

  2. Many factors influence EUA prices in the short and long run

  3. Putin’s pro-Kyoto comments Unexpected cold, dry weather forecast; New Buyers; Polish NAP news; UK NAP First indications NAPs generous Mild wet winter; Sell-off of excess allocation Mainly one big buyer

  4. Each influence can have a short, medium or long term impact. • Short term price drivers for the period 2006-2007 tend to be: • Relative fuel prices • Fuel mix influences demand for EUAs • Weather • Economic activity • Energy generation and consumption generate emissions. • Policy issues.

  5. Medium term drivers. 2008-2012. • NAP methodology • Medium term fuel forecasts • Credits supply. • Technology • Post Kyoto framework

  6. Longterm drivers for the period after 2012 • Climate policy • Market framework • Fuel markets • Macro Economics • Technology.

  7. Weather and its impact on pricing. • The impact of weather has varied effects: • Cold weather increases energy consumption and so CO2 emissions through power and heat generation • Rainfall and wind speeds will affect the share of power generated by non-emitting sources and thus emission levels. • This is of course important for countries and regions relying on hydro and or wind power to any significant extent.

  8. Correlation of the impact of weather and fuel on the EUA price throughout 2005. • According to Point Carbon: • The correlation between the EUA price and the combined effect from fuel and weather was 92% • The individual correlations to fuel prices and weather were 89% and 48% respectively.

  9. Short term price drivers in the EU ETS. • In a survey conducted by Point Carbon in February: • About 45% of respondents thought that fuel and commodity prices were the most important with a further 20% considered it to be the second most. • 30% thought that political factors was the most important with a further 25% considering it second most • 10% thought weather with a further 20% consider it second most.

  10. Long-terms drivers • In a survey conducted by Point Carbon in February: • About 60% of respondents thought that political factors were the most important with a further 15% considered it to be the second most. • 20% thought that fuel and other commodity prices were the most important with a further 30% considering it second most • 3% thought weather was the most important with a further 7% consider it second most.

  11. The impact of weather. • In the Nordic states, during dry years CO2 emissions tend to soar along with the price of power with Norway and Sweden drawing power from the pool at higher levels and coal fired generation in Denmark and Finland ramping up. The Danish emissions profile is thus a good litmus test for the impact of weather.

  12. Denmark and its susceptibility to weather. Source: Point Carbon.Danish power exports LH axis and bars and emissions from the power and heat sector RH axis and line.

  13. Denmark and its exposure to weather/emissions • During the period 1990-2003 emissions generated from power and heat fluctuated from a low of about 24MtCo2 in 1980 to a high of 42Mt CO2 in 1996 which was an exceptionally dry year. • Weather becomes a key price driver in the short term and increases volatility.

  14. Denmark. • Another key fundamental is Emissions to Cap • Power demand and emissions vary throughout the year. • Need to create a seasonally adjusted cap. • This will differ between countries. • Demand and emissions are typically higher during winter than summer in Northern Europe. • Demand tends to peak during summertime in Southern Europe • Being aware of the seasonal adjusted cap in each country helps to forecast emission prices.

  15. Conclusion. • Weather is a contributing factor in the pricing of emissions. • Weather will tend to effect short term prices but not so much longer term prices. • Output of emissions in certain European countries can vary enormously due to precipitation. • As far as we know there have been no emissions trades completed with a weather trigger. • We are seeing more enquiries.

  16. EVOLUTION MARKETS LLC 10 Bank Street White Plains, NY 10606 P 914-323-0255 F 914-328-3701 London - New York – Bratislava - CalgarySan Francisco - Houston www.evomarkets.com

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