1 / 25

EU ETS: Calm, but for how long? Energy Risk Europe 2006

EU ETS: Calm, but for how long? Energy Risk Europe 2006 Atle Christiansen, Point Carbon London, 3 October 2006. Key questions. Phase I (2005-2007) Can price developments be accounted for? Phase I is long, but why is it trading short? Phase II (2008-2012) What are the key price drivers?

brinda
Download Presentation

EU ETS: Calm, but for how long? Energy Risk Europe 2006

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. EU ETS: Calm, but for how long?Energy Risk Europe 2006 Atle Christiansen, Point CarbonLondon, 3 October 2006

  2. Key questions • Phase I (2005-2007) • Can price developments be accounted for? • Phase I is long, but why is it trading short? • Phase II (2008-2012) • What are the key price drivers? • Will EU NAPs provide sufficient scarcity?

  3. Bear run: Softening fuel prices Bull run: Weather/fuel prices Price collapse: Verified emissions data Range bound: Fluctuating fuel prices Length to market Range bound: Compliance buying Length to market Bull market: Weather/fuel prices 250-300 Mt cut in NAPs Bull run: Length not to market Oversold? Can price developments be accounted for? What now?

  4. Fundamentally long, but trading as if it is short? • Phase I is fundamentally long (Point Carbon’s view) • 100 Mt surplus in 2005 • Ample supply of NERs (and possibly CERs) • Prices should approach transaction cost (”single digits”) • So why is the market trading as if it is short? • Industry length does not come to market • Utilities are net short on daily basis • NERs are not currently available

  5. Supply side: Where is the length?

  6. Where is the length? NB! Poland not included (-32 Mt)

  7. Where is the length?

  8. Why has industry length not come to market? • Compliance is key • Do not optimise carbon portfolio • ”Hedge” risk of being short • Penalty regime (€40/t) • Production variability • Policy uncertainty • Concerns over impact on Phase II allocation • Lack of market access? • 14 Mt surplus for installations with cap <50k

  9. 2005: Long in theory, but balanced in practice?

  10. Demand side: Short, but for how long?

  11. How much have utilities already covered? • 2005: Aggregate shortage 83 Mt • 65 Mt in UK, Spain and Italy • 2006: Estimated short >100 Mt • Dry conditions in Scandinavia and Iberia • Increased coal burn UK and German power production • Compliance/hedging strategies • Some borrowed for compliance in 2005 • Some hedge prompt AND forward exposure • Compliance purchasing for Phase I has probably peaked • May see weakening of demand side Q2 2007

  12. Trading short, but for how long? Reference scenario: Supply outstrips demand Q2 2007

  13. Outlook for Phase II Market structure and key price drivers

  14. Market structure

  15. Strong demand if unchecked • Business-as-usual scenario • Aggregated 5 year shortage 2008-2012

  16. Potential AAU supply is 7-8 Gt • Potential CER/ERU supply is 1-3 Gt But supply may be plentiful Does NOT mean that prices will go to zero!

  17. Time for a NAP?

  18. NAP timeline 30 June 2006: Only Estonia submitted NAP by deadline 6 Sept 2006: 11 MS submitted NAPs 31 Dec 2006: Formal EC deadline Early Oct 2006: First EC decision on NAPs expected (?) Spring 2007: NAP process completed? Early July 2006: German and Polish NAPs submitted

  19. How will the Commission assess the NAPs? • Key criterion is achievement of Kyoto target • ETS + Other policies + Procurement = ”on track” to Kyoto? • ”Excessive use” of 2005 verified emissions data • Countries on track to Kyoto (13 MS): • Cap not above verified 2005 emissions • Countries not on track to Kyoto (12 MS): • Cap below verified 2005 emissions • Bulgaria and Romania? • No verified emission figures

  20. ? -12 -3 ? -4 -1 -11 -7 1.5 27 -6 -32 -3 -21 -14 -5 1 -19 -4 -0.4 7 10 -0.5 -0.1 Czech Republic and Denmark have not submitted drafts. Links to Norway and Iceland through EEA agreement? NAP status: The good, the maybes and the ugly Likely to be rejected by EC Within an acceptable range Likely to be accepted by EC

  21. Where are the battlegrounds? • Heavyweights: Poland and France • 51 Mt surplus in 2005 • Lax drafts (Poland +40 Mt from Phase I) • Banking? • Middleweights: Czech Republic and Denmark • 25 Mt surplus in 2005 • Still without drafts • Welterweights: Baltics, Netherlands and Slovakia • 23 Mt surplus in 2005 • All have proposed to increase cap

  22. Huge potential supply of CERs/ERUs 400 Total CER/ERU limits Phase II (5 years) All sectors: 1.5 Gt* Power & heat: 0.8 Mt* *Based on Point Carbon’s estimated caps/limits 300 Million CER/ERU 200 100 0 UK Italy Spain Latvia Poland France Ireland Finland Austria Greece Estonia Slovakia Norway Portugal Slovenia Hungary Belgium Sweden Germany Lithuania Denmark Czech Rep Netherlands Luxembourg Power & Heat limit Total limit Source: Point Carbon

  23. Phase II: Bullish or bearish? • Bullish: Strong demand if unchecked • Projected shortage of 5 Gt (EU15+JPN+CAN) • Policies and measures might not deliver • Demand from US/AUS? • Bearish: Supply is plentiful • Potential 7-11 Gt from AAUs/CERs/ERUs • EU ETS NAPs are crucial • Need shortage of 200-300 Mt/year • Mixed signals so far • Let’s get ready to rumbleTM ...

  24. Concluding remarks • Can price developments be accounted for? • YES, driven by fundamentals and policy • If Phase I is long, why is it (at times) trading short? • Length does not come to market • Utilities net short on a daily basis • Phase II: What are the key price drivers? • CERs (AAUs) and NAPs • Will NAPs provide sufficient scarcity? • Perhaps....

  25. Thank you for the attention For more information: www.pointcarbon.com acc@pointcarbon.com

More Related