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Relevance of CO2 price signals to the Power Industry in EU Emissions Markets CERA Week

Relevance of CO2 price signals to the Power Industry in EU Emissions Markets CERA Week 9 February 2006 Anthony Dols Managing Director European Climate Exchange. Legal Disclaimer. Safe Harbour Statement

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Relevance of CO2 price signals to the Power Industry in EU Emissions Markets CERA Week

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  1. Relevance of CO2 price signals to the Power Industry in EU Emissions Markets CERA Week 9 February 2006 Anthony Dols Managing Director European Climate Exchange

  2. Legal Disclaimer Safe Harbour Statement Statements in this presentation regarding IntercontinentalExchange or ICE Future’s business, including, but not limited to development of the emissions trading market or the integrating CO2 price signals into Power Markets, that are not historical facts are "forward-looking statements" that involve risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. For a discussion of certain such risks and uncertainties, which could cause IntercontinentalExchange's actual results to differ from those contained in the forward-looking statements, please see "Risk Factors" in the Company's Registration Statement on Form S-1 (Reg. No. 333-123500), as amended, as filed with the Securities and Exchange Commission. 2

  3. Topics • Summary on trading in EU ETS and at ICE ECX • CO2 price deveIopments in EU ETS trading markets • Relevance of CO2 price signals to power industry 3

  4. The European Climate Exchange (“ECX”) Strong ownership and operational structure: • ECX B.V. is a wholly-owned subsidiary of the Chicago Climate Exchange (CCX) • ECX collaborates with ICE Futures - formerly the International Petroleum Exchange (IPE) - to offer a series of trading products for the EU ETS Products are traded and listed on the ICE electronic platform: • IPE ECX Carbon Financial Instruments futures Contracts, launched on 22 April 2005, listed and traded on the ICE electronic platform and financially guaranteed by clearinghouse LCH.Clearnet • Quarterly Futures contracts Mar-Jun-Sep-Dec until Mar08, thereafter annual contracts Dec2008– Dec2012 • Also clearing of OTC transactions is offered thru an EFP (= Exchange For Physical) contract Leading market position amongst the European Emission Exchanges: • ICE/ECX has captured some 80-90% of Exchange traded and cleared volumes • To-date some 135 mln tons of CO2 were traded and/or cleared on ICE/ECX futures platform • In January 2006, volumes almost tripled with some 34 mln tons of CO2, or more than US$ 1 billion in value, traded and cleared on ICE/ECX 4

  5. Background to EU Emissions Trading Scheme • Kyoto Protocol provides the basis • Divided in 2 Phases: 2005-08 and 08-2012 • Specific industry sectors included in Phase I • Covers some 40% of CO2 emissions • 2.2 bln tons of CO2 emissions per year or some EUR 55 billion in value* • In force 1 January 2005; Phase II coincides with 1st Kyoto Commitment Period • Regulated Cap-and-trade scheme, enforced by financial penalties (€40/excess tonne in Phase I; €100/excess tonne in Phase II) • Phase I EU ETS sectors: Power Generation, Oil & Gas, Pulp & Paper, Cement, Steel, Glass & Ceramics & some Chemical industries • Covers therefore the CO2 emissions of roughly 5,000 companies or 12,000 installations in all 25 EU Member States • EU Member States must each prepare a National Allocation Plan (NAP) which specifies the allocation of CO2 allowances per installation for each Phase. Allowances held in dematerialised form in National Registries. • EU ETS currency is the “EUA” which is a unique certificate representing the right to emit 1 ton of CO2 in a given year • Total number of EUAs in Phase I: some 6.6 billion i.e. 2.2 billion per year * Current EUA prices 5

  6. Drivers in EUA market • Supply / Demand: • Scheme is intended to drive emission reductions by a short market • Differs across EU with some countries and sectors structurally short (e.g. Italy, Spain & Power Sector) and others long (e.g. Poland, Czech Republic) • Some alleviation of shortage by ‘import’ of Emission Rights thru investment outside EU in emission reduction projects under “CDM and JI“ schemes and a New entrants Reserve (NER) • Estimated shortage across EU over Phase I is estimated at some 250 mln tons (source Point Carbon) • Influenced by many factors including fuel prices; weather; short term reduction capability e.g. by switching to low emitting plant; Economic Growth; Phase I end issues; Politics • Compliance vs Financial market: • The EUA is expected to be traded like any other financial instrument and financial players are expected to contribute significantly to market dynamics with new products such as CO2 options & REPOs being developed 6

  7. Recent development of the EU ETS market Healthy open interest development [26.2 mln tons on 3 Feb 06] Significant 2005 Market volume and daily volume on the rise EU ETS market is maturing Volatility [40-50%] shows active market Fundamentals start to drive prices [R2=0.92 fuel & weather (source Point Carbon)] Note : Graphs are based on ICE / ECX data 7

  8. EU ETS market - maturity signals • The CO2 emission allowance is now a significant instrument and traded as part of the energy portfolio • Significant number of market participants and growing • Significant initial trading volumes, expected to grow to some 20 to 30% of the underlying in 2006 = 600- 700 mln tons or EUR 1.6 to 1.8 bln. • Tighter correlation with e.g. power prices, fuels and weather • New risk management instruments appearing e.g. options 8

  9. EU ETS market - Longer term expectations • More stringent in Phase II NAPs i.e. EUA shortage could increase • Fundamentals expected to become more important driver • More sectors to be included, a.o. Aviation, Maritime • Smaller emitters in mandatory sectors to be included • Political “bail-out” unlikely as market traction and EU guidelines represent significant barriers for any alleviation of CO2 policies • “Post Kyoto” dialogue indicates that EU ETS will be extended beyond 2012 • 2007 is a key year for new developments at UNFCC and in EU 9

  10. Carbon Price signals in ETS market • Marginal power cost includes CO2 price in liberalised EU markets • CO2 price theoretically driven by cost of reducing emissions in the power sector incl. switching between high and low emitting technology • Based on the current forward fuel markets several market players (e.g. Morgan Stanley, Deutsche Bank, JP Morgan, Fortis) see potential for much higher CO2 price ie EUR 40-60/t in 2006/2007. • Current coal to gas switching to would require a higher EUA price • Current forward and future CO2 prices show a lower price in 2008 but NAP II disclosure mid 2006 could alter that picture • No indication that CO2 price is already impacting investment but switching in summer season (low gas price) has been seen in 2005 10

  11. Conclusions CO2 price: • has directly impacted operations of power producers across Europe • is being reflected in power prices in several EU markets • has triggered recognition of rights as a financial asset • could see a significant increase when fundamentals apply • starts to drive longer term strategy Trading Markets: • Liquidity of physical trades to increase significantly and new risk management tools providing further impetus • Exchanges will play a more significant role as price transparency and credit risk are key issues 11

  12. Members in ECX CFIs on ICE FuturesJanuary 2006 Deutsche Bank* Dresdner Bank* Electrabel Endesa E.On UK Fimat International Banque* Fortis Bank Global Clearing* Goldman Sachs* HSBC Bank* ICAP* JP Morgan Securities* Jump Trading Kyte Broking Madison Tyler MAN Financial* Marex Financial Marquette Partners (UK) Merrill Lynch International* Merrill Lynch Commodities Mizuho Securities* ABN AMRO Futures* Accord Energy ADM Investor Services* Amerex Atel Trading Bache Financial* Banco Santander* Barclays Capital* Bear Stearns International* BHF Bank* BNP Paribas Commodity Futures* BP Gas Marketing Breakwater Trading British Energy Trading Calyon Financial* Cargill Investor Services* CEZ Climate Change Markets Credit Suisse* Morgan Stanley International* Natexis Commodity Markets Optiver Rand Financial Services* Saxon Financials Scottish Power Energy SEB Futures* Sempra Energy Europe Shell Energy Trading Shell International Smartest Energy Spectron Energy Services Starmark Trading The Kyte Group ThyssenKrupp Tradelink TFS Derivatives UBS* Universal Data Xconnect Trading *Entities marked with a star can offer clearing services to third parties.

  13. Thank You! Anthony Dols Managing Director anthony.dols@ecxeurope.com Telephone: +31 (0)20 799 7619 Website:www.ecxeurope.com 13

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