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THE IMPACT OF THE EU ETS ON THE NORDIC ENERGY MARKETS Experiences from the year 2005 and results of the model analysis

THE IMPACT OF THE EU ETS ON THE NORDIC ENERGY MARKETS Experiences from the year 2005 and results of the model analysis. Tiina Koljonen, VTT Nordic Energy Policy Perspectives, Helsinki 24.1.2006. OUTLINE. EXPERIENCES FROM THE YEAR 2005

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THE IMPACT OF THE EU ETS ON THE NORDIC ENERGY MARKETS Experiences from the year 2005 and results of the model analysis

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  1. THE IMPACT OF THE EU ETS ON THE NORDIC ENERGY MARKETSExperiences from the year 2005 and results of the model analysis Tiina Koljonen, VTT Nordic Energy Policy Perspectives, Helsinki 24.1.2006

  2. OUTLINE • EXPERIENCES FROM THE YEAR 2005 • Evolution of the European emissions trading system and carbon markets • Impacts of the EU ETS on the Nordic electricity markets • RESULTS OF THE MODEL ANALYSIS OF THE NEP MODELLING GROUP • Overview of the NEP models • Future scenarios for the Nordic electricity system

  3. CARBON MARKET IN 2005 • EU ETS started on time 1 January 2005 • 11.2.2005 Nord Pool market place was opened for forward trading • 20 June 2005 the Commission had made decisions on all 25 National Allocation Plans (NAPs) • By the end of 2005: • 18 national registers were up and running (not operating: Cyprys, Greece, Hungary, Italy, Luxembourg, Malta, Poland) • More than 70% of the 2005 allowances were distributed to the operators (tot. amount 6572 Mt for 2005-07) • 6 market places for forward and/or spot trading Source: ECX

  4. CARBON PRICES VARIED BETWEEN 7 AND 29 €/t IN 2005-Due to low trading volumes in 2005 individual actors could have increased allowance prices by making small transactions - Data source: www.pointcarbon.com

  5. FOSSIL FUEL PRICES DRIVE CARBON PRICES- The volatility of CO2 price was much grater than the volatilities of fuel and electricity prices in 2005 - Source: Shell

  6. THE MONTHLY TRADING VOLUMES ARE INCREASING- Most of the cleared trading was done with dec-05 allowances in 2005- 2.1-17.1.-06

  7. CO2 ALLOWANCE PRICE IS A NEW FACTOR INFLUENCING NORDIC ELECTRICITY PRICE- CO2 price drives electricity forward prices -

  8. PRICE DURATION OF NORD POOL SYSTEM PRICE- In 2005, emissions trading and high fossil fuel prices rose the electricity prices in the Nordic area - Dry year without EU ETS Normal year with EU ETS Wet year without EU ETS Data source: www.nordpool.no

  9. NORD POOL TERMIN PRICES FORECAST 35-40 €/MWh PRICE LEVELS FOR THE NEXT YEARS- The impact of the carbon price could be more than 10 €/MWh - Data source: www.nordpool.no

  10. THE COMPETITIVENESS OF CONDENSING POWER PRODUCTION HAS DECREASED CONSIDERABLY- In Finland, condensing power plants were initially built for base load purposes, now they are used only to cover peak load demand - • Shift in electricity market merit order, coal condensing is more cost-effective than peat. • Finnish condensing power units are still needed when precipitation is low. • Imported electricity has replaced domestic condensing power production in Finland Max-min 15 TWh

  11. STATE OF FINNISH POWER SYSTEM IN 16.1.-22.1.-06Record consumption (14 776 MW), condensing power plants were not operating, Russia restricted power export, no free transmission capacity from Sweden Power balance was under considerable strain in Finland

  12. THE IMPACT OF CO2-PERMIT PRICES ON ENERGY MARKETS IN THE NORDIC COUNTRIESResults of the model analysis of NEP modelling group Hans Ravn, Ram-løse EDB Lasse Torgersen, ECON Thomas Engberg Pedersen, COWI Per Erik Springfeldt, EME Analys Thomas Unger, Profu Juha Honkatukia, VATT Tiina Koljonen, VTT

  13. THE NEP MODELS – BASIC FEATURES Model Geography Market Investments Balmorel The Baltic Electricity and Generally endogenized (exog in Sea Area distr heating the present analysis) PoMo The Nordic Electricity Exogenous countries (excl Den) ECON-Classic Northern Europe Electricity Partly endogenous VTT-EMM The Nordic Electricity Exogenous countries MARKAL-NORDIC The Nordic Stationary Endogenized countries energy system GTUP Global Oil, coal, gas, Exogenous electricity

  14. WHOLESALE ELECTRICITY PRICES- Synchronized inputs for fuel prices, Swedish nuclear phase-out, discount rate (7%) - Gas 17 €/MWh, HFO 22 €/MWh, Coal 5,9 €/MWh, Biomass (upper limit) 19 €/MWh Gas 19 €/MWh, HFO 24 €/MWh, Coal 6,0 €/MWh, Biomass (upper limit) 19 €/MWh

  15. NORDIC ELECTRICITY SUPPLY- Differences in investments for renewables and cross-border el. transmission capacities, phasing-out of old coal and oil fired plants, electricity demands-

  16. CONCLUSIONS AND FUTURE PROSPECTS • Allowance markets are immature due to short history: • Daily trading volumes have been low, prices high and volatile, non-operational registries in 8 EU countries • Due to high carbon price level, the impacts of the EU ETS have been greater than expected • The allowance markets have changed the competitiveness of coal and peat fired condensing power • Leads to weakened security of supply • CO2 emissions will decrease due to increased imports and lower specific emissions in electricity production • Electricity price and volatility would increase in the future in the Nordic area • Uncertainty about future CO2 prices and regulation policy • In the continental Europe the price of electricity is higher – price differences even out as physical interconnections improve

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