forward auctioning volumes in the eu ets•more capacity in the market to bank than borrow •first...

© Bloomberg New Energy Finance, 2004-2010

Guy Turner, Director Carbon Market Research

Forward auctioning volumes in the EU ETS

13 December 2010

2 Forward auctioning 13 Dec 2010

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1. Demand

Contents

3. Balance

2. Supply


0

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011 2012 2013 2014

Demand side summary (Mt/year)

Bloomberg New Energy Finance

Hedging begins in 2007

Demand for EUAs in year i =

projected emissions for short sectors (power & aviation) (i)

- free allocation (i)

- volume bought (i-1, i-2, i-3..)

+ volume needed (i+1, i+2, i+3..)

Assume:

• 21% target by 2020

• Current forward curves for fuel prices, including EUAs

• Hedging profiles (see next)

MtCO2 817Mt demand in 2012


Hedging profiles (Mt/year)

Bloomberg New Energy Finance, company quarterly reporting

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3 6 9 12 15 18 21 24 27 30 33 36months forward

RWEE.ON

Vattenfall

EnBW

Drax Power

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3 6 9 12 15 18 21 24 27 30 33 36months forward

Enel

Iberdrola

EDP

CEZ

Liberalised power sectors Semi- liberalised power sectors

• Liberalised power sector = 3 year hedge• Semi-liberalised power sector = 2.5 year hedge• Regulated power markets = 2 year hedge• Industrial/aviation sectors = 2 year hedge

NB: Hedging profiles taken as of summer 2010 - profiles are likely to have shortened since the summer due to reduced margins on future power sales.


1. Demand

Contents

3. Balance

2. Supply


Supply

Company reports, Bloomberg New Energy Finance

1. Surplus EUAs

2. Phase II NER distribution

3. CERs

4. Fixed auction volumes

5. Forward auctioning


Surplus EUAs

Company reports, Bloomberg New Energy Finance

• Industrial companies have created 1bnt surplus EUAs throughout Phase II

• c. 240Mt sold to date

• Cement - > high

• Steel -> low

• Other sectors -> medium

• Will the remaining 800Mt be sold and if so when?

• Cash generation -> yes

• Reducing free allocation in Phase III due to benchmarks -> no

• Assume:

• 2009 and 2010 highest years of selling, thereafter reducing volumes sold

• 44Mt EUA sold in 2012


Phase II NER

CITL, Bloomberg New Energy Finance

284Mt

- 82Mt

- 56Mt

Volume currently remaining as declared within EU ETS CITL (November 2010)

Volume forecast to be distributed to new entrants (accepting that CITL data is not up to date)

Volume cancelled because of auctioning restrictions and some cancellation (including Ireland!)

= 146Mt Volume remaining to be auctioned in 2012


CER supply


• CER volumes are assigned in the year in which they are contracted, not delivered

• Higher percentage of non-HFC/N2O volume expected to flow to EU ETS in Phase III, reducing impact of quality restrictions

• Assumption:

• 611Mt available in Phase II to EU ETS participants

• 141Mt bought in 2012

0

20

40

60

80

100

120

140

160

2008 2009 2010 2011 2012 2013 2014

MtCO2

CER supply volume bought by EU ETS


Auctioning volumes


• NER300:

• 300Mt of EUAs to be sold in 2012 when registry system up and running

• Forward auctioning:

• Base case assumption -> 100Mt in 2012.


Supply side annual summary

CER Phase II Auctions

Industrialselling NER Phase III

supply * Total

2008 94 44 28 0 0 167

2009 104 71 112 0 0 287

2010 122 91 116 0 0 329

2011 150 69 71 0 0 290

2012 141 96 44 146 300 726

2013 106 0 3 0 929 1,039

2014 144 0 0 0 1,057 1,202


* Excluding any early auctioning


1. Demand

Contents

3. Balance

2. Supply


0

200

400

600

800

1,000

1,200

1,400

2008 2009 2010 2011 2012 2013 2014

Ph III

CCS

NER

IND

Ph II

CER

Demand

Supply and demand balance (Mt/year)


Cumulative surplus in 2012 = 45Mt

c. 100Mt of earlyauctioning to balance 2012

2012 without early auctioning:

Demand = 817Mt

Supply = 726Mt

Unmet demand = 91Mt

NB: cumulative surplus at start of 2012 = 45Mt

where is this?will it come to market?


• More capacity in the market to bank than borrow

• First half of Phase III looks long (incl CERs). Less forward auctioning would mean more volume sold in 2013 and 2014. This could exacerbate a slightly bearish market in these years.

• Creates firm price signal in short term

• Risk of high prices mitigated by size of potential industrial supply.

• Some reserves may be being held by intermediaries / power companies

Some final thoughts

Arguments for erring on more early auctioning

Arguments for erring on less early auctioning

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Forward auctioning

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forward auctioning volumes in the eu ets•more capacity in the market to bank than borrow •first...

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