IFIEC EUROPE – International Federation of Industrial Energy Consumers

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Climate Change Policy as Today’s Driver Climate Change Policy as Today’s Driver for Energy Policyfor Energy Policy

Annette Loske, IFIEC EuropeAnnette Loske, IFIEC EuropeA.Loske@vik.deA.Loske@vik.de

Prague, 12.9.2007Prague, 12.9.2007

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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2007 EU Strategic Energy Review2007 EU Strategic Energy Review

The long awaited position how to further develop / improve the internal energy market

Published together with the final sector inquiry report:

“consumers and businesses are losing out because of inefficient and expensive gas and electricity markets”

Main reasons: high levels of market concentration vertical integration of supply, generation and

infrastructure leading to a lack of equal access to, and insufficient investment in infrastructure

possible collusion between incumbent operators to share markets

The Jan. 10th – package: „An Energy Policy for Europe“

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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2007 EU Strategic Energy Review2007 EU Strategic Energy ReviewContent:

1.Climate Chance Policy Goals

• EU commitment of 20 % GHG reductions by 2020 compared to 1990*

• EU objective in international negotiations of 30 % GHG reductions by 2020 compared to 1990

• EU binding target of 20 % renewable energy in primary energy consumption**

• EU goal of reduction primary energy use by improving energy efficiency at 20 % by 2020

2.Energy markets

See presentation Hans Grünfeld

*) Currently achieved: - 2 %; Kyoto target: - 8 % till 2008 - 2012**) Currently achieved: 7 %

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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2007 EU Strategic Energy Review2007 EU Strategic Energy Review

State of Agreement:

1.Climate Change Targets

• Agreed at March 07 Council

2.Energy Policy

• Draft directive proposal Sept. 19th• Inofficial version widely spread

and well known already• Clear: difficult agreement on

unbundling issue in Council• Lengthy process for

implementation to be expected

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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Emissions trading – The Main EU Climate Emissions trading – The Main EU Climate Change Policy InstrumentChange Policy Instrument

1st trading period: •close to its end•test period failed due to missing shortage•huge indirect price effects through opportunity cost pass-through by electricity companiesHigh costs – low results

+ 24

€/M

Wh

+ 7

1 %

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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IFIEC EUROPE – International Federation of Industrial Energy Consumers

Source: London Economics Study for EU Commission

The additional costs for consumers are significant EU-wide But also high competition distortion for consumers within the EU EU consumers / EU industry hit by EU ETS much more than needed !

How big is the indirect cost effect?How big is the indirect cost effect?Academic survey on the marketAcademic survey on the market

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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13 to 10 €/MWh price difference

Certificates Price: 1.09 €/t

Certificates Price: 15.59 €/t

How big is the indirect cost effect?How big is the indirect cost effect?Real price pictureReal price picture

Full pass through of COFull pass through of CO22 value is (nearly) a reality now ! value is (nearly) a reality now !

Tendency: prices up

Power prices including 1st period CO2 prices

Power prices including 2nd period CO2 prices

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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Emissions trading – The Main EU Climate Emissions trading – The Main EU Climate Change Policy InstrumentChange Policy Instrument

2nd trading period: •Greater shortage•More direct costs •Even higher indirect costs through greater use of auctioning•„Cost-effective instrument“ used to raise new state funds with the argument: „Solving the windfall profits problem“

Example: coal power plant, certificates price 20 €/t

Additional price stimulusDue to wish to keep margins

by companies with market power

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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Emissions trading – The Main EU Climate Emissions trading – The Main EU Climate Change Policy InstrumentChange Policy Instrument

3rd trading period: •Review in Process led by DG Environment•Amended Directive expected later 2007•Issues in focus:

• Expanding to other sectors and gases• Small installations – possible exclusion• Monitoring, reporting, verification• Compliance and enforcement• Cap-setting (EU-wide / national)• Increased predictability• Allocation methodologies (Benchmarking, Auctioning)• New Entrants• Closure Rules• Linking with other ETS• CDM/JI

General direction:•Change as little as possible - save the system •Much more harmonisation•Indirect cost effects accepted widely as part of the system•Competitiveness problems of industry (if any) to be solved otherwise

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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Performance-based allocation:Performance-based allocation: Same incentive as auctioning, (hardly or) no leakage, good for competitiveness

IFIEC Position in EU ETS Review – 1IFIEC Position in EU ETS Review – 1stst element element

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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The advantages of relying on actual dataThe advantages of relying on actual data

The 4 problems solved !

Power price effect limited to actual cost

Option not to produce but to sell is gone

Cutting down the system‘s costs

Providing for really cost efficient instrument

Lower impact on competitiveness

Higher attractiveness for other countries to join

Better competitiveness for industry

Leakage only at extremely high CO2 prices

Negative global emissions effects diminished significantly

Competitive strategies (going for market share) supported to the benefit of whole economy

No special rules for new entrants

No special rules for closures

Equal treatment for every player in the market

1. Power prices1. Power prices 2. Leakage2. Leakage3. Hindering com-3. Hindering com-petitive strategiespetitive strategies

4. Discriminate 4. Discriminate new entrantsnew entrants

Basing EU ETS on actual data provides for a system, thatstimulates efficiency improvementsestablishes a real cost-efficient instrumentenables (extremely needed) competition in the electricity marketmakes it feasible to combine Kyoto and Lisbon

IFIEC Position in EU ETS Review – 2IFIEC Position in EU ETS Review – 2ndnd element element

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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The proposed design – performance-based allocation based on actual production - solves the major problems:

Eliminating the disadvantages of present rules Uncompetitive high electricity prices Exporting and increasing emissions (leakage) Hindering competitive strategies Discriminating new entrants

Realizing the advantages of a market based instrument Providing for cost efficiency Setting the right incentives for efficiency improvements Guarantee of total cap

If not solving ETS‘ huge power price effect there is the need to save EU energy intensive industry by additional mechanisms, which would bring discredit on EU ETS

IFIEC Position in EU ETS ReviewIFIEC Position in EU ETS Review

IFIEC EUROPE – International Federation of Industrial Energy Consumers

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OutlookOutlook• EU ETS to function on a tougher ground also beyond 2012

• Present Trend: • Auctioning (up to 100 percent) for electricity (not exposed to international

competition)• Benchmarking for industries under global competition • Grandfathering in single, small areas• Compensation mechanisms for some industries ?

• Climate Change Policy to remain the leading part of the energy policy triangle for a longer time

• A competitive internal energy market to be established by new measures ???