The impact of the EU ETS on European energy and carbon markets

Transcription

1 The impact of the EU ETS on European energy and carbon markets David Newbery Danish Environmental Economic Conference Skodsborg Hotel 23 August uk

2 Outline Climate Change Challenge more carbon underground than we should release Kyoto then ETS sets targets The logic of EU targets GHG targets and the EU ETS EU Directive and ETS R&D and EU SET Plan D Newbery Copenhagen

3 Climate change challenges World should not release all C from fossil fuels Climate policy risks depressing fossil fuel prices unless CCS on major scale? How best to limit cumulative GHG release? Limits on annual emissions or scarcity GHG price related to remaining absorptive capacity? Kyoto sets emissions targets not a carbon price EU ETS as response to emissions targets Ambitious target of 80% reduction by 2050 D Newbery Copenhagen

4 Peak CO 2 -warming vs cumulative emissions If we want a 50% chance of less than 2 o C rise we can only use another 500 Gt C ever! Now Unconventional oil +gas Proven L H Resource MR Allen et al. Nature 458, (2009) doi: /nature08019

5 The logic of EU targets easy to determine fair allocation and can buy off opponents with free allocations does not impinge on sovereign tax powers EU carbon tax failed easier to give impression of leadership/action without spelling out costs ETS => electricity prices unanticipated by voters Targets should be translated into sensible policy D Newbery Copenhagen

6 CO 2 prices are volatile and now too low EUA price October 2004-April 2010 Actual emissions revealed Futures Dec 2007 OTC Index Second period Dec 2008 Second period next Dec CER 09 Euro/t CO Second period 5 start of ETS 0 6 Oct-04 Apr-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

7 Effect of quota driven ETS Scarcity of EUAs determines EUA price rather than long-run view of required carbon price Fuel cost + EUA of marginal plant sets electricity price When coal and gas competitive in electricity market EUA price set by coal-gas relative price => coal and gas-fired plant costs move together Lax quantity target keeps coal competitive Discourages greater CO 2 reduction D Newbery Copenhagen

8 EUAs can make coal and gas competitive in GB Fuel choices in UK electricity generation, Gas price Euros/MWht Fuel post ETS Coal 34%, gas 55% 26 fuel pre-ets Coal cheaper than gas fuel +EUA cost Phase I 20 fuel + EUA Phase II Gas cheaper than coal 10 8 Coal 38%, gas 50% D 8Newbery 10 Copenhagen NETA\Pxdata\fuel_choice Coal price Euros/MWht

9 UK price movements: 2007 to 2009 in Electricity forward 2010 ( /MWh) Gas cost forward (2010) + EUA Coal cost forward (2010) + EUA EUA price in /tco2 /MWhe Jan-07 1-Apr-07 1-Jul-07 1-Oct-07 1-Jan-08 1-Apr-08 1-Jul-08 1-Oct-08 Correlation of coal+eua on gas+eua high at 96% Source: Bloomberg data 1-Jan-09 D Newbery Copenhagen

10 Collapse in EUA price impacts electricity prices Forward base year contracts - France and Germany Aug 2005-May Euros/MWh FR base 2007 DE base 2007 EUA coal cost EUA gas cost Aug Sep Sep Oct Oct Nov Nov Dec Dec Jan Jan Feb Feb Mar Mar Apr Apr May- 06 Source: EEX D Newbery Copenhagen

11 But not price less EUA cost => EUA directly feeds through to electricity price Forward 2007 annual prices - France and Germany 2006 Euros/M Wh FR peak less gas EUA DE peak less gas EUA FR base less gas EUA DE base less gas EUA DE base less coal EUA coal EUA cost 0 1-Jan Jan Jan Feb-06 2-Mar Mar-06 1-Apr Apr-06 1-May May-06 EUA cost in CCGT Source: EEX D Newbery Copenhagen

12 Rise in gas price shifts generation into coal Weekday moving 24 hr av coal and gas generation Britain 1 Oct-9 Dec gas output coal output gas cost + EUA /MWhe GWh/24 hours Oct-05 5-Oct-05 6-Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct-05 1-Nov-05 3-Nov-05 4-Nov-05 8-Nov Nov Nov Nov Nov Nov Nov Nov Nov Nov-05 2-Dec-05 5-Dec-05 7-Dec-05 9-Dec-05 Source: NGT D Newbery Copenhagen

13 Suppose gas price increases Impact on gas market initially: demand falls (fuel switch gas => coal) => demand for EUAs rises => EUA price => partially offsets advantage of coal => offsets some demand reduction for gas => reduces elasticity of demand for gas, ε Lerner Index (p-c)/p = 1/ε => increases market power of gas suppliers Gazprom, and suppliers with protected markets Bad idea D Newbery Copenhagen

14 Demand for gas Demand for gas if EUA price constant Price of Gas g Demand for gas if EUA price varies EUA price rise induces some switch back to gas Price rise Initial demand fall (gas-coal) Demand for gas in ESI D Newbery Copenhagen

15 Policy implications Imposing extra constraint on market reduces demand elasticities, amplifies market power If the price of EUAs is independent of gas demand then there is no multiplier effect => banking over longer periods helps Other reasons for fixing C-price, not quantity: Prices vs Quantities (Weitzman, 1974) D Newbery Copenhagen

16 Permits vs Taxes Weitzman: Taxes superior to permits unless MB of abatement steeper than MC CO 2 is a global persistent stock pollutant CO 2 damage today effectively same as tomorrow => marginal benefit of abatement essentially flat marginal cost of abatement rises rapidly hazard of global warming very uncertain, as are the future abatement costs Carbon tax superior to tradable permits but permits easier to introduce D Newbery Copenhagen

17 Costs of errors setting prices or quantities /tc Correct MC MC Start of ETS efficiency loss from quota Best estimate of Marginal cost of abatement t* t efficiency loss from charge MB, Marginal benefit from abatement Q* Q Newbery IIB 1 D Newbery Copenhagen 2010 Reductions in emissions 17

18 Reforming ETS Reform EU ETS to provide rising price floor sufficient for nuclear or on-shore wind or CCS Commitment to raise CO 2 price at 3% p.a. over life of plant may suffice 25/EUA 2010 => 34 in 2020, 61 in Making it credible: write CfD on this path offer CfD at 45/EUA for 20y from commissioning? makes extra carbon savings additional D Newbery Copenhagen

19 Carbon tax alternative Each Member State imposes a Carbon tax tax bads not goods as part of fiscal adjustment rebated by EUA price for covered sector can start low: 20/t CO 2 and escalate at 5% p.a. above RPI = 34/t by 2020 Tax or full EUA auctioning to finance SET- Plan and RES, avoid taxing electricity D Newbery Copenhagen

20 Supporting RD&D 80% GHG reduction => decarbonising electricity Zero-C electricity requires renewables and CCS + nuclear RES is not yet commercial (except in niches) requires support now to drive down future costs R&D + deployment drives innovation and learning But RD&D is a public good benefiting the whole world So how to gain collective support for RD&D? D Newbery Copenhagen

21 ETS and Renewables Aim: deliver low-c solutions for world Need to explore a portfolio of possible solutions Then select those which show most promise Danger with RES target choose cheapest Fortunately MS have differing resources to explore And differing aspirations to industrial leadership Directive: least bad feasible solution? D Newbery Copenhagen

22 Experience curves justify deployment support Source: IEA D Newbery Copenhagen

23 2050 projected CO2 price Euros/tonne CO projections Renewables depresses C-price 2009 projections after Renewables Directive and recession 10 0 with 12.5% renewables with 20% renewables 2009 projections Source: Committee on Climate Change, 2008 and 2009 D Newbery Copenhagen

24 Failures of ETS Current ETS sets quota for total EU emissions Renewables Directive increases RES => increased RES does not reduce CO 2 => but does reduce price of EUAs => prejudices other low-c generation like nuclear Risks undermining support for RES Solved by fixing EUA price instead of quota D Newbery Copenhagen

25 Reforming 2020 Directive Not to reduce CO 2 - ETS ensures no impact ETS intended to price CO 2 but fails to give credible signals not to support low-c generation, only RES => support to RD&D to drive down costs of RES How? Support investment or generation? Learning comes from: design (cost, reliability, controllability, etc) production, installation, siting/planning, grid integration but not from operation (provided reliable) D Newbery Copenhagen

26 Implications for RES support No RES should bid below SRMC Given that it can rapidly reduce output => support should be for availability, not output RES should not have automatic priority merit order should be based on avoided costs => if RES is more costly than alternatives (including balancing, redispatch), back it off => foregone RES generation should count to RES target (as it has no CO 2 credit) unless ETS reformed to support CO 2 price D Newbery Copenhagen

27 Conclusions ETS to price CO 2 but volatile, price too low, impacts gas market power RES Directive to support deployment and learning => Well defined MS funding in place through obligations But RES Directive undermines ETS risks bringing ETS into disrepute => Reform ETS provide floor price de-links gas and coal markets reduces risk of low-c generation investment makes Renewables contribute to reduced emissions Failing which encourage MS to impose C tax With rebates for EUA s surrendered D Newbery Copenhagen

28 The impact of the EU ETS on European energy and carbon markets David Newbery Danish Environmental Economic Conference Skodsborg Hotel 23 August uk

29 Spare slides on SET-Plan

30 SET Low-C Plan Strategic Energy Technology (SET) Plan Promising technology benefits from LbD Supported by Directive and national deployment Many obstacles require R&D and perhaps pilots need efficient collective action to increase low-c R&D IPR benefits made widely available, contrary to MS interests But R&D collapsed at end of 1980s liberalisation and resulting pessimism over nuclear future? SET plan to leverage MS s R&D, steer choices Ensure adequate size and diversity of portfolio D Newbery Copenhagen

31 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% UK Electricity R&D intensity ROCs other power hydrogen and fuel cell nuclear fission and fusion Renewables fossil fuels D Newbery Copenhagen percent electricity revenue Source: IEA

32 0.15% 0.10% 0.05% 0.00% UK Renewables R&D intensity (3-yr moving average) D Newbery Copenhagen Source: IEA geothermal bioenergy ocean wind solar percent electricity revenue

33 SET support schemes 2007 SET R&D non-nuclear 2.4bn (Nuclear 0.94) 70:30 private:public; 80:20 MS:EC SET plan to 2020 total 70 bn or double current rate Grid: 2bn; fuel cells + H 2 : 5bn; Wind: 6bn; nuclear fission 7bn; bio-energy 9bn; smart cities 11 bn; CCS 13 bn; Solar: 16bn; Joint programming to amplify MS R&D CCS as an example ETS auction revenues as funding source? D Newbery Copenhagen

34 Three pillars of EU low-c policy ETS to price CO 2 for mature low-c investments - reform needed Directive: demand pull for renewables justified by learning spillovers and burden sharing induces near-commercial low-c deployment EU SET-Plan to treble R&D spend to support less mature low-c options Ensure they work together not in conflict D Newbery Copenhagen