THE IMPACT OF EU ETS IN THE NORDIC ELECTRICITY MARKET

Transcription

1 THE IMPACT OF EU ETS IN THE NORDIC ELECTRICITY MARKET /MWh Marginal cost of Coal Condensing power incl. CO2 Marginal cost of Coal Condensing power Electricity Market Price Nord Pool (sys) Summary On the request of Energia lehti, a Finnish energy magazine, Suomen ElFi estimated the impact of EU Emission Trading Scheme (EU ETS) in the Nordic Electricity market during years In the study we find that the EUA price has passed through to electricity price by 100% in average and increased the market value by roughly 50 %. Also, CO2 emission cost for the electricity consumers has been 9 times higher than the actual market price of EUA at the same period. Suomen ElFi Oy Fleminginkatu HELSINKI

2 The impact of EU ETS in the Nordic electricity market THE NORDIC ELECTRICITY MARKET AND THE PRODUCTION THE NORDIC ELECTRICITY WHOLESALE MARKETS AND EU ETS PRICING OF THE ELECTRICITY FUTURES THE IMPACT OF EU ETS IN THE ELECTRICITY MARKET CO2 EMISSIONS IN THE NORDIC ELECTRICITY PRODUCTION Author: Suomen ElFi Oy Antti Koskelainen Fleminginkatu 34 FIN HELSINKI antti.koskelainen@elfi.fi phone: Suomen ElFi Oy represents large Finnish electricity consumer in the fields of industry, business and services. The company implements project entities that improve cost-efficiency of energy procurement in addition to supervising the interests of associates in the power market. ElFi companies consumes approximately 15 % (13 TWh/a) of the total electricity consumption of Finland. Page 1

3 1. THE NORDIC ELECTRICITY MARKET AND THE PRODUCTION Finland has been part of the Nordic Electricity Market since The Nordic electricity market covers Finland, Sweden, Norway and Denmark. This Nordic market area is called Nord Pool area, based on the name of the common Power Exchange. In Nordic electricity market the power production (and the consumption) is approximately TWh/a. Roughly half of the production is based on hydro power production, mainly locatesd in Norway and Sweden. All together, approximately 65 % (2008) of power generation in Nordic is based on the renewable energy like hydro, wind and biomass/wood based fuels. Nuclear power represents approximately 20 % share of the production. So, in total 85 % of Nordic power production is CO2 free TWh/a CO2 free/neutral production Production with fossil CO2 emissions Source: Nordel Annual statistics Picture 1, Power production in Nordic Page 2

4 2. THE NORDIC ELECTRICITY WHOLESALE MARKETS AND EU ETS The Nordic wholesale market for the electricity is operated by Nord Pool Spot ASA power exchange, located in Oslo Norway. In Nord Pool Spot the market actors trade electricity in the spot market. The Spot market is so called day a head market operated once a day by closed trading round -principle, where actors place their bid- and ask- offers for each individual 24 hour for next day. The Spot -market operates with marginal cost principle, where the crossing of bid- and ask curves determinate the price ( /MWh) and the volume (MWh/h) for each hour. In a short term, taking in to account the electricity s specific character as non storable commodity, the large portion of hydropower production and the lack of demand response (un-elastic consumption), there is high volatility in the Nordic wholesale prices. In addition to Spot market Nord Pool ASA / Nasdaq OMX Commodities provides market place for financial products from days to years, five years forward. The financial products are settled against the spot price (underlying asset is spot), so market actors can hedge their future market price risk through financial market products. The coal condensing power has been the marginal production capacity in Nordic last decade. The marginal cost of coal condensing power has set the price for Nordic power market in a normal hydrological situation. At times, mainly due the variation in hydrological situation, but also variations in other market conditions, like changes in consumption, temperature, etc., the price for Nordic electricity market has been defined by other production plants marginal costs than coal condensing power. When choosing a long enough observation period, which consist different market and weather conditions, the impact of these conditions will dampen. In the competitive and well functioning market, the price of electricity will approach the marginal production plant s marginal costs (includes fuel, O&M and CO2 cost) in several years observation period. It is essential to note, that due to the large portion of hydro power production in the Nordic power system and the possibility to storage the water in reservoirs, the price of electricity can be determined by the marginal costs of coal condensing power even though coal condensing plant is not operating as the marginal power plant at the given moment, because of the strategic bidding of producers. EU s Emission Trading Scheme, EU ETS, started in It has had a significant impact in the electricity market price, because Emission allowances (EUA) price effect s the marginal cost of the coal condensing power plants. As an average coal condensing power plant in Nordic has efficiency somewhere around 39 % and 1 ton coal as a fuel has CO2 emission factor 0,35 ton/mwh, we shall have CO2 emission factor for produced electricity by coal condensing power ~ 0,9 ton/mwh e. The price of EUA will pass through to the electricity market price by factor 0,9 in theory. (An example: With EUA price 15 /ton have price impact to electricity price of 0,9 ton/mwh*15 /ton = 13,5 /MWh ). This is illustrated in Picture 2 and described later in this document. Page 3

5 Picture 2, Picture of principle, the price formation in the electricity market 3. PRICING OF THE ELECTRICITY FUTURES As illustrated in chapter 2, in theory the electricity prices are set by the marginal costs of marginal production capacity. How this theoretical pricing actually is realized in the power market, can be determined by calculating the production cost of marginal production and comparing this to the realized market price (more in chapter 4). In a functioning market, this is the case for electricity future markets as well (because the underlying asset for futures is spot). This can be verified (similar method that in the spot market) by calculating the marginal cost of coal condensing power from the future market price of coal (API2) and the future market price of emission allowances (EUA) and comparing result to the actual market price of future electricity market. A strong correlation can clearly be seen in pictures 3 and 4, which also shows that in Nordic the CO2 cost actually pass through to the future electricity price by 100 % almost all the time. Page 4

6 Picture 3, The electricity market price and marginal production costs of coal condensing power including CO2 cost s, year Picture 4, The electricity market price and marginal production costs of coal condensing power including CO2 cost s, year Page 5

7 4. THE IMPACT OF EU ETS IN THE ELECTRICITY MARKET Since EU s Emission trading scheme EU ETS started 2005, the market price of EUA has been in range 0-30 /ton and in average 13,3 /ton between years EUA price /ton Picture 5, The market price of EUA years In our study the impact of EU ETS for the Nordic electricity markets is estimated by calculating the marginal cost ( incl. O&M) of the marginal production capacity, coal condensing power by using the realized market price s for coal (API2) and emission allowances (EUA) during years In other words, electricity price was calculated with same principle as the electricity markets are pricing the electricity for the future (pictures 3 and 4), but in this case backward using the actual realized market price s for coal (API2) and emission allowances (EUA price). Finally, we compared the results to the realized electricity market price (Nord Pool Spot, SYS). In period the marginal price of coal condensing power incl. EUA was extremely close to the actual electricity market price in Nordic. Period The marginal costs of coal condensing power incl. EUA The Electricity market price, Nord Pool SYS Deviation % /MWh 37,61 37,12 1,3 % This observation verifies that the CO2 cost (EUA) actually has passed through to the electricity market price by 100 % of its theoretical value in average during years As illustrated in chapter 3, the electricity market futures have also been priced according to marginal production cost of coal condensing power. If the future market pricing and historical spot pricing would have separated strongly, it would have raised questions about the market functionality and pricing. Page 6

8 As explained in chapter 2, In short observation period different market condition shifts the electricity market price off from the marginal production costs, coal condensing power. This can be seen in Picture 6. However as describe earlier, when the observation period is long enough, which includes different market conditions, the impact of individual market condition fades out and the pricing in the market will approach the marginal production costs. 80 /MWh Marginal cost of Coal Condensing power incl. CO2 Marginal cost of Coal Condensing power Electricity Market Price Nord Pool (sys) Picture 6, The electricity market prices and Marginal cost of Coal condensing power inc. CO2 cost, weekly resolution, years The Nordic electricity consumption was in total 1930 TWh during years By valuing this electricity consumption by realized electricity market price and comparing this to the market value calculated by marginal cost of coal condensing power excluding CO2 cost s (grey) we shall have an estimate of the impact of EU ETS in the Nordic electricity market value. The electricity market value by Nord Pool market prices 71,7 billion The electricity market value by marginal cost of coal cond. power excl. CO2 47,9 billion The impact of EU ETS in Nordic electricity market value (diff. of previous) 23,8 billion An alternative and simpler way to estimate the impact of EU ETS in Nordic electricity market value is to calculate it by realized EUA prices, the emission factor for coal condensing power and realized electricity consumption in Nordic. The impact of EU ETS in Nordic electricity market value: 13,3 /ton * 0,9 ton/mwh * 1930 TWh = 23,1 billion Page 7

9 Both approach gives similar estimate of the impact of the EU ETS in Nordic electricity market value. Small difference can be explained by the tighter weekly resolution used in calculating the impact via market prices and consumption (It takes in account the seasonal variation in electricity consumption and prices). Based on our study we can summary that during years in the Nordic electricity market: - The EUA price has passed through to electricity price by 100% in average (theoretical factor ~0,9 ton/mwh) - The EU ETS have increased the market price ~50 % (~12 /MWh) - The impact of EU ETS in Nordic electricity market value has been remarkable and the market value has increased by approximately 23 billion. 5. CO2 EMISSIONS IN THE NORDIC ELECTRICITY PRODUCTION The CO2 emissions in the Nordic electricity production has been in range milj.ton/a, during years The variation in the hydro power production, due different hydrological situation, explains most of the yearly variation. 60 CO2 emissions in Nordic electricity Production NO SWE DK FIN Picture 7, sources: Tilastokeskus, Dansk Industry and Norsk Industry Before the EU ETS, the CO2 emissions in the Nordic electricity production were in average 44 milj.ton/a in years With the EU ETS, during years the CO2 emissions in the Nordic electricity production was in average 39 milj.ton/a. Directly comparing these two observation periods, Page 8

10 CO2 emissions in the electricity production has decreased altogether in average 5 milj.ton/a (11%) in EU ETS years However, taking in account the variation in hydro power production and variations in the electricity consumption, conclusions has to be made carefully. When estimating how the EU ETS has decreased the CO2 emissions in the Nordic electricity production, it is important to take in account the impact of different Support Schemes renewable energy production like feed-in tariffs, green certificates, investment support and tax reduction support schemes. With these Support Schemes the Nordic countries has promoted new renewable electricity production with several billions during last decade. Energy consulting company Pöyry Energy Oy studied New market design for the Nordic electricity market in June 2009 for the Federation of Finnish Technology Industries. Part of the study was to estimate the impact of EU ETS for the electricity market prices and cost impact for the market value in Nordic in year In the study, it was shown that the EU ETS shall have huge cost burden for electricity consumers. EU ETS will bring 10 times bigger cost for the electricity consumers than the actual cost of buying the EUA s, needed in power production, from the emission market. Picture 8, Pöyry Energy Oy, New Design for the Electricity Market report This study provides similar estimate for years To calculate the cost of one CO2 emission generated in Nordic electricity production, it was estimated that year 2009 CO2 emissions in the Nordic electricity production were at the same level as in in average. (When this report was origin published in Finnish in April 2010, the statistics of year 2009 CO2 emissions was not yet available). As a result, CO2 emission cost for the electricity consumers was 120 /ton (23,8 billion /196 milj.ton). This was 9 times than the market price of EUA at the same period (13,3 /ton). Also the cost of one CO2 reduction in the Nordic electricity production was for the consumers 950 /ton (23,8 billion /25 milj.ton) with the assumption that all CO2 emission reduction during last year are achieved by the EU ETS (not taken in account the impact of several Support Schemes for renewable energy). Page 9