EDF EU Group entities are regulated under EU ETS and EDF operates on the carbon market (EUAs and CERs/ERUs) through EDF-T, its trading entity

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1 CARBON MARKETS SEMINAR PROSPECTS OF CARBON MARKETS AFTER THE PARIS AGREEMENT PART II - INSTITUTIONAL ARRANGEMENTS FOR EFFECTIVE CARBON PRICING VIEWS FROM THE PRIVATE SECTOR : EDF GROUP Dr. Jean-Yves CANEILL Head of Climate Policy EDF TOKYO, June 18, 2016 Ministry of the Environment (MOE), Institute for Global Environmental Strategies (IGES) EDF Group in 1 «slide»! A leading player in the energy market, active in all areas of electricity from generation to trading and network management; Balance between regulated and deregulated activities; Engineering and operating generation plants and networks. Leader in the French and UK electricity markets, solid positions in Italy and numerous other European countries; industrial operations in Asia and the United States EDF EU Group entities are regulated under EU ETS and EDF operates on the carbon market (EUAs and CERs/ERUs) through EDF-T, its trading entity EDF Group is an actor low carbon in specific emissions thanks to its energy mix built with low CO 2 emitting technologies : nuclear in France and UK, hydro and renewables Corporate Responsibility commitment to stay below 150gCO 2 /kwh at group level A carbon strategy decided in 2008 and a climate change adaptation strategy in data 37.6 million Customers 159,112 Employees TWh Net electricity output (Net Installed Capacity: Gwe) 75.0 billion Sales 95.0 gco 2 per kwh generated (CO 2 specific emissions) 59.1 Mt CO 2 (CO2 absolute emissions)

2 Challenges for our sector Power Sector A large number of actors Geographical differences Sectoral perspectives Competition in regional areas New opportunities and vector of development Government Differing perspectives Geographic/regional perspectives National energy policies Need actions Need for fulfillment of commitments Source: adapted from WBCSD Investment, diffusion and innovation Actions Emission reductions, development, survival EDF s historical involvement and current positioning History of the EDF Group involvement 1990: Launching «Climate Science and Economics» concern in R&D Division : R&D project on consequences of emissions trading on multi-annual management of generation facilities 2001: A Kyoto Steering Committee organized with the main players of EDF group to share experience and preparing future (AERES commitments) 2005: Developing a Carbon Fund to mitigate our carbon exposure when EU ETS regulation is entering into force 2008: Signing a corporate Carbon Strategy within EDF Group Since 2013, engaging into the EU ETS revision process 2016: Revisiting our carbon targets in the framework of our strategy Cap 2030 International initiatives 1992: Creation of E7 - EDF is a member - Commitment on sustainable development principles 1998 / 2003: With EURELECTRIC, launching the GETS experiments 2001: Active member of AERES (French voluntary commitment system) and investigating CDM and JI projects 2002+: Involvement in the WBCSD Electricity utility project : Eurelectric project The role of electricity and Power Choices

3 Key conclusions from GETS experiments «Greenhouse gas emissions and Energy (Electricity) Trading Simulations» GETS 1 (1999) Most companies traded CO 2 actively and learnt quickly how to include the price signal into their strategies Trading per se was not a problem Investment, not trading, delivered compliance at the end; emissions trading helped to lower the cost of compliance GETS 2 (2000) Companies investments drive environmental compliance...the emissions trading market allows them to integrate fully environmental goals into business strategies and decision making. THREE STEPS IN THE INSTITUTIONNALISATION OF THE EXPERIMENTAL PROCESS GETS Eurelectric IEA/PwC GETS Process Paris Bourse Industry, Financial Institutions European Commission + Governments + European Parliament 1997 Kyoto 1999 GETS1 Nov 1999 COP GETS2 COP EC Stakeholder Consultation GETS 3 and 3bis 2003 Adoption FROM M. CARTEL, PHD THESIS

4 POWER CHOICES : approach zero CO2 emissions in 2050 for EU electricity generation (EURELECTRIC) tco2/mwh Baseline 2009 Power Choices CO2 Intensity of Power Generation (From Eurelectric) Why a carbon strategy? Reducing carbon emissions has become an issue at stake internationally. Electricity sector is one of the sector first envisioned by adminstrative authorities when designing carbon policies in all countries Financial analysts have identified the carbon risk as an important one and that will have an influence on financial asset values. Reducing risks has to be encouraged as most as possible EDF Group is, because of its history, well positionned as far as carbon emissions are concerned. Keep alive this position needs the inclusion of the carbon issue in the strategic gestures of the group Carbon has to be integrated in the basic strategy on generation as well as downside

5 EDF Group Carbon Strategy (adopted in 2008) Remain the lowest emitter (g CO2/kwh) among the major European energy utilities + presently : remain under 150 gco2/kwh Generation «remaining the lowest CO2 emitter among the major European energy utilities» Investing in nuclear energy and renewables (hydro, wind, photovoltaic, biomass ) Using high efficiency generating technologies Implementing R&D programs on low carbon technologies Developing «smart grids» and energy storage solutions Employees Making our employees examples of climate change ambassadors and EDF Group strategy ambassadors By acting on private energy consumption and CO2 emissions of our employees By developing motivation, education, training, and communication actions Managing investments Integrate carbon in the decision-making process Clients Promoting eco-efficient end-use of electricity Innovative appliances and decentralised generation Demand side management Smart grids and smart meters and investing in R&D for fuel displacement by low carbon electricity High temperature heat pumps Hybrids cars, electric cars Operational CO2 emissions Reduce our direct & indirect CO2 emissions From our buildings From our cars Generated by transportation and purchase Managing CO2 emissions Managing carbon risk Carbon risk policy Compensation policy Carbon fund Carbon prices display unique features Carbon prices have been very volatile and trendy in the past Multiplicity of price driver : weather, gas to coal switch, regulation, economic situation. Steep supply curve Strong trends as similar class of players implement similar strategies

6 Company compliance strategies Three basic options 1. Internal abatement Efficiency improvements, fuel switching (if portfolio allows) in short term Repowering, restructuring plant portfolio, carbon capture and storage in longer term 2. Use of ETS market Spot trading of EU allowances (active / passive) 3. Hedge EU allowance forward contracts / derivative products CERs (and ERUs post 2008): bilateral, funds But limited availability of CERs in pilot period Balance for each company based on own circumstances Industrial business Model - Objective Fuel Cost CO2 Cost Fuel Power Plant Under the EUTS System Electricity Sale Variable Margin = Electricity Sale (Fuel Cost + CO2 Cost) The objectives of an industrial business company is to maximise and hedge the variable margin of the plant: In order to maximise the variable margin, an optimisation mathematical model is used to calculate the forecasted generation of the power plants (Volume and Schedules) for example in the next three years In order to hedge the margin, our hedge policy is to buy Fuel and CO2, and sell Electricity simultaneously ( and according with forecasted generation), several months / years before the generation, in order to freeze the price of each commodity and fix the margin

7 EDF Group and the Carbon Market The corporate level draws the corporate strategy taking into account national circumstances Carbon constraint is integrated within the risk policy of each entity of the Group, in order to optimise at the best, the use of the generation units in the analysis of investments portfolios Synergies are activated appropriately A Carbon Fund managed by EDF-T, our trading company in order to cover a part of the CER s needs (offsets to comply at the least cost) Carbon strategy and investment strategies How to match them together? Main drivers of our carbon strategy: in particular EU absolute targets (- 75% in 2050) + our own commitments : a low CO2 profile The case of our existing fleets Improving nominal efficiencies of the fossil fired plants When decomissioning plants, replacing by lower emissions plants Integrating CO2 price signal in the financial assessment of projects Changing the perimeter of the Group (acquiring and/or changing shareholder value) Possibility or not to induce further reductions National energy policy contexts Increasing capacity of our fleet to meet increasing demand Relying on low and free CO2 generation technologies Examining carefully any fossil fired project (CCS expectations?) Integrating CO2 price signal in the decision

8 Main Lessons Climate change challenge is becoming an important driver of the economic activity Mitigation issues such as «carbon» constraints has to be now included in any long term strategy Anticipation of strong regulatory approaches through setting internal targets has helped our Group to adapt more quickly to the new context : it is one of EDF Group commitment to sustainable development Involvement of the power sector in EU ETS birth has been essential The GETS experiments together with quite a number of other experiences helped to create a mediating platform through which right ideas channeled through the whole process up to the final political discussion and decision Stakeholder involvement is important given the fact that these regulations imply ahead strong decisions from the actors Creating an epistemic community that can take the process forward Idea of a trial and error process that can help to test the design ex ante An important lesson learned : collective creation of the design The different instruments and ideas were brought into the debate by the different participants This allowed the participants to the future regulation that was going to emerge to get appropriation of the instrument and male it acceptable Challenges ahead : recover a right governance of the climate/energy package 2030 in line with the Paris agreement targets