wake up! reforming the eu emission trading scheme (ets .../media/files/us-files/intelligence/... ·...

E N E R G Y

Wake up! Reforming the EU Emission Trading Scheme (ETS): Comparative evaluation of the different options Launch event presentation

08/11/2016

E N E R G Y

Table of Contents

2

I. Context, objectives and key messages of the study 2

II. Key issues with the current EC proposal for EU ETS reform 9

III. Fixing the EU ETS: Possible approaches for reform 15

IV. Conclusions and policy recommendations 22

V. Appendix 25

E N E R G Y

I. Context, objectives and key messages of the study

E N E R G Y

Strategy

Policy and Regulation

M&A and Due Diligence

Competition Economics & State Aid

Disputes (economical, commercial and technical)

Introduction to FTI-Compass Lexecon Energy

FTI-Compass Lexecon Energy is a collaboration of energy experts from Compass Lexecon and FTI Consulting. Compass Lexecon is a wholly owned subsidiary of FTI Consulting.

CLIENTS INCLUDE:

■ Electricity Utilities, including generation, transmission, distribution and customer businesses

■ Gas Utilities, including upstream, midstream and downstream businesses

■ Technology and OEM providers

■ Regulators

■ Lawyers

■ Governments, including at the national and European level

■ Lenders and investors

■ Trade Associations

Corporate

Finance Strategic

Communications

One of the world’s largest investor

relations businesses specialising in

advising companies in critical

situations.

Technology

Provides e-discovery software,

services and expertise to deliver

smart solutions for clients.

Economic and

Financial Consulting

Analysis of complex economic,

regulatory and finance issues to

assist clients in understanding the

issues and opportunities they face.

Forensic and

Litigation Consulting

Independent dispute advisory,

investigative, data

acquisition/analysis and forensic

accounting services.

Provide strategic, operational,

financial and capital needs of

businesses. Address complete

spectrum of financial and

transactional challenges.

We support clients across the energy value chain

4

Fixing the ETS Conclusion Appendix Issues with proposal Context & objectives

E N E R G Y

A series of economic and political factors have led to a significant surplus of ETS allowances which requires urgent and decisive action

5 Source: http://www.eea.europa.eu/data-and-maps/data/data-viewers/emissions-trading-viewer

The EU established a pioneering CO2 Emissions Trading Scheme (ETS) in 2003 as the cornerstone of its climate change strategy

Yet a series of economic and political factors have led to an imbalance of supply and demand and depressed carbon prices

This risks increasing the costs of mitigating climate change as the ETS does not support investment in clean technologies

The mere existence of the ETS is threatened as another decade of low prices would likely undermine its credibility and lead to the implementation of national policies


EU ETS emissions (stationary installations), 2005 – 2015

http://www.eea.europa.eu/data-and-maps/data/data-viewers/emissions-trading-viewer











E N E R G Y

ETS reform options are currently discussed

6

A current window of opportunity to reform the EU ETS, but closing in a few months

Ongoing codecision process in Parliament and Council following proposal from Commission

Urgent action required before ETS loses credibility and national policies get implemented

Proposal from the Commission being discussed, supporting 3 structural reforms

An increase in the speed of decline of the annual emissions cap from -1.74%/year to -2.20%/year

A Market Stability Reserve (MSR) which could park annually 12% of the surplus allowances accumulated in the previous years(i)

An enhanced carbon leakage framework to preserve the competitiveness of the European industry

Changed context since Commission tabled proposals

Paris climate Agreement committing EU to pursue efforts towards a more ambitious +1.5°C target

Spread of uncoordinated Member States interventions to decarbonise their national electricity sector, displacing the EU ETS as the central tool to decarbonise the EU ETS sectors

2015-2017


(i) MSR enacted through an EU decision – Not part of Directive revision

Context of the study

E N E R G Y

This study aims at assessing the impact of potential ETS reform options, and their effect on the power sector

7

Objectives of the study

Identify the different underlying issues with the EU ETS

Use proprietary model of the ETS market to evaluate the impact of the EC’s proposed reform

Identify and model the impact of alternative approaches for ETS reform

Use proprietary power sector model to evaluate impact of the different options for ETS reform on the power sector

Study committee members

Provide fact-based evidence by modelling the impact of different approaches for ETS reform

Derive policy recommendations and disseminate the study results with key stakeholders


E N E R G Y

Our impact assessment is based on an in-house ETS and EU power market model calibrated based on a robust set of assumptions

8


Note: The EU ETS modelling approach is inspired from the ZEPHYR model developed by Raphaël Trotignon & Boris Solier (Paris Dauphine University, Chaire Economie du Climat : http://www.chaireeconomieduclimat.org)

Our baseline scenario is based on the recent EC Reference Scenario 2016, and our power sector model is based on the latest announcements from TSOs, regulators and market participants

FTI-CL EU ETS model factors in the inter-temporality and anticipations from the different market participants actually observed in the ETS market (myopic agents with 3-5 years horizon)

http://www.chaireeconomieduclimat.org/

E N E R G Y

II. Key issues with the current EC proposal for EU ETS reform

E N E R G Y

The reform needs to be more ambitious if it is to tackle the different ETS issues and rebuild the credibility of the ETS

Short-term Long-term

Emissions below target – largely driven by complimentary policies

Not in line with the goal of limiting global warming to 2°C, and a fortiori, with the ambition of limiting it to 1.5°C

Too low to provide efficient signal for carbon abatement via coal-gas switching, and driving lock-in of fossil plants

Too low to drive investment in clean technologies leading to continuation of need for targeted support for specific technologies

Vulnerability to market shocks and overlap with complimentary policies Overlapping low carbon policies achieve mandated abatement at a high cost and

displace ETS-driven efficient abatement

Emissions

Prices

X

X

X

X

10

1

3 2

4


CO2

Synthetic assessment of the issues identified for ETS reform

Policies overlap Other low carbon policies: RES, EE, mandated plant closures, etc.

ETS

mar

ket

ETS

rob

ust

ne

ss

E N E R G Y

ETS emissions, 2015 – 2040

The current emissions trajectory is not in line with the objective of limiting global warming to +2°C

11

The EU ETS proposal is not in line with the EU 2050 objective of 80%-95% emissions reduction to stay below 2°C…

“In order to set the cap equal to this level [90% emissions reduction by 2050], the LRF in the ETS would need to further increase to -2.4% until 2050” (EC, Impact

Assement 2014)

… and a fortiori, with the ambition of limiting it to 1.5°C as suggested by the Paris agreement


Source: European Commission, ”Impact assessment 2014 - A policy framework for climate and energy in the period from 2020 up to 2030“, p. 105

CO2

1

E N E R G Y

The EU ETS carbon price level is too low to drive investment in clean technologies (RES, nuclear, etc.) and avoid investments in fossil fuels technologies

Estimates of the social cost of carbon(i) range from about 20-70€/t in 2020, and 40-110€/t in 2030

ETS prices do not support investment in clean technologies, supporting an inefficient decarbonisation path

12


Note: (i) It is the marginal global damage costs of carbon emissions for Europe. Estimated as the NPV of climate change impacts in the long-term of one additional tonne of carbon emitted today.

EU ETS carbon price (real 2015), 2015 – 2040

2

The EU ETS carbon price level is too low to provide a reliable short-term economic signal for switching to low carbon technology in the power sector(ii)

It only reaches the CO2 coal / gas breakeven price in the 2030s(ii)

(ii) Given the range of efficiencies of existing plants, the fuel switch would be triggered between a range of CO2 price. Source: Knopf (2013), “The EMF28 Study on Scenarios for Transforming the European Energy System”.

E N E R G Y

Carbon prices below 20€/tonne by 2020 and 25€/tonne by 2025 would drive lock-in of emissions via (re)investment in 187 GW of fossil technologies over 2025-2040 (52 GW of coal and lignite power plants lifetime expansions and 137 GW of gas new capacity).

Low carbon price would maintain significant carbon emitting technologies in the mix: about 360 GW of fossil fuel plants still in operation in 2040.

The ETS baseline scenario leads to a significant long-term lock-in of fossil generation capacity

13

Carbon emitting technologies capacity outlook, 2015 – 2040

360 GW of fossil plants still in operation in 2040


Note: (i) Plants compliant with emissions standards could be extended ;(ii) We use plant-specific information on all coal & lignite plants, from Platts, national registers, LCP dataset, Transitional National Plan and operators announcements. In case of no data, assumption of a standard lifetime of 50 years coherent with Germany G7 Coal analysis (September 2015).

2/3

137 GW of new gas investments

52 GW of coal and lignite life expansion investments

E N E R G Y

CO2

EU and national overlapping policies prevent the EU ETS to provide an efficient and credible signal to decarbonise

14

Allowance cap reduction to neutralize impact of RES-E and EE policies, 2021 – 2030

A number of overlapping policies have / will likely reduce the demand for carbon allowances, and thus threaten the ETS balance and strength of the price signal:

EU energy efficiency and (marginally) RES policy

IED and nationally driven coal phase-out plans

Overlapping policies often achieve mandated emission reductions at a higher cost than ETS-driven abatement

-148 Mt in 2030 (11% of cap)


4

E N E R G Y

III. Fixing the EU ETS: Possible approaches for reform

E N E R G Y

We have identified six types of options for a more ambitious reform, which we have analysed and assessed

Setting a higher Linear Reduction Factor (LRF) consistent with COP21 targets (above 2.2%)

Without rebasing

With rebasing

Option types Central parameters

2.6%

Rebasing in 2021 on projected 2018-2020 emissions ([email protected]%)

Green club of countries cancelling allowances with budget of 0.007% GDP(i)

Cap reduced by amount of emissions equivalent to EE & RES measures

20-50€/t growing at 5%+inflation p.a.

24% outtake rate


Parameters range in policy debate

1.74% - 2.8%

Rebasing on 2016-2018 or 2018-2020 emissions

No / One-off / Continuous cancellations

No compensation

Compensation of national measures

Compensation of EU measures

No measure / Floor only / Cap & floor

Strong or moderate growth of cap/floor

12% / 24%

12% + % on oversupply above 833Mt

Developing voluntary allowance cancellation

Adjustments of overlapping policies to neutralize the effect of Energy Efficiency, Renewable policies, IED, etc.

Introducing a price corridor

Increasing the Market Stability Reserve outtake rate (above 12%)

16 (i) Similar effort as Swedish government measure recently announced

ETS

E N E R G Y

Each option structurally improves the ETS, but no single option addresses all the issues

17

Positive impacts of options vs. current package

+

+

+

+

+

6 options to address issues

Solutions

Reduction of cap

Voluntary allowance cancellation

Adjustment for overlapping policies

Price corridor

Stronger Market Stability Reserve

Performance against issues

ETS

Depends on calibration

+

Short Term

Impact on issues

Long Term

Robustness/ policy overlap

+

+

+


Limited short-term impact, due to market players’ limited foresight and gradual impact of reform. Growing impact as the market is drying up post-2020.

Limited impact due to budget constraint

Limited short-term impact if implemented as a gradual reduction in cap, because of market players’ limited foresight . Long term impact depend on implementation.

Supports short-term carbon prices. Long term impact depends on calibration, in any case strengthening credibility of ETS and its robustness to potential future shocks.

Positive short-term impact as stronger MSR rebalances market faster. Limited impact as stronger MSR does not alter supply and demand balance in the long term.

+

Depends on implementation

E N E R G Y

A range of combinations of reform options could comprehensively address the different issues of the ETS

18

Baseline - EC Reform (Re)investment in 187 GW of

fossil technologies over 2025-2040

360 GW of fossil plants still in operation in 2040.


Positive short term impact

Positive long term impact

Cost effective decarbonization:

Supports investment in clean technologies, prevents lock-in and favours coal-gas switching

Depends on calibration of floor / ceiling

Depends on calibration of floor / ceiling

ETS

ETS

ETS ETS



E N E R G Y

The Higher LRF option has growing impact as the market is drying up post-2020

The Rebasing has a more moderate impact

The Adjustment for overlapping policies, Price corridor and Stronger MSR options have limited impact in the long term as those options do not materially alter supply and demand balance in the long run as compared to baseline

The Volontary cancellation option has limited scale due to budget constraint

Only Higher LRF and Rebasing options lead to lower emissions in line with the EU long-term climate targets

19

Emissions under ETS


ETS

CO2

E N E R G Y

Rebasing, Price corridor and Stronger MSR options support short-term carbon prices for decarbonization

20

EU ETS carbon price (real 2015)

The Higher LRF and Adjustment for overlapping policies options do not foster coal-gas switching and investment in clean technologies in the short run, due to market participants’ limited foresight and gradual impact of reform

The Rebasing, Price corridor and Stronger MSR options support short-term carbon prices, favouring coal-gas switching and investment in clean technologies

The Volontary cancellation option has limited scale due to budget constraint


ETS

E N E R G Y

Reform options lead to up to 86 B€ additional auction revenues, that could, in part, further support compensations for carbon leakage risk

21

Net revenue from auctions, 2015 - 2040


Methodology: Cash flows are computed as the annual revenue derived from the auction of allowances.

Net revenue is defined as the net present value of cash flows over 2015 – 2040. Cash flows are discounted using a -0.7% real interest rate. https://data.oecd.org/interest/long-term-interest-rates.htm

Budget opportunities to further compensate European industry for carbon leakage risk

ETS

An appropriate treatment of the carbon leakage risk to is an essential pre-requisite of any ambitious ETS reform

https://data.oecd.org/interest/long-term-interest-rates.htm








E N E R G Y

IV. Conclusions and policy recommendations

E N E R G Y

Conclusion: Wake up! The ETS reform needs to be more ambitious to salvage the ETS

23

1 2 3 The ETS needs reform urgently

Window of opportunity

Context change: Paris climate agreement marks increased ambition

Credibility of ETS at stake: vicious circle

Decarbonization driven by national regulations and financial support for some specific technologies

The Commission’s proposed ETS reform needs to be more ambitious

Inefficient and costly pathway to decarbonisation

EU long term emissions goal in danger

Price signal insufficient to avoid fossil fuel technology lock-in in the power sector

We modelled six alternative options for ETS reform and their combinations

Options addressing either short term or long term issues, EU or national scope: no silver bullet

We identified six combinations of options which could form the basis of an ambitious yet realistic ETS reform

2016


✘ ✘ ETS

Loss of credibility National measures

Expensive decarbonization

CO2

LRF Rebasing Green Club

Corridor MSR+

ETS

Other policies

E N E R G Y

Thank you for your attention

24

Contact for questions:

Fabien Roques

Senior Vice President

FTI - COMPASS LEXECON

+33 1 53 05 36 29

[email protected]

DISCLAIMER

The authors and the publisher of this work have checked with sources believed to be reliable in their efforts to provide information that is complete and generally in accord with the standards accepted at the time of publication. However, neither the authors nor the publisher nor any other party who has been involved in the preparation or publication of this work warrants that the information contained herein is in every respect accurate or complete, and they are not responsible for any errors or omissions or for the results obtained from use of

such information. The authors and the publisher expressly disclaim any express or implied warranty, including any implied warranty of merchantability or fitness for a specific purpose, or that the use of the information contained in this work is free from intellectual property infringement. This work and all information are supplied "AS IS." Readers are encouraged to

confirm the information contained herein with other sources. The information provided herein is not intended to replace professional advice. The authors and the publisher make no representations or warranties with respect to any action or failure to act by any person following the information offered or provided within or through this work. The authors and the

publisher will not be liable for any direct, indirect, consequential, special, exemplary, or other damages arising therefrom. Statements or opinions expressed in the work are those of their respective authors only. The views expressed on this work do not necessarily represent the views of the publisher, its management or employees, and the publisher is not responsible for,

and disclaims any and all liability for the content of statements written by authors of this work.

Extended study presentation available

on our website:

FTI Intelligence - Carbon

http://www.fticonsulting.com/fti-

intelligence/energy/research/carbon

www ?

mailto:[email protected]

http://www.fticonsulting.com/fti-intelligence/energy/research/carbon





E N E R G Y

V. Appendix

E N E R G Y

Comparison of options – Detailed indicators

26

Only Rebasing, Corridor and Stronger MSR have a strong price impact in the short run – preventing high carbon technology lock-in.

Rebasing and Corridor have a strong long-term impact on price – reflecting social cost of carbon.

Only Higher LRF and Rebasing have a significant impact on long-term power sectors emissions – meeting EU targets of 90% reduction by 2050.

EC Baseline

Higher LRF Rebasing Voluntary

cancellation Adjustem

ent Corridor

Stronger MSR

CO2 emissions

(Mt CO2-eq)

(% reduction compared to

baseline)

2020 1,636 1,619

(1%)

1,606

(2%)

1,636

(0%)

1,609

(2%)

1,524

(7%)

1,530

(6%)

2030 1,241 1,172

(6%)

1,173

(5%)

1,216

(2%)

1,127

(9%)

1,200

(3%)

1,109

(11%)

2040 846 738

(13%)

786

(7%)

847

(0%)

834

(1%)

846

(0%)

842

(0%)

Emissions price (€/tCO2)

2020 4.7 5.9 9.4 4.7 6.5 20.0 10.3

2030 30.4 34.2 34.9 31.7 37.0 31.0 33.5

2040 59.1 92.1 75.1 58.4 58.4 56.8 56.4

Auction revenues

(bn€)

2021-2030

227 244 256 235 248 247 254

2031-2040

381 446 415 381 378 369 382


E N E R G Y

Power market dispatch model

We use a dispatch model of the CO2 EU ETS power markets. It is calibrated to reproduce historical power market prices and generation level.

For each year, we optimise market participants operational and investment /retirement decisions based on their expected costs and revenues.

Modelling features

Our power market model is designed to model renewable generation. Hourly wind & solar profiles are derived from our in-house methodology that converts consolidated wind speeds / solar radiation into power output. Hydro generation is derived from hydro thermal co-optimization algorithm embedded at the heart of Plexos.

FTI-CL electricity sector model

Power market model – Modelling approach

27

■ Demand

■ Fuel prices

■ Hourly Renewable profile

■ Plant build / retirement

■ Operating costs / constraints

Inputs European Power Market Dispatch model

■ Wholesale power prices and spreads at different granularities

■ Capacity price

■ Emissions

■ Fuel Consumption

■ System costs

■ Imports & Exports

■ Asset valuation

■ Policy and regulation comparison

Outputs

Utility Strategic Decision

Power Market Dispatch model

Asset Profitability

module

Hourly generation dispatch

Optimization of operational constraints

Co-optimization of hydro and thermal generation

Energy revenue

Ancillary Services revenue

Capacity revenue

NPV analysis for:

New entrant

Mothballing

Retirement

Conversion

■ Regulated generation

■ Energy policy

■ Regulatory development in spot markets

Regulation


wake up! reforming the eu emission trading scheme (ets .../media/files/us-files/intelligence/... ·...

Documents