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Julia Reinaud Energy Efficiency and Environment, IEA IEA Side Event - SBSTA 10 May 2007

CO 2 Allowance and Electricity Price Interaction - Impact on Industry’s Electricity Purchasing Strategies -. Julia Reinaud Energy Efficiency and Environment, IEA IEA Side Event - SBSTA 10 May 2007. The analysis.

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Julia Reinaud Energy Efficiency and Environment, IEA IEA Side Event - SBSTA 10 May 2007

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  1. CO2 Allowance and Electricity Price Interaction- Impact on Industry’s Electricity Purchasing Strategies - Julia Reinaud Energy Efficiency and Environment, IEA IEA Side Event - SBSTA 10 May 2007

  2. The analysis • “Pass-through” of CO2 to electricity prices: from theory to observations (Fig.1) • Describing various EU electricity “markets” and prices • Industrial electricity prices and supply strategies (Fig.2) • Market mechanisms • Regulated tariffs • Self-generation • New business-models for the purchase of electricity • Conclusions and policy recommendations

  3. Figure 1.Electricity and CO2 prices CO2 price correction Electricity prices dropped along with CO2 prices while fuel prices remained constant

  4. Figure 2.Covering Consumption Profiles with Different Supply Contracts Source: Boisseleau, 2003

  5. Regional features • Scandinavia : prices formed on NORD POOL ('merit order' principle – hourly marginal cost of generation) • Spain : “regulated” tariffs may be a chosen option – negotiation between industry and generators since 2006 for long term contracts (generation costs based on domestic coal-fired plants) • Italy : annual contracts via tenders (fixed or indexed prices) • UK : "screen pricing" with trading of blocks (daily, monthly, trimester) + intra-day adjustment mechanisms. Exception to “screen pricing”: Centrica • Continental Europe : "screen pricing" for sale of annual blocks + “spot” (day-ahead) + intra-day adjustments • Eastern Europe and Baltic States : limited information

  6. New business models • Pooling purchases for long term contracts (e.g., Exeltium) • Self-generation with or without third parties (e.g., TVO based on Mankala principle) • Indexed contracts (e.g., Centrica) • New intermediaries to manage price risk and seeking investment opportunities in generation (e.g., Basel, Elfi)

  7. Conclusions on energy-intensive industry’s electricity prices • Prices can be lower than day-ahead and “bloc” prices only when the industrial facility accepts risk sharing • Sharing capital cost, locking-in prices, securing demand volumes • Industry-generator contracts can be indexed on “virtual plants” (e.g. Exeltium) • The actual choice of a high / low CO2 technology is in the hands of the generator • Electricity contracts indexed on non-fossil fuel generation costs • Loss of CO2 rent for generators

  8. Policy Insights • Careful: the “pool” model is not the norm! • Pass-through of CO2 price is inevitable in competitive markets • As a result, auctioning allowances to the power generators should not trigger higher electricity prices • Simplifies the allocation process • Politically more difficult; not without technical difficulties • The ultimate goal of cap-and-trade is to reduce emissions at least cost • Governments should refrain from using allocation processes as means to plan address diversity of power supply mix • Critical element of allocation: provide visibility on long term goals for power investment

  9. Thank you • Julia.Reinaud@iea.org • www.iea.org/textbase/papers/2007/jr_price_interaction.pdf

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