While joining EU, according to Adhesion Treaty,Poland was obliged to adapt its law and methodology of taken actions to EU regulations. One of the main challenges for the Polish energy market is the third phase introducing "auction system" in emission trade. According to the European Commission - auctioning of the allowances should be the principal rule used in relation to allocation in the Third Phase as the guarantee of transparency and simplicity of the system as well as the greatest stimulus that motivates investments in low-emission technologies.
Poland as a participant of European emission allowances trade market to become a serious business partner has to verify the rules of its functioning, learn more about the best practises and make use of our neighbours experience. That is why, we decided to organise the professional meeting place for European leaders in emission trade.
On 22 November 2012 we hosted "European Emission Trading Summit" - it was the first edition of the event organised by CBE Polska Team which became a great success.The participation list was closed earlier than expected. Representatives of following countries appeared: Poland, Austria, Belgium, Bulgaria, France, the Netherlands, Germany, Norway, Slovenia, Switzerland, Hungary and the United Kingdom. Representatives of regulatory institutions (the European Commission, KOBIZE, Energy Regulatory Office - URE) also participated. Please see the report below:
Seven years of ETS system - the summary and forecasts for both: obliged and obliging.
"European Union Emission Trading System it is not only an obligatory system that is used in the territory of European Union and European Economic Community. It is also an essentail tool, that is used to face problems and challenges connected to the climate change, not only in Europe, but also in the whole world. EU ETS is also the biggest world's cap-and-trade type system. According to the World's Bank, ETS is that what drives the global emissions market. It is about construing emissions reduction in the way of decreasing costs for units that are in the system" - said Piotr Plizga from DG Climate Action, European Commission in the beginning of European Emission Trading Summit held on 22 November 2012 in Warsaw.
Expert reminded that the system has been in force since 2005 and that it consists of phases. At the moment we are in the Phase II. The III Phase means the escalation in two ways Firstly, new sectors will be included and secondly - the gas market will be added as well. Currently there is 50% of CO2 emission and a bit less of other gases. The C02 market was priced to 77 billion euro (total turnover) and the value of emission allowances was 6 billion euro. These figures are rising.
The role of the European Commission.
Mr. Plizga said that from the point of view of European Commission the first and the most important issue for ETS are issues connected to the environment protection. The system guarantees the limitation of emission to the agreed level and at the same time it is a very useful tool when it comes to programming limits for emission and joining it to other aims that were agreed to achieve according to the strategy of Europa 2020 - increasing the renewable energy use and increasing of efficiency of sectors that influence greenhouse gases emission to the atmosphere.
Expert reminded also that European Commission has many roles in emission trading. The Commission is in charge of creation and implementation of climate politics and consequences of ETS solutions. At the same time the Commission has a legislative inititive which is essential for creating the direction of system's development in the future. It is worth adding that according to the Lisbon Treaty, changes in ETS system are accepted in a way of standard legislative procedure in which the Parliament is involved and for voting there is used a qualified majority.
Watching the legislative progress in the past few years, it appears to be obvious that ETS executive means for ETS are accepted in a way that Commission proposed - after veryfying it with Member States and after verifying the regulations according to compliance with legislative norm by the Parliament and the Government (in such ways executive regulations about auctions and decisions of emission rating were accepted. European Commission monitors implementation of rules on the national level and has a legitimation to start a legal proceeding against the Member States that act against the regulations as well as to audit the compliance of particular states legislation with EU directives.
The representative of European Commission reminded that EC acts also as the main governor and is responsible for supervision and functioning of EU register in which there are located the bills of ETS operators and of Member States. Additionally it administrates EUTL.
European law regulations - part 2
Dr. Michał Będkowski-Kozioł representing Law Firm Kochanski Zięba Rapala i Partnerzy, which was the Law Partner of the conference, emphasized that the EU ETS system is not entirely compact and all the time we are waiting for next solutions , additional law regulations, national regulations (about the period of transformation, between II and III phases) etc. Expert said that "we are still waiting for a new law, we've got only a basis for the alteration project, there is no the content - the text of the project - that is why it is hard to evaluate the legal solutions that will be in force in the third period".
The representative of the Law firm emphasized that the base of EU ETS is the directive 2003/87, then he reminded that "the directive is the specific act of European law as it requires implementation to the national law systems of Member States, which means that solutions accepted in particular countries can differ to each other in some way". It is a known tendency in direcitves (and their projects) that there become more and more specific.
The Directive 2003/87 has been changed for many times and, according to the Expert, the most important change has been the directive 2004/101 that added emission allowance (according to the Kyoto protocol), the directive 2008/101 that added aviation to the system and the most important - the directive 2009/29, which opens the III Phase and radically modifies the system.
The European system of emission trade depends also on executive regulations and decisions. Executive regulations become the part of national systems and in contrary to directives - there is no implementation needed. Decisions are the acts for Member States or other units and are obligatory only in the field included in the decision.
ETS is a system, where the power of particular regulations is different and it makes the whole system quite difficult. According to many experts, some solutions of the system are too complicated.
Prospects of changes in the III Phase
Bedkowski-Kozioł mentioned that before the changes of 2009 year , EU concentrated on reduction of CO2 emission (starting from III Phase to the system will be added the reduction of greenhouse gases). The second important issue which was emphasized by the representative of the law firm, is introducing cap-and-trade system: some allowances will be given to the sectors and entrepreneurs will be able to decide in which way they will be used (they can be used for their own purposes of emissions reduction, but can be also a subject of trade).
The obliged units must participate in the system. Before it worked in a bit different way: Member States prepared National Plans for emissions allocation and it was a base for defining emissions limits (for particular countries). The speaker added that "the rule for EU ETS system was to allocate allowances without any charges... In the Phase III, to the system will be added additional branches of industry (mentioned in the attachment 1 to the directive 2009/29 and additional greenhouse gases). Directive applies also to CCS installations. Moreover, according to the directive in force there is a possibility of excluding small installations- according to the article 27 of the directive. There is important though to implement the means that have an influence on emission reduction.
"Starting from now the limit will be given for the whole European Union instead of giving limits for particular countries". Next changes will be made because of auction sales. The trade of allowances will be the main rule for the system. The expert added: "The key regulation of directive describing European emission limit is limit given by European Commission". The current directive 2010/634/ WE from 22 October 2010 cancelled the decision 2010/384 dated to 9 July- and this is one of main point that assures us that changes in the system come really fast. The expert mentioned the bases for calcultaion: "It was taken the value from the first half of the period 2008-2012 and it was given on the basis of allowances given - the ones that have been given or will be given by Member States of National Plans of Emission Reduction".
At the same time the system introduces the reduction indicator of yearly decrease regarding the ratio=1,74% and to 2020 it will obtain the level of 20% reduction. In ETS it is also possible to make a correction by adding new emitting units and new installations (according to art.9a of directive 2003/87 in the new version).
Bedkowski-Kozioł added also that "Member States can sell all types of allowances that haven't been given as free of charges as benchmark and derogation. It is the main rule; although there are some exceptions". They are included in art.10 of directive 2003/87/WE.
The emission trade from the point of view of EEX
EEX would like to create some standards in European Union. So that if offers participation in the trade connected to the gray and green projects.According to Viviana Ciancibello, Key Account Manager from European Energy Exchange AG: EEX presumes that the structure of the market will change and in the future there wont be any allowances that are free of charge.
Auctions at EEX are scheduled for Tuesdays and Thursdays and the access to auctions is described in article 18 of executive regulations about auctions. Participants of these are operators and companies as well as financing institutions and corporates. There is also a category of middlemen that will take part in biddings representing their own companies or their clients (it is dependable on regulatory institutions).
One of the main requirements for participation is to register the company in the territory of EU and to open a nominated bank account. Additionally you need some technical agreement according to maximum value of the biddering (offer). All these are described in article 16 of the executive regulation about auctions. To become a member of the exchange and to get the membership in the Spot type or in derivate market. There is also the new type of membership that is connected only to the participation in auctions (if requirements are met). You can take part in auctions if you are a member of Eurex. Furthermore, in the Phase III the identity of clients will have to be defined. Additionally the financial firm has to have the authorization from the member state where a company is registered.
The representative of EEX informed that "the minimum size is 500 allowances which equals 500 tons of CO2. The offer might be withdrawn only in the case of mistakes. The price is given in the end of the bidding windows while all the offers are joined together by the certain algorithm" We must remember that the trade on the market is virtual and it is not made automatically by the transfer of allowances being the subject of the trade. To transfer credit to the external account you need to use the ECC (clearing house).
The trade appears to be intuitional. The access to the exchange doesn't require any additional software- all you need is to log in (logins and passowrds are provided by supervisors of EEX). Ciancibello added that : "if we take part in auctions on behalf, we need to submit the bidding form".
Emission trade from the point of view of ICE
A day before European Emission Trading Summit - on 21 November - there was the first auction at the ICE, on behalf of the British government (6,5 mln EUA). Sam Johnson Hill, Business Development Manager of ICE Futures Europe found it very succesful. The expert said that " the volume of the exchange is becoming bigger and bigger and currently it is around 30,000 contracts. Soon, there will start every-day transactions at the ICE ..." Expert informed that there are two ways to access the exchange. You can become a member, which reduces costs, and you can trade indirectly - via member of the ICE. What is more benefitable? Well, it all depends on the type of company.
The offer of the ICE can be cancelled in 2 hours. There is a system of notifications received by offerers and the whole market about completing the transaction. The matter of prices at the ICE appears to be the same as at the EEX. There are two matters that have to be considered: you've got to be an EU ETS operator or an investing company that is under the regulation.
Ewa Krukowska of Bloomberg asked: How does the procedure of cancellation of auctions look like, considering that the price was too low? For the last few days prices of stocks were lower than the prices in the derivate market. Who makes the decision about potential cancellation of the auction in such case? How do technical aspects of such closure look like?" Johnson-Hill answered: "There is a reserved price methodology. Myself haven't had too much side of that ...as there is certain Chinese Wall between myself and the suprvision team. In fact it is down to British government to decide if there is an element of flexibility. A few weeks ago the market was barely moving and last two weeks we have seen a 10% move in a day. We want to ensure that any reserved price will take it into account. Ofcourse methodology isnt available for everyone to see."
Speculation avoiding and risk reducing.
"What is or what will be the best practice in terms of managing the risks which companies are facing in Phase III?"- this question was aked by James Atkins, the President of Vertis Environmental Finance in the beginning of his speech. The company was the Partner in the "European Emission Trading Summit". Entering the Phase III we have to have the reliable knowledge about all these matters that we are speculating on. The most important change is decrease in free emission allowances allocation, so that companies will have to pay if they want to get more of these. Decisions connected to emission trade can have some essential influece on functioning of some companies.
According to Atkins, the policy of III Phase has to answer three questions: "When should we sell?" , "What volume?" and "In which way?" Before that there should be asked another question though: Why do we trade emission allowances? If prices of allowances will be constant we would just add them to the budget of company and make a notice to a financial director. But prices are not constant and for some companies the differences in prices may mean either a profit or a loss of million euros.
The President of Vertis emphasized that we shouldn't pressume what will be the changes in a price for emission allowances in the future and he used such an example:
"The steal mill since September hasnt done any trade and it has a shortage of 300,000 tons. The carbon price is 8 euro so exposure is 2,4 mln euro. If the price moves by one euro like it did last week and suddentl the exposure would grow to 2,7 mln, that's a change of 300,000 euros and it is much more than financial director can tolerate".
Of course we can use the volatility of carbon price based on historical volatility and make a simulation of price change. It would be only a half of success though as we dont live in a linear world. We can use only quasi- academic approach to risk management.
The key to avoid losses is the knowledge how to deal with the situation when constantly changing price of emission allowances influences profits of company. Profits will be out of control as companies dont have any influence on changing emission allowances prices and when percentage of production and demand for a coal will be higher than expected and if allocated amount of allowances will be much bigger than expected - it will mean that effects of price changes will be more severe. It is speculating of course-and we should avoid speculations. Let's say that the client manages a heating plant and account it in connection to the heat provided- if costs of gas or CO2 goes up, the margin will decrease or will not exist at all.
Atkins said that in last months we could noticed numerous strategies that company has been using or they thought they had been using to minimalize costs of carbon dioxide emission. Costs of such a strategy depends on trading schemes and sensibility of margin to clients' flexibility. Additonally, he emphasized that there is no possibility to use the hedging approach. If the company protects itself from changes in price for heat of electric energy - there can be a hedging strategy used to protect from changes in allowances price. For example: aviation companies are able to forecast quite precisely use of allowances for the whole year. The expert added that sometimes it might be profitable to invest in low-emission technologies.
The forecast for the market - According to the Point Carbon
Marcus Ferdinand, Senior Market Analyst from Thomson Reuters Point Carbon, asked three questions in the opening of his lecture: "What does the back-loading mean for the market ?", "What are the extends?", "Aviation exclusion - what does it mean to the market?"
As Ferdinand said, at the market - at the moment , according to the calculation of Point Carbon-there is an overdemand for allowances and it will last until 2020 year. It is very difficult to predict how prices will change, especially in a short term, as they are influenced by political decisions.
Declarations of decisive units influence prices in the energy market. CER prices are currently very low and it seems that the market stopped. Because of delay in political and administrative processes we can notice big volume of allowances in the market that aren't needed in the market.
There are possibilities to change, current, decreasing tendencies of the market. European Commission published the proposal to remove a certain amount of allowances from the market. It was also prepared a report about structurizing ways of changing the market and make it more environmentally friendly. There are also short-term actions in the longer process. The proposal of EU is to cut 400 mln tons of C02 in 2012 , 300 mln tons in 2014 and 200 mln tons in 2015 and later to add 300 mln tons in 2019 and 600 mln tons in 2020.
The back-loading means (in the most probable version) removing 900 mln tons in 2013-2015 years and adding them back to the market in years 2019-2020. It is currently one of the most often discussed aspects of EU ETS system. Everything will be clear in December as there might be the situation in which there wont be voting as the process might be really various. There is needed the qulified majority, which means that 91 votes are enough to block the option of back-loading. It is uncertain how particular States will vote- there are some presumptions, forecast and speculations though.
Poland is the only one that declared that would be voting against. It is also 100 % sure that the UK and Italy will be voting for ( although some companies at the conference said that as far as they knew it was not so sure about Italy). Generally, many countries haven't made their decisions yet or they dont want to announce it.
One of the most important countries in the debate might be Germany - they have a lot of votes (29) and the country seems to have influence on decisions made by other Member States. Reports shows that German Ministry of Economy is agains , the Ministry of Environment is for (that is what the Minister said in the interview a few days ago), while the German Ministry of Finance hasn't said anything in the topic.
Needs of the market and changes observations are the key to correct C02 emissions management.
"In the first phase EU ETS European Commission provided a surplus of allowances and enabled all the installations and units to learn how to trade them. The surplus caused decrease in prices. In Poland we had lack of allowances only in the first year. In next years, because of recession, the surplus decreased. When it comes to the year of 2012 - forecast shows the surplus in the amount of 2-3 mln tons. In the world, in 2008 there was 186 mln tons of shortage, in 2009 as well, in year 2010 and 2011 there was the surplus, but generally speaking in the last 4 years we have had shortage." - said Michał Mazurkiewicz, Manager of Carbon Emission Trade Division of PGE Polska Grupa Energetyczna.
The expert reminded that in 2005 year, prices were in the level of 25-30 EUR. The market expected that all the presumptions will come true (they expected it to reach the level of 65 euros). The market was unable to define its needs at that time.
In 2006 year we found out that the number of allowances for each country and prices ... started to fall. Allocations received by particular countries and installations were to high considering their needs. There appeared a problem of transferring the allowances between phases.This problem caused that allowances lost their value and their prices went down and reached the level of couple of cents.
Mazurkiewicz, because of many questions that have to be answered and observing current levels of prices, expects the stagnation in the market and prices in the lvel of 8-9 euros. According to the expert,the back-loading will not influence the market of EUA much. In the case of CER, a forecast is quite good- grey CERs will be a bit below 1 euro while green ones will be over 1 euro. Shall we believe in such "optimistic" forecasts?
Regular cards and joker cards - according to leading Norwegian company
We trade with all those, who are obliged- with both: industry and governments - in some way also with our departments in Germany. We've been in the market in 2003 - last year we made transactions for more than 200 mln tons - said Deketelaere, Carbon Originator from Norwegian Statkraft company, which was the Networking partner of the conference held in Warsaw. In the beginning the expert asked: How to manage your carbon portfolio?
According to Jo Deketelaere there are two kinds of tools- so called regular cards and joker cards. The first ones are those what Statkraft calls "flexibility of instruments of EUA and aEUA".
Expert said: "We can also distinguish something that is called flexibility in time- we can choose the moment when we play "joker card", we dont have to use them for current transactions". According to Deketelaere the important thing is to observe market prices and to evaluate, considering various periods in the future and at the same time to generate the profit. Additionally the expert finds the market that is outside the exchange interesting.
The portfolio managers needs to be aware that the market is uncertain and make sure for the value of portfolio to be balanced independly from what is going to happen.
Awaiting the decision about the back-loading and potential constant redemption influences the market. How to face all these challenges?
The most important thing is to observe the market and follow its tendencies. Current prices of emissions are very uncertain and portfolio of emission is sensitive and reacts on many conditions : We are trying to buy cheap and sell for a profit, but it is hard to judge when a transaction should be made, especially considering the changeable market.
Why EDF finds CO2 portfolio management so important?
EDF Trading was established 12 years ago, when power market deregulated. Herve Gueguen, Head of Carbon Operations of EDF Trading, said: "when you trade power you have to trade gas and when you use gas in your power stations and you want to hedge your exposure you need to gain a position on the gas market"
Because of a very similar reason EDF started trading CO2 emissions and enhanced its market's position.
The EDF Group is a key market player is up to the competition. Emission allowances are very important for the French Group, despite that the ratio of emissions in EDF installations is lower than average ratio for Europe. Although considering the production scale, the company is a big emitting unit - departments of the group are located in numerous countries and they emit together over 90 mln tons of carbon dioxide a year - which is much more than all the units in Poland together.
Guegen - as the other experts of the conference - emphasized the importancy of asministrative and political decisions and the necessity of observing the market and interperting the changes in it. Many of the groups haven't sold its emission allowances what resulted in lack of profits.
A proper portfolio management, careful observations of tendencies in the market and risk minimalizing by using various mechanisms for protection and being prepared for unexpected changes- it requires experience and/or using specialistic advice.
By:: Kamil Szkup - Zespół CBE Polska
Translated by: Justyna Kostka, CBE Polska
The article was based on the lectures and materials from European Emission Trading Summit held on 22 November 2012 in Warsaw. The event was organised by CBE Polska Team, in cooperation with the European Commission, Law Firm Kochański, Zięba, Rapala i Partnerzy, exchanges: European Energy Exchange AG, ICE Futures Europe and companies : Vertis Environmental Finance (Partner), Thomson Reuters Point Carbon, PGE Polska Grupa Energetyczna, EDF Trading and Statkraft (Networking Partner).
The Sponsors: Saga Commodities, Axpo, STX Services, Belektron, Aither CO2 and Amsterdam Capital Trading.
Honorary Patrons: Koalicja Klimatyczna, Polska Izba Przemysłu Chemicznego, Stowarzyszenie Producentów Płyt Drewnopochodnych.
Media Patrons:arbon Trading Magazine, EcoMena, Biznes i Ekologia, Ogrzewnictwo.pl, EnergoPortal.eu, eko-samorzadowiec.pl, Energia i Dom, PortalEnergetyczny.pl, inzynieria.com, Paliwa i Energetyka, ecoPress.pl, GlobEnergia, Czysta Energia, ecoManager, BiomassEnergy.gr, Renewable Energy Data Base, OGEL, The DailyEnergy Report, The Baltic Course, EBE.org.pl, Polski Przemysł oraz Ziemia na Rozdrożu.
Thank you to all the participants and Partners. At the same time we invite you all to the II edition of Forum next year!
Wood Based Panels Producers Association of Poland
