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Dr. Annette LoskeVIK Verband der Industriellen Energie- und Kraftwirtschaft

German Federation of Industrial Energy Consumers

IFIEC Europe Chairwoman of WP Climate and Efficiency

Aspects of Climate Change and Environmental Aspects of Climate Change and Environmental PoliciesPolicies

Consequences for the Industrial Energy Consequences for the Industrial Energy Consumers in Germany and the EUConsumers in Germany and the EU

Sept. 14, 2005AEM-SVSE Conference, Prague

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Federation of intensive industrial energy consumers (member companies primarily from sectors, in which energy costs really matter like chemicals, steel, non-ferrous metalls, glass, paper, cement etc.)

VIK membership represents about 80 percent of the German industrial energy consumption

Representative for the interests of the members towards the policy, the administration, the economy and the legislation in Germany and the EU

Consultant for the member companies in all energy, environmental and water related issues

Member if IFIEC Europe – the European federation of industrial energy consumers

VIK Verband der Industriellen VIK Verband der Industriellen Energie- und Kraftwirtschaft e. V.Energie- und Kraftwirtschaft e. V.

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Climate Change Policy The EU Emissions Trading Scheme - Its Impact on the

Electricity Price

Renewable Energies Policy The Consequences for Industrial Energy Consumers

AGENDAAGENDA

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Industrial Energy Users‘ warning about the Industrial Energy Users‘ warning about the threat of excessive price effects from EU ETSthreat of excessive price effects from EU ETS

Mechanism: The inherent flaw Effect: Excessive price effect

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Price Development for Electricity Futures at the German Power Exchange EEX

31

32

33

34

35

36

37

38

39

40

41

42

43

44

Jan04

Feb04

März04

April04

Mai04

Juni04

Juli04

Aug04

Sept04

Okt04

Nov04

Dez04

Jan05

Feb05

März05

April05

Mai05

Juni05

Juli05

Aug05

€/M

Wh

2005 2006 2007 2008 2009 2010 2011

Electricity Price Development Electricity Price Development since start of EU ETSsince start of EU ETS

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Price Development on the Price Development on the COCO22-Certificates-Market-Certificates-Market

EEX CO2 - Index

5,00

7,50

10,00

12,50

15,00

17,50

20,00

22,50

25,00

27,50

30,00

25.1

0.20

04

01.1

1.20

04

08.1

1.20

04

15.1

1.20

04

22.1

1.20

04

29.1

1.20

04

06.1

2.20

04

13.1

2.20

04

20.1

2.20

04

28.1

2.20

04

05.0

1.20

05

12.0

1.20

05

19.0

1.20

05

26.0

1.20

05

02.0

2.20

05

09.0

2.20

05

16.0

2.20

05

23.0

2.20

05

02.0

3.20

05

09.0

3.20

05

16.0

3.20

05

23.0

3.20

05

01.0

4.20

05

08.0

4.20

05

15.0

4.20

05

22.0

4.20

05

29.0

4.20

05

09.0

5.20

05

17.0

5.20

05

24.0

5.20

05

31.0

5.20

05

07.0

6.20

05

14.0

6.20

05

21.0

6.20

05

28.0

6.20

05

05.0

7.20

05

12.0

7.20

05

19.0

7.20

05

26.0

7.20

05

02.0

8.20

05

09.0

8.20

05

16.0

8.20

05

23.0

8.20

05

30.0

8.20

05

€/t

Tagesnotierung Index Monatsdurchschnitt Index A. Loske 02.09.2005

7

30

32

34

36

38

40

42

44

46

48

25.1

0.20

04

08.1

1.20

04

22.1

1.20

04

06.1

2.20

04

20.1

2.20

04

05.0

1.20

05

19.0

1.20

05

02.0

2.20

05

16.0

2.20

05

02.0

3.20

05

16.0

3.20

05

01.0

4.20

05

15.0

4.20

05

29.0

4.20

05

16.0

5.20

05

30.0

5.20

05

13.0

6.20

05

27.0

6.20

05

11.0

7.20

05

25.0

7.20

05

08.0

8.20

05

22.0

8.20

05

Ele

ctri

city

Pri

ce, €

/MW

h

0

5

10

15

20

25

30

35

CO

2-Certificatesp

rice, €/t

Baseload Electricity Contract in 2006 CO2-Certifikatsprice

Correlation between Electricity and CO2-Certificates-Prices

Correlation: 0,98

Is there a link?Is there a link?

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The major flaws in the EU ETS - 1The major flaws in the EU ETS - 1

Electricity Price Increases provide Windfall Profits for the Electricity Industry

Quantity:

RWE Trading: 1 € price increase in CO2-market leads to at least 0.49 € electricity price increaseprice increase since start of EU ETS about 16 €/t:

about 8 €/MWh price effect on electricity price

RWE – Harry Roels: 16 million t CO2 certificates purchase need per year, i.e. cost of 350 million € at 22 € per t CO2, about 1.8 €/MWh real cost from EU ETS for RWE

„The important point is not the windfall profit for utilities, but the other side of this coin – the windfall loss for electricity intensive industries that compete globally“ (analyst from Markedskraft)

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The major flaws in the EU ETS - 2The major flaws in the EU ETS - 2

Missing Stimulation of Investment into CO2 Emissions Reduction Measures negative consequences from reduction measures within the scheme in the

form of less allowances granted in future polluter-earns-principle consequence of the current ET regime EU ET scheme reason for inactivity regarding climate change measures

within industry

Freezing Market Shares – Conflict with Competition Rules When incumbent players are granted allowances based on

grandfathering, i.e. their historical market share, any new player seeking market share will: cause to his competitor retaining revenues for allowances not used,

and have to buy the allowances necessary for his production.

Significant disadvantages for potential “winners” and significant advantages for potential “losers”

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An Alternative ApproachAn Alternative Approach

Option of an output related CO2 emissions regime, granting allowances ex post adjusted, i.e. only depending on actual production based on a

relevant performance standard(at least or in the first step: for electricity industry)

Opportunity cost principle would not apply, since the opportunity “to use or to sell” would not exist.

The situation for the electricity producers changes from: if electricity is produced and delivered, the relevant amount of allowances can

not be marketed (in the present ex ante cap and trade system), to only if electricity is produced and delivered, the free amount of allowances

resulting from better efficiency can be marketed.

Allowances could be marketed only in case of a CO2 efficiency level higher than the established performance standards.

Output related system really gives incentives for CO2 improvement measures and rewards the more efficient player in the market. The polluter pays-principle is followed.

No freezing of market share. New entrants with more efficient technologies not hindered but rewarded by exceeding certificates compared to the benchmark

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Correcting the failures of the Correcting the failures of the EU Emissions Trading SchemeEU Emissions Trading Scheme

Not only cosmetics and minor changes to the system for the next trading period !

Healing the major flaws of the system urgently !

Otherwise EU ETS has no chance to be accepted by others and to be exported to other parts of the world !

Urgent action needed:Current monitoring processNew NAPs for 2008 – 2012 to be presented mid 2006

Pressure from ÉU Member States is needed!

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The Failure of the EU ETS and the Market The Failure of the EU ETS and the Market Power in the Electricity MarketPower in the Electricity Market

Thesis: Only in a market without functioning competition, the companies can really price in the EU ETS opportunity costs!

VIK has launched a complaint at the Federal Cartel Office to investigate a potential abuse of market power in the area of electricity prices and CO2-opportunity costs

Federal Cartel Office has opened an official investigation against RWE and E.on

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Climate Change Policy The EU Emissions Trading Scheme - Its Impact on the

Electricity Price

Renewable Energies Policy The Consequences for Industrial Energy Consumers

AGENDAAGENDA

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Renewable Energies in the EURenewable Energies in the EUVolume DevelopmentVolume Development

0

10

20

30

40

50

60

70

80

Austri

a

Belgium

Czech

Rep

.

Denm

ark

Estlan

d

Finlan

d

Franc

e

Germ

any

Greec

e

Hunga

ry

Irelan

dIta

ly

Latvi

a

Lithu

ania

Luxe

mbu

rg

Nethe

rland

s

Poland

Portu

gal

Slow. R

ep.

Slowen

ia

Sweden

United

King

dom

Per

cen

t o

f C

on

sum

pti

on

1997 (Basis Year of EU Dir.) 2002 2003 2010 Target acc. To EU Dir.

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National measures installed with the objective to meet the targets

Often financed through surcharge on electricity price

In the meantime: in most of the EU Member States special regimes for energy intensive industrial comsumers

However: Financial burden for industrial consumers stays Substantial Unequal

Implementing the EU DirectiveImplementing the EU Directive

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Renewable Energies in the EURenewable Energies in the EUThe Cost Burden for Industrial ConsumersThe Cost Burden for Industrial Consumers

0

1

2

3

4

5

6

7

8

9

10

11

12

13

Austria

Belgiu

m

Czech

Rep

.

Denm

ark

Finla

nd

France

Germ

any

Italy

Nether

lands

Sweden UK

€/M

Wh

50 GWh/a 100 GWh/a 150 GWh/a

Direct RES Surcharges on the Electricity Price for Industrial Consumers, 2004

Source: IFIEC Europe Survey

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The German SituationThe German Situation

3,33

2,01

2,00

2,39

4,21

2,02

2,16

2,80

2,66

2,30

2,74

3,21

3,60

2,68

3,05

3,48

3,47

0,69

0,930,91

0,83

0,70

0,79

0,55

0,48

0,53

0,660,63

0,45

0,37

0,41

0,31

0,22

0,28

0,39

0,61

0,56

0,510,47

0,500,47

0,360,34

0,39

0,460,43

0,34

0,29

0,210,220,17

0,21

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

Q1

- 2

00

1

Q2

- 2

00

1

Q3

- 2

00

1

Q4

- 2

00

1

Q1

- 2

00

2

Q2

- 2

00

2

Q3

- 2

00

2

Q4

- 2

00

2

Q1

- 2

00

3

Q2

- 2

00

3

Q3

- 2

00

3

Q4

- 2

00

3

Q1

- 2

00

4

Q2

- 2

00

4

Q3

- 2

00

4

Q4

- 2

00

4

Q1

- 2

00

5

Q2

- 2

00

5

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

1,00Quartalspreis EEX-Base [ct/kWh]

Rechn. Erhöhung (VDN) [ct/kWh]

Weitergabe an Endkunden [ct/kWh]

ct/kWh ct/kWh

Development of RES SurchargeBased on German feed-in tariff system

German Hardship Regime

Hardship Regime Reduction

1st Regime: Since July 2003:consumption > 100 GWh and share of electricity costs at least 20 percent of the gross value added (“Bruttowertschöpfung”)reduced rate of 0.5 €/MWhfor consumption beyond 100 GWh

2nd Regime: Since Jan. 2005:consumption > 10 GWh and share of electricity cost at least 15 percent of gross value addedreduced rate of minimum 0.5 €/MWh for 90 % of consumption or for 100 % with the criteria of 1st regime; rate calculated based on a maximum of 10 percent surcharge increase for the other consumers, resulting in fact in about 0.11Ct/MWh in 2005

59 TWh (about 25 percent of industrial electricity consumption) benefit from 2nd special regime

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Renewable Energies in the EURenewable Energies in the EUThe Cost Burden for Industrial ConsumersThe Cost Burden for Industrial Consumers

These direct costs are only one part of the burden package

Further environmentally founded surchargesExamples: Austria: CHP surcharge 1.5 €/MWh Denmark: CHP surcharge of 5.3 €/MWh for first 100 GWh/a Germany: CHP surcharge of 0.5 or 0.25 €/MWh and Ecotax of 12.3 €/MWh

(partial recompensation) Finland: Energy tax 4.2 €/MWh France: CSPE Package (public service obligation and environmental

purposes) 4.5 €/MWh

Necessary grid investments and reserve capacity requirements Dena grid study in Germany: 850 km additional TS lines necessary till 2015 –

1.1 billion € investment leading to 3.6 to 4.6 €/MWh for non-privileged consumers and 1.5 €/MWh for priviledged consumers

Much more investment with start of off-shore wind program beyond 2015

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Electricity is an important production input in manufacturing industries

Financial burdens put on it means a significant distortion in the competitiveness

Achievement of the EU Lisbon Strategy („more and better jobs in a more dynamic, innovative and attractive Europe“) is only possible with a sound EU industrial basis

EU industry‘s high efficiency standards in manufacturing must be understood as a major contribution to the EU‘s climate change policy but not as a threat to it!

ConclusionsConclusions

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For further questions:For further questions: Dr. Annette Loske

VIK Verband der Industriellen Energie- und Kraftwirtschaft e.V.

Richard-Wagner-Straße 41

D-45128 Essen

Tel.: ++49-201-810 84-22

FAX: ++49-201-810 84-30

E.Mail: a.loske@vik.de

Internet: www.vik.de