UK POWER SELLERS WANT MORE CERTAINTY IN EMISSIONS MARKET

European carbon trading scheme will not cut power sector emissions, MPs told; The European carbon trading system is a 'failure' and will not help the UK to meet its emission reduction targets, electricity generator EDF warns a committee of UK MPs
Felicity Carus, 29 April 2009 (UK Guardian)

SUMMARY
Humphrey Cadoux-Hudson, managing director of new nuclear at mega-power supplier EDF Energy, told a UK parliamentary audit committee the current rules governing the European Union (EU) emissions trading market are not rigid enough.

The EDF position is that in order for the EU’s Emissions Trading Scheme (ETS) to have a significant effect on the emission of climate change-inducing greenhouse gases (GhGs), it must have a rigid set of rules governing the allocation and trading of European Union Allowances (EUAs) so that the price on emissions is high and stays high.

The second point made by EDF, according to the report, is that revenues from the ETS should not be used to subsidize wind energy disproportionately to other choices the market might choose as viable (like the nuclear energy EDF specializes in).

The ETS is the EU’s designated method of controlling GhGs. It caps the spew of the big emitters and requires them to buy EUAs for GhGs beyond the cap. If they can produce power with emissions below their caps, they can sell allotted EUAs. In developing the ETS, the EU fell prey to unforeseen market vagaries that created EUA price fluctuations. The uncertainty made the difficulty for power companies like EDF of doing business in a carbon-constrained world even more difficult because it is more unpredictable.

EDF, the members of the UK parliament to whom EDF’s Cadoux-Hudson testified and most EU leaders expect the rules and parameters of the post-2012 ETS to be a central topic of debate at the crucial Copenhagen world summit in December. The international community is scheduled to come together at Copenhagen to agree to guidelines on a successor to the Kyoto treaty out of which the ETS and the world’s best efforts to date to deal with global climate change came.

Designing a worldwide emissions regime that includes a stable price on GhGs is expected to be a central feature of the much-anticipated debate.

This has been learned. (click to enlarge)

EDF brought a litany of complaints about the ETS to the audit committee. It began with the fact that the development of the scheme unfolded in phases. Uncertainties plagued the first phase (2005 to 2008). EDF complained that the second phase ends in 2012 and there is doubt about whether a replacement scheme will come out of Copenhagen. The uncertainty is as disquieting in the many meeting rooms concerned with global climate change as it is in the meeting rooms where planning for long-term energy needs is done. Uncertainty, by its very nature, is disquieting. That does not mean it can be avoided.

Despite the fact that London has become the international center of the emissions markets, cap&trade remains a controversial topic in UK. Many, led by environmentalist James Lovelock, believe the market concept is too subject to “scamming” by market manipulators. Lord Nicholas Stern, whose crucial 2006 review of the economics of climate change helped raise world awareness of the challenge, supports the ETS but believes the key to a market that is successful at reversing climate change is a firm, predictable base price on EUAs.

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COMMENTARY
The UK government’s goal is to cut the nation’s GhGs 80% by 2050. The government's Committee on Climate Change says the only way achieve that goal is "almost full decarbonisation" of the UK’s power supply by 2030.

The ETS is perhaps the EU’s most courageous undertaking since it faced off with the Soviet Union during the Cold War. Starting from almost nothing, the EU’s market designers worked through early controversies, such as the question of what portion of EUAs were to be auctioned. Their decision to auction only a portion and lure big power companies (like EDF) into the system with free allowances led to the problematic early-stage price fluctuations.

It also led to a round of profit-taking by the big companies (like EDF) that had been given free EUAs, profit-taking that may have reached as high as £1.6 billion/year as the first phase transitioned to the second phase and it became clear the free allowances were going to remain unused.

The EU slowly began to auction more of the allowances and the ETS emissions price was stabilizing at an effective range of €25-to-31/tonne last year. Then the financial crisis hit and companies (like EDF) began dumping unneeded allowances for cash, causing new price fluctuations and sending the price as low €8/tonne in February. The EU has begun to study the kind of regulations that might prevent this from happening going forward. It is obvious regulation will be more effective in the ETS’s next phase.

It is the nature of markets that loopholes will be exploited. If that negated the validity of the market, Wall Street would have had to close down long ago.

State of the art. (click to enlarge)

The current controversy EDF is stirring up is over how revenues from the auctioning of EUAs should be used. EDF insists the EU must allow the revenues to go to whatever forms of “low carbon” energy the marketplace chooses. This conveniently opens the door to using ETS revenues for subsidies of nuclear power plants (like those operated by EDF). Many would prefer to see the use of the revenues restricted to New Energy sources like solar, wind, hydrokinetic, biomass and geothermal.

In objecting to over-subsidizing wind and the other New Energies, EDF raises the specter of the damage done by Spain’s feed-in tariff. Set very high and without a cap last year, Spain’s subisidy to solar drove an avalanche of invesment but the boom drove world silicon and solar panel prices out of wack and led to domestic corruption between elements competing to get on the gravy train.

EDF is, however, skewing the issue even in making this valid point. Spain continues to “pick winners” with its FiT. It simply redesigned its FiT to suit market factors.

Maybe the Brown government is backing wind because it's so good for the economy. (click to enlarge)

EDF described its objection to the use of ETS revenues to subsidize New Energy as “government picking winners.” Cadoux-Hudson said it was the government's job to provide the policy and up to industry to find the solutions. Curiously, he has apparently raised no objections to the French government’s "picking" of the nuclear industry (operated by EDF's parent company Electricite de France) despite public health concerns about radioactive leakage and radioactive waste and the prohibitive and rising costs associated with the building of new nuclear power plants.

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QUOTES
- Humphrey Cadoux-Hudson, managing director of new nuclear, EDF: " What is needed are rules that will create a market that will allow us to create low-carbon technology."
- Cadoux-Hudson, EDF:"The thing that drives the price of something is certainty. The recording and verification of emissions creates uncertainty, as does the entry of new countries into the system…rules [are required…Certainty is] not something you can dig out of the ground."
- Cadoux-Hudson, EDF: "It may be that Copenhagen gives us a ray of light that we can trust long term prices but we haven't seen that in a sustainable price – we need a price signal right across the EU…"

Like the economy overall, the ETS is showing signs of coming back. (click to enlarge)

- Cadoux-Hudson, EDF, on the investment of auction revenues in New Energy: "Renewables shouldn't be built for their own sake. We should just be very focused on reducing emissions…We want to see the country reduce carbon emissions. We don't think government should be left to decide on the technology. It should be left to the companies. Operators have a good record on this, such as taking sulphur out of emissions to stop acid rain, taking the lead out of petrol."
- Ravi Baga, head of policy, regulation and environment at EDF: "We support the government's 15% target on renewables, but not its renewable electricity target. Money would be better spent on decarbonising the heat and transport sectors, rather than crowd the market with renewables competing against each other. It's inevitable that if we deliver the renewable target through subsidies, that will undermine the pricing."
- James Lovelock, author, The Gaia Theory: "Carbon trading was an idea with potential but the danger is that it so rapidly develops into a scam…"