Aspects of Climate Change and Environmental Policies Consequences for the Industrial Energy Consumers in Germany and the EU Sept. 14, 2005 AEM-SVSE Conference, Prague Dr. Annette Loske VIK Verband der Industriellen Energie- und Kraftwirtschaft German Federation of Industrial Energy Consumers IFIEC Europe Chairwoman of WP Climate and Efficiency

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

AGENDA Climate Change Policy The EU Emissions Trading Scheme - Its Impact on the Electricity Price Renewable Energies Policy The Consequences for Industrial Energy Consumers

Industrial Energy Users‘ warning about the threat of excessive price effects from EU ETS Mechanism: The inherent flaw Effect: Excessive price effect

Electricity Price Development since start of EU ETS

Price Development on the CO2-Certificates-Market

Is there a link?

The 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 increase price 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)

The major flaws in the EU ETS - 2 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” 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

(at least or in the first step: for electricity industry) An 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

Correcting the failures of the EU 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 process New NAPs for 2008 – 2012 to be presented mid 2006 Pressure from ÉU Member States is needed!

The Failure of the EU ETS and the Market Power 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

AGENDA Climate Change Policy The EU Emissions Trading Scheme - Its Impact on the Electricity Price Renewable Energies Policy The Consequences for Industrial Energy Consumers

Renewable Energies in the EU Volume Development

Implementing the EU Directive 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

Renewable Energies in the EU The Cost Burden for Industrial Consumers Direct RES Surcharges on the Electricity Price for Industrial Consumers, 2004 Source: IFIEC Europe Survey

The German Situation Development of RES Surcharge Based on German feed-in tariff system German Hardship Regime 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 added reduced 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 Hardship Regime Reduction

Renewable Energies in the EU The Cost Burden for Industrial Consumers These direct costs are only one part of the burden package Further environmentally founded surcharges Examples: 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

Conclusions 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!

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