IFIEC EUROPE – International Federation of Industrial Energy Consumers 1 Climate Change Policy as Today’s Driver for Energy Policy Annette Loske, IFIEC Europe Prague,

IFIEC EUROPE – International Federation of Industrial Energy Consumers EU Strategic Energy Review  The long awaited position how to further develop / improve the internal energy market  Published together with the final sector inquiry report:  “consumers and businesses are losing out because of inefficient and expensive gas and electricity markets”  Main reasons:  high levels of market concentration  vertical integration of supply, generation and infrastructure leading to a lack of equal access to, and insufficient investment in infrastructure  possible collusion between incumbent operators to share markets The Jan. 10 th – package: „An Energy Policy for Europe“

IFIEC EUROPE – International Federation of Industrial Energy Consumers EU Strategic Energy Review Content: 1.Climate Chance Policy Goals EU commitment of 20 % GHG reductions by 2020 compared to 1990* EU objective in international negotiations of 30 % GHG reductions by 2020 compared to 1990 EU binding target of 20 % renewable energy in primary energy consumption** EU goal of reduction primary energy use by improving energy efficiency at 20 % by Energy markets See presentation Hans Grünfeld *) Currently achieved: - 2 %; Kyoto target: - 8 % till **) Currently achieved: 7 %

IFIEC EUROPE – International Federation of Industrial Energy Consumers EU Strategic Energy Review State of Agreement: 1.Climate Change Targets Agreed at March 07 Council 2.Energy Policy Draft directive proposal Sept. 19th Inofficial version widely spread and well known already Clear: difficult agreement on unbundling issue in Council Lengthy process for implementation to be expected

IFIEC EUROPE – International Federation of Industrial Energy Consumers 5 Emissions trading – The Main EU Climate Change Policy Instrument 1 st trading period: close to its end test period failed due to missing shortage huge indirect price effects through opportunity cost pass-through by electricity companies  High costs – low results + 24 €/MWh + 71 %

IFIEC EUROPE – International Federation of Industrial Energy Consumers 6 Source: London Economics Study for EU Commission  The additional costs for consumers are significant EU-wide  But also high competition distortion for consumers within the EU  EU consumers / EU industry hit by EU ETS much more than needed ! How big is the indirect cost effect? Academic survey on the market

IFIEC EUROPE – International Federation of Industrial Energy Consumers 7 13 to 10 €/MWh price difference Certificates Price: 1.09 €/t Certificates Price: €/t How big is the indirect cost effect? Real price picture Full pass through of CO 2 value is (nearly) a reality now ! Tendency: prices up Power prices including 1 st period CO 2 prices Power prices including 2 nd period CO 2 prices

IFIEC EUROPE – International Federation of Industrial Energy Consumers 8 Emissions trading – The Main EU Climate Change Policy Instrument 2 nd trading period: Greater shortage More direct costs Even higher indirect costs through greater use of auctioning „Cost-effective instrument“ used to raise new state funds with the argument: „Solving the windfall profits problem“ Example: coal power plant, certificates price 20 €/t Additional price stimulus Due to wish to keep margins by companies with market power

IFIEC EUROPE – International Federation of Industrial Energy Consumers 9 Emissions trading – The Main EU Climate Change Policy Instrument 3 rd trading period: Review in Process led by DG Environment Amended Directive expected later 2007 Issues in focus: Expanding to other sectors and gases Small installations – possible exclusion Monitoring, reporting, verification Compliance and enforcement Cap-setting (EU-wide / national) Increased predictability Allocation methodologies (Benchmarking, Auctioning) New Entrants Closure Rules Linking with other ETS CDM/JI General direction: Change as little as possible - save the system Much more harmonisation Indirect cost effects accepted widely as part of the system Competitiveness problems of industry (if any) to be solved otherwise

IFIEC EUROPE – International Federation of Industrial Energy Consumers 10 Performance-based allocation: Performance-based allocation: Same incentive as auctioning, (hardly or) no leakage, good for competitiveness IFIEC Position in EU ETS Review – 1 st element

IFIEC EUROPE – International Federation of Industrial Energy Consumers 11 The advantages of relying on actual data The 4 problems solved !  Power price effect limited to actual cost  Option not to produce but to sell is gone  Cutting down the system‘s costs  Providing for really cost efficient instrument  Lower impact on competitiveness  Higher attractiveness for other countries to join  Better competitiveness for industry  Leakage only at extremely high CO 2 prices  Negative global emissions effects diminished significantly  Competitive strategies (going for market share) supported to the benefit of whole economy  No special rules for new entrants  No special rules for closures  Equal treatment for every player in the market 1. Power prices 2. Leakage 3. Hindering com- petitive strategies 4. Discriminate new entrants Basing EU ETS on actual data provides for a system, that  stimulates efficiency improvements  establishes a real cost-efficient instrument  enables (extremely needed) competition in the electricity market  makes it feasible to combine Kyoto and Lisbon IFIEC Position in EU ETS Review – 2 nd element

IFIEC EUROPE – International Federation of Industrial Energy Consumers 12 The proposed design – performance-based allocation based on actual production - solves the major problems: Eliminating the disadvantages of present rules  Uncompetitive high electricity prices  Exporting and increasing emissions (leakage)  Hindering competitive strategies  Discriminating new entrants Realizing the advantages of a market based instrument  Providing for cost efficiency  Setting the right incentives for efficiency improvements  Guarantee of total cap If not solving ETS‘ huge power price effect  there is the need to save EU energy intensive industry by additional mechanisms, which would bring discredit on EU ETS IFIEC Position in EU ETS Review

IFIEC EUROPE – International Federation of Industrial Energy Consumers 13 Outlook EU ETS to function on a tougher ground also beyond 2012 Present Trend: Auctioning (up to 100 percent) for electricity (not exposed to international competition) Benchmarking for industries under global competition Grandfathering in single, small areas Compensation mechanisms for some industries ? Climate Change Policy to remain the leading part of the energy policy triangle for a longer time A competitive internal energy market to be established by new measures ???