1. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 1 ECCP Meeting, EU ETS Review, 22 nd May 2007 Back-up info, some views and experiences (not necessarily shared by all sectors) Applicability and practical aspects of Performance-based allocation Vianney Schyns, IFIEC Europe Vianney.Schyns@usgbv.com

2. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 2 Contents 1.Number of benchmarks 2.Transaction costs & complexity 3.Setting the benchmark below average performance 4.Technical definition  all energy carriers 5.Benchmarks in a direct emissions scheme

3. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 3 Pareto: few activities have major coverage Netherlands: almost 100 benchmarks already defined

4. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 4  High transaction costs often mentioned in literature Transaction costs lower in practice Typical consultancy costs: € 25-40,000 per benchmark Higher cost first time complex benchmark So 100 benchmarks cost say € 3-4 mln “Verification Bureau”, NL say < € 1 mln for 100 benchmarks (each 4 years?) Excl. verifier, for NL only: say € 5 mln for 4 x 75 Mton = < € 0.02/ton CO 2  Determination of benchmarks cheaper on EU scale  Additional: annual costs of monitoring & verification  Complexity often mentioned as problem  Defining new benchmarks needs great care – technology expertise  Practical principle: keep it simple – ignore secondary effects  Once defined  rather straightforward Transaction costs and complexity

5. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 5  Benchmark data of plants under the scheme (now EU) Benchmark between average & best performance, e.g. Benchmark = WAE – CF x (WAE – BP) WAE = Weighted Average Efficiency CF = Compliance Factor, to comply with total cap BP = proven Best Practice, proven means actual measured operational data (or rather BP Group, for extra stimulation of innovation)  Formula coincides with EU ETS Directive Annex III (3), average emissions and achievable progress for each activity  Industry most likely opposes following alternatives  Dutch/Flemish worldtop 10% – too short allocation, unstable outcome  shape benchmark curve + incomplete participation  Related only to BP (BP + X%) – too short allocation, contra- incentive to improve BP, effectiveness & innovation Possible feasible benchmark formula

6. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 6 Benchmark = WAE – CF x (WAE – BP)

7. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 7 Benchmark takes account of all energy carriers (1) Production plant Feeds Steam Natural gas ? Other fuel ? Electricity CO 2 ? Product(s) Many energy functions can be done either with: Steam, or Electricity, or Natural gas or other fuel Benchmark takes this into account: Normalised calculation to (total) primary energy – or total CO 2 Benchmark for only fuel is meaningless Benchmarks for manufacturing and (related) utility plants Examples: chemical plants, refineries, paper plants, etc.

8. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 8 Benchmark takes account of all energy carriers (2) Furnaces with heat recovery to steam Feeds Methane from feedstock CO 2 Separations with high power compressors Simplified scheme steamcracker 2/3 of the investment Separation train can be: Efficient, with net-export of steam of whole cracker Inefficient, steam import Both can be with the same direct emission of the cracker itself (ethane, LPG, naphta, gas oil, etc.) Power train can be: Steam turbine driven Electric motor driven Combinations High influence on electricity & steam balance, direct emissions elsewhere (ethylene, propylene, etc.) Products Steam recovery Electricity Steam

9. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 9 Benchmarks in a direct emissions scheme (1) Allocation = direct emission – emission {total plant – total BM} Production plant Feeds Steam Natural gas Other fuels Electricity CO 2 Product(s) Site utilities have also benchmarks Example: Net-import of secondary energy carriers: 70 – {120 – 100} = 50 Plant worse than benchmark Further examples: Zero net-import: 120 – {120 -100} = 100 Plant worse than benchmark Net-import: 70 – {90 – 100} = 80 Plant better than benchmark

10. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 10 Benchmarks in a direct emissions scheme (2)  Easy inclusion in an ETS  No conceptual problem in a direct scheme and no legal problem with Directive, on the contrary  Allowances according to deviation with benchmark  In formula: A = RDE + RSE – Σ production x (REE/RCE – benchmark) x CCF RDE = Realised Direct Emission (ton CO 2 ) RSE = Realised Sequestered Emissions (ton CO 2 ) REE/RCE = Realised Energy (or CO 2 ) Efficiency (GJ/ton product or ton CO 2 /ton product) Benchmark = benchmark energy (or CO 2 ) efficiency CCF = CO 2 Conversion Factor (= 1.0 in case of CO 2 -benchmark)  Note: Process emission is in this view included in the Best Practice

11. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 11 Benchmarking in the product chain Benchmarking provides incentives in the whole product chain … Electricity and heat generation Industrial manufacturing plant with use of electricity and heat Fuel Electricity Product Heat, from CHP or from boilers Fuel … the efficiency of the production of electricity & heat … the efficiency of the use of (fuel), electricity & heat Feed

12. IFIEC EUROPE – International Federation of Industrial Energy Consumers IFIEC Back-up material (not necessarily shared by all sectors) 12 Benchmarks need great care Production plant Feeds Steam Hardly or zero fuel Electricity Hardly or zero CO 2 Product(s) Present Dutch formula is incorrect Allowances = HE x G x E x C HE = historic emissions G = Growth Factor E = Energy Efficiency (benchmark/actual energy use) C = Compliance factor to remain within total cap Formula becomes meaningless – even introduces gaming – in case of significant import of secondary energy carriers (utility boilers & CHP are rightfully separate), for example: HE (= ~ zero) x E = ~ zero Other effectiveness’ shortcomings Maximisation E (110%) Minimisation E (85%)