Association of European
Power Exchanges
The Implications of price volatility with regard
to stabilization of environmental markets
Istanbul, 11 November 2009
Stefano Alaimo
Chairman of Environmental Markets WG - Europex
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Index
• Emissions reduction and environmental markets
• How to support renewables: Feed in Tariff or market
mechanism based on Green Certificates
• How to stabilize an environmental market: some proposals
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Promoting CO2 reduction in Europe
EU has put in place an effort to challenge global warming through the
adoptions of some measure in the field of:
• Energy production from renewable sources
• End-users energy efficiency
• Industrial carbon dioxide emission reduction
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Need for Regulation in supporting renewable electricity
Renewable electricity (RE) has usually an environmental impact lower
than conventional sources
RE technologies are still not economically competitive vs conventional
sources (coal, gas etc.)
Regulation must be put in place to fill the gap and allow “green”
technologies to be competitive and foster RE production
Grid development has to be done but the cost must be paid by
someone
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Need for Regulation in supporting renewable electricity
Considering the large investment needed to establish RE in an energy
system, it will be crucial to attract private capital
Long term stability of income is a pre-condition to:
• attract investors in long term investment
• have access to low-interest credit
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Policies to support renewable electricity
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There are two main policies followed in Europe to support RE:
• Feed in tariff
Czech Republic, France, Germany, Spain, Portugal, Greece
• Market mechanism based on green certificates
Belgium, Italy, Poland, Romania, UK, Scandinavia
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Feed in tariff
RE is purchased by a “subject” at an incentivized price (above market price) for
a fixed period (15 -20 yrs).
It would be preferable that an independent (state) agency was the subject
responsible for purchasing the electricity and paying the tariff.
Different technologies receive different prices. The price is related to the
generation cost of the technology
The general concept is that an investor can get more or less the same return
from his investment in RE plants regardless the technology used
Pro: long term stability and low risk for producers, homogeneous development of
all the available technologies
Cons: high cost, no incentive to use economically most-effective technologies,
negative impact on electricity market liquidity
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Green Certificates
A market mechanism based on green certificates (GC) needs some
steps to be put in place:
• An obligation (percentage of RE to be satisfied) with a penalty for not
complying with the obligation
• Operators that must be comply with the obligation (ex: producers/
consumers/retailers)
• An independent issuing body that qualifies RE plants, will issue GC
and will withdraw GC from obliged parties
• A market place to allow GC trading beside an OTC market
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Green Certificates: price volatility
It is commonly believed that market mechanism should fosters investments
in economically most effective technologies as the value of GC is more
remunerative for cheaper sources
but
There is a problem of “market equilibrium”
Offer side and demand side are not as elastic as needed to re-adjust the
market instantaneously
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Green Certificates: price volatility consequences
If there is an oversupply situation the price can go too much down and
investments can be put at risk
In an overdemand situation, the price can increase and the burden for final
consumers might be too hefty
More:
When there is prices instability in the long term, investment programs could
be discouraged
With the ambitious goals set by the new 20-20-20 European Directive, the
success in fulfilling those targets might be at risk
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EuroPEX initiative
The EuroPEX Environmental Markets WG has recently started its work
The focus is to analyse the environmental markets where they have been
implemented, how they are working and how they might be improved
At a first glance, a market disequilibrium and consequent price instability on
long term period emerged as one of the main challenge to be tackled in GC
market.
The WG is currently discussing what could be the possible solutions
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Possible measures against price volatility
There are many possibilities in lowering volatility and give stability to a
GC markets
One is to change the percentage of obligation when there is an
oversupply of GC. The difference between GC offered and GC needed to
meet the target is brought as additional target in the following years
This method has been applied in Italy with regard to the Energy Efficiency
Certificates market
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Possible measures against price volatility
Another possibility is to create a corridor in which the price movements are
bounded.
An institutional body (IB) could be responsible for:
selling GC at a price which will set the upper limit of the corridor
buying GC at a price which will set the lower limit of the corridor
Belgium (Wallon region) has applied in GC market a min price and a fine in
case of missing GC (which represents a max price in the market). Also Italy
introduced a cap and floor as temporary measure.
There is a proposal from the Polish Finance Minister of introducing a cap
and floor price mechanism with regard to Emission Trading Scheme.
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Possible measures against price volatility
Another possibility is to set up a future market to allow operators to manage
their risks
It allows to give operators a price signal for future investments in renewables
It is not easy to launch a forward market on GC if the underlying is not that
liquid
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Conclusions
Establishing an environmental market it is not an easy task
It is always to be kept in mind that there is an interest from investors to have
certificates prices high but also a general interest to keep the total cost of
supporting mechanism down as the final consumers will have to pay for it at
the very end
GC market mechanism is a way to lower the total cost of supporting
renewables
There is not “the solution” but some proposals that have to be discussed
and assessed before implementation
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Association of European
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Environmental Markets Working Group - EuroPex
Members of the Environmental Markets WG:
Stefano Alaimo – GME (Italian Power Exchange)
[email protected]
Yves Langer – Belpex (Belgian Power Exchange)
[email protected]
Robert Gersdorf – EEX (European Energy Exchange)
[email protected]
EuroPex General Secretary:
Manuel Coxe
[email protected]
Julien Cossé – Powernext (French Energy Exchange)
[email protected]
Pawel Opara – PolPX (Polish Power Exchange)
[email protected]
Rodica Popa – OPCOM (Romanian Power Exchange)
[email protected]
Miroslav Rehor – OTE (Czech Market Operator)
[email protected]
Raul Santamaria – OMEL (Spanish Power Exchange)
[email protected]
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