Managing risk and utilizing opportunities
in phase 2 of EU ETS
Harri Roto, phone +358 40 840 8007, email
[email protected]
November 20th 2007
1
www.greenstream.net
GreenStream in brief
• GreenStream is a leading Northern European
company in the carbon markets and
renewable energy markets focusing on:
- Renewable energy projects
- Greenhouse gas offset projects
- Brokerage and portfolio management of
carbon units and renewable energy
certificates
• Offices in Helsinki, Hamburg, Oslo,
Stockholm, Vilnius and Beijing
2
www.greenstream.net
Core competencies of GreenStream
Core competence
Services offered
• Fund management (carbon and renewable energy);
current investment vehicles include
Green
Investment
- Multilateral Carbon Credit Fund (EBRD and EIB)
- Fine Carbon Fund
- Blåfall
• Services including
Intermediary
Green Certificates,
Broker of the Year
2004, 2005, 2006
- Brokerage of carbon credits and green certificates
- Portfolio management services
• Services including
Advisory
- Strategies, market analysis, project financing
- CDM/JI/GIS project services
3
www.greenstream.net
European Union Emissions Trading Scheme
Overview
The largest emissions trading market
1,101
- Market value EUR 19.4 billion in 2006(1)
Linking Directive allows CERs and ERUs
500
- Emission reduction credits from CDM/JI
projects can be imported into the EU ETS
•
321
2005
Third phase 2013-2017 (expected)
- GHG emission reduction target 20 % of 1990
baseline by 2020(3)
1) Source: State and Trends of the Carbon Market 2007, World Bank
2) Based on estimates by UBS, JP Morgan, Société General, Deutsche Bank and Citigroup
3) Source: Communication "Limiting Global Climate Change to 2° Celsius: The way ahead for 2020 and beyond, EU
2005
2006
2006
Price development of EUAs
40
EUR / allowance
•
6.4
Source: State and Trends of the Carbon Market 2007, World Bank
Figures converted from USD to EUR using ECB´s average annual exchange rates
- More stringent allocations and higher prices
expected
- Analysts forecast EUA prices between EUR
20-40 per allowance(2)
10
0
0
Second phase 2008-2012
- Estimated average shortfall of 1.25 billion
tonnes of carbon dioxide equivalent(1)
19.4
20
8000
7000
6000
5000
4000
3000
2000
1000
0
30
20
10
0
24/06/2005
24/12/2005
24/06/2006
ECX Dec 08 volume
24/12/2006
Spot
Volume (ktCO2)
•
1,000
MtCO2
- Covers some 12,000 installations in the EU
30
1,500
EUR billion
•
Market
EU ETS
development
trading
24/06/2007
ECX Dec 08
Source: Reuters
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Portfolio Management
Why Manage the EUA portfolio?
• Not just a bureaucratical burden but valuable assets
• EUA allowances are a raw material for production,
similar to fuels & other costs of production
• Not doing anything = taking a view on the price
development
• 2005-2007 period has shown extreme volatility in
price
• The lesson learned: manage the price risk
Portfolio Management
•Estimates/ data regarding emissions and allocated
allowances
•Creating trading and risk management policy
•Implementing the strategy
© GreenStream Network Oy
Portfolio Management - example
•Company A has an estimated under allocation
•The hedging of the deficit of a specific year (or month)
will start well in time
•There is an agreed ”pipeline” in which the hedge level
must be at any moment of time
•Emission estimates important
© GreenStream Network Oy
Portfolio Management -example
© GreenStream Network Oy
Portfolio Management - example
© GreenStream Network Oy
Portfolio Management
• Strategy depends on the nature of business of each
company
• Some have a real option to not produce and to sell
the EUA’s instead – some do not
Leads into different strategies
• CER/ ERU use an integral part
CERs – a great opportunity
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Secondary CERs
• CER with guaranteed delivery (vs. Primary CER
which includes project risk)
• CERs have importance to all companies with
installations under EU ETS
• Cap for CER (and ERU) use per installation defined
in NAPs as % of allocation for 2008-2012
• OTC market at the moment most liquid (Forward,
later also SPOT)
4.
6.
2
6. 007
6.
2
8. 007
6.
12 200
.6 7
.
14 200
.6 7
.
18 200
.6 7
.
20 200
.6 7
.
22 200
.6 7
.
26 200
.6 7
.
28 200
.6 7
.2
0
2. 07
7.
2
4. 007
7.
2
6. 007
7.
10 200
.7 7
.
12 200
.7 7
.
16 200
.7 7
.
18 200
.7 7
.
20 200
.7 7
.
24 200
.7 7
.
26 200
.7 7
.
30 200
.7 7
.2
0
1. 07
8.
2
3. 007
8.
2
7. 007
8.
2
9. 007
8.
13 200
.8 7
.2
00
7
€/tCO2
SCER08, EUA08 (Point Carbon)
24.00
EU Allowance December 2008
Secondary CER December 2008
22.00
20.00
18.00
16.00
14.00
12.00
10.00
EUA-CER SWAP
• Secondary CERs valued today at ~80% of EUAs
• A company with EUAs can create positive cash flow and/ or
more credits for compliance by exchanging EUAs for CERs
• EVERY COMPANY UNDER EU ETS SHOULD DO IT!
• Project markets (primary CERs) not as easily accessible and
managing project risks is an issue
• Example 1 (figures only exemplary, not an offer):
– Company A delivers 80kt EUAs and receives 100kt CERs (forward
deliveries)
• Example 2 (figures only exemplary, not an offer):
– Company A delivers 100kt EUAs and receives 100kt CERs +
400000€ cash (forward deliveries & payment)
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