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Squaring the circle: energy market integration and the EU ETS: - Electricity carbon leakage

Squaring the circle: energy market integration and the EU ETS: - Electricity carbon leakage. Dr. Stefan Weishaar , M.Sc., LL.M. Associate Professor of Law and Economics, RUG Dipl.-Inf. Sami Madani Consultant, The Advisory House . We shall argue. E-Leakage undermines ETS effectiveness

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Squaring the circle: energy market integration and the EU ETS: - Electricity carbon leakage

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  1. Squaring the circle: energy market integration and the EU ETS: - Electricity carbon leakage Dr. Stefan Weishaar, M.Sc., LL.M. Associate Professor of Law and Economics, RUG Dipl.-Inf. Sami Madani Consultant, The Advisory House

  2. We shall argue • E-Leakage undermines ETS effectiveness • Conflicting policy thrusts • Policy problem is for real • …and it will not disappear…

  3. Energy market integration • Unbundling energy conglomerates • Unbundling national grids from energy production • Legal unbundling, active support of interconnectors between MS and non-EU

  4. Energy efficiency -20% below 2020 • Energy generation • Transformation • Distribution • Consumption Emissions trading -20% below 1990 • Energy • Ferrous metals • Minerals • Pulp and Paper • Aviation Renewables 20% Renewables • Wind • Solar • Hydro-electric • Tidal • Geo-thermal • Biomass

  5. EU ETS effectiveness? • Flanking policies => Waterbed effect => no impact on ETS effectiveness • So far leakage discussion looks at industry => State aid + free allocation => little if any impact on environmental effectiveness on ETS • Electricity Carbon leakage threatens environmental effectiveness of ETS: -> NO policy tools

  6. Policy conflicts • Climate change policy • Price on CO2 emissions Energy production more expensive Energy Policy • Energy security • Competitiveness (market integration) • Sustainability (low carbon economy) Lower transmission and capacity costs Energy Community Treaty • Raising environmental standards • Infrastructure investments Higher generation costs vs. Lower transmission and capacity costs => energy leakage easier => is it for real / at which EUA price?

  7. Electricity leakage for real? • SAAs are bound to the Aquis => ETS • AAs => Ukraine NO, but a little yes => Moldova NO, but a little yes • Energy Community Treaty countries => no ETS Coal / Lignite Gas Coal

  8. Electricity leakage for real? • Partnership agreement => ETS? • EU Morocco Action Plan => Implementation of Kyoto, no ETS Coal Nuclear

  9. In a nutshell… (Euro/MWh) energy gen. costs (Mold. ,Ukraine, Morocco) (Euro/MWh) energy transport fees (Euro/MWh) energy cross border (transmission) fees electricity generation costs (D, IT, PL, FR, ES) CO2emissions in tons per MWh (plant efficiency)

  10. Assumptions + Data • Assumption: substitution of baseload capacity => peak demand transfer prices are not paid. • Eastern: Energy gen. costs: Ukraine and Moldova High: 49,79 €/MWh Low: 38 €/MWh • Southern: Energy gen. costs: Morocco High: 49,79 €/MWh Low: 32 €/MWh • Wholesale market prices (average baseload prices) D: 37,79; IT 62,99; PL 36,65; ES 44,25; FR 46,94 €/MWh • Average transport costs (ENTSO-E) • Cross boarder capacity transmission (constant base load)

  11. Eastern border findings Electricity leakage at EU borders (PL) High: 12,88 €/EUA Low: 1,32 €/EUA Falls well Commission’s price estimates for 1st (22-30 Euros) and 3rd period (30 Euros)

  12. Eastern border findings Electricity leakage in DE High: 24,14 €/EUA Low: 12,66 €/EUA IT High: 44,54 €/EUA Low: 14,55 €/EUA Falls well Commission’s price estimates for 1st (22-30 Euros) and 3rd period (30 Euros) 1 2 1 2

  13. Southern border findings Electricity leakage in ES High: 8,01 €/EUA Low: -12,31 €/EUA FR High: 17-24 €/EUA Low: -3,5-3,5 €/EUA Close to current prices and well Commission’s price estimates for 1st (22-30 Euros) and 3rd period (30 Euros) 4 4 5 5

  14. On-going developments • Mitigating element for E-leakage: • Energy Community Treaty: Environmental standards (SOx, IPPC) will increase in Ukraine and Moldova • Association Agreements: Energy sector reform, safety standards, Ukraine YET: Belarus still resists EU charm…

  15. On-going developments • Exacerbating element for E-leakage: Energy sector reforms=> competitiveness Cross border transmission fees earmarked as being of common European interest => Reg. 347/2013 => Transmission costs and capacity costs will fall Examples: • North-South electricity interconnection in Central Eastern and South Eastern Europe, Iberian peninsula => interconnection and internal power lines • Baltic Energy Market Interconnection Plan in Electricity => internal grid infrastructure

  16. Conclusion • Energy market integration runs counter ETS • Already at current prices electricity leakage is an issue in border MS and soon also for more central MS => Stranded costs!! • In the future CO2 prices will rise, market integration will advance, interconnections improve => facilitate E-leakage and undermine the EU ETS => no policy tools / solutions for E-leakage!! Caveats: Generation costs in 3rd countries Market structure + demand in receiving countries (RES policies)

  17. Questions?

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