CO2 cap causes major increase in European power costs: UBS

CO2 cap causes major increase in European power costs: UBS

London (Platts Emissions Daily)--9Jun2005


The launch of the European Union Emissions Trading Scheme has driven up power
prices in the region significantly, according to a research document released
Wednesday by the UBS bank.

The report adds, however, that the cost of carbon dioxide emissions has only
been partially absorbed by the price of electricity, and that power could
become even more expensive as the market matures. The bank calls this a
"windfall" for generators, which is more pronounced in more competitive
markets where coal and gas substitution is easier.

Since the start of the year, power prices have risen by Eur5/MWh in Germany,
Eur6/MWh in France, Eur7/MWh in Belgium and Eur8/MWh in the Netherlands, the
report said, while carbon dioxide prices have risen by Eur12/mt over the same
period.

While not all of this increase is due solely to the CO2 price, UBS believes
that the total effect of the EU ETS on 2006 power prices is between Eur7/MWh
and Eur9/MWh. "While this is a significant impact, it is still lower than the
current EU Allowance price of Eur19/mt implies," the bank said in the report.

UBS has calculated that for every Eur1/mt increase in the EUA price, power
prices in Germany and France should increase by Eur0.70/MWh. By this logic,
UBS said, the total impact of the ETS on power prices should be around
Eur13/MWh. 

Looking at the overall CO2 market, UBS said prices have risen strongly this
year on the back of high gas prices, which have improved coal's
competitiveness and also fueled demand for EUAs to cover increased carbon
emissions from coal use. The rise is also due to a dry year for hydro
generators as well as tighter than expected CO2 allocations across Europe.

The relatively poor year for hydro generation has meant that power producers
have had to fall back on gas-and coal-fired generation to make up the
shortfall, thus boosting emissions and the demand for EUAs.

The tighter-than-expected CO2 National Allocation Plans in Italy, Poland and
the Czech Republic have also changed the general perception of the market, the
report said.

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