Brussels (Platts)--16May2008

Power generators with a carbon-intensive fuel portfolio are set to lose
billions of euros under the European Commission's plans for the post-2012 EU
emissions trading scheme, a French university academic said Thursday.

"Full auctioning of ETS carbon dioxide allowances will induce a high
redistribution of wealth," Michel Cruciani from the Center of Energy and Raw
Materials Geopolitics at the Universite Paris Dauphine told a public hearing
on the ETS at the European Parliament in Brussels.

"Don't underestimate the impact on coal power generators," he said. "We
project losses would exceed Eur10 billion ($15.5 billion), based on 2005
generation figures and an average CO2 price of Eur17/mt."

These projections were taken from a forthcoming working paper from the
center's Professor Jan Keppler, said Cruciani.

Power generators received free ETS allowances up to 2012, but these
allowances had an opportunity cost in that generators could have decided to
generate less and sell their surplus allowances in the ETS. So generators
passed on this opportunity cost by increasing their prices to take account of
the ETS CO2 price.

But under full auctioning, coal power generators would have to buy more
ETS allowances than those using lower carbon gas or zero carbon nuclear and
renewable energies. They would pass through as much of these increased costs
as possible by making their power more expensive.

As power prices are set by the most expensive plant needed, in peak hours
when all plant is needed companies using lower carbon fuels would benefit from
the higher prices set by the more expensive coal plant, without having the
coal generators' extra costs.

PPC, RWE BIGGEST POTENTIAL LOSERS

Cruciani cited figures from French bank Credit Mutuel CIC Securities that
estimated the potential impact of full auctioning on individual European
energy companies.

Coal-heavy generators such as Greece's PPC and Germany's RWE would be
hardest hit, paying an estimated 72% and 30% respectively of their gross
earnings to buy allowances after 2013, he said. These figures were based on
their 2006 emissions, a CO2 price of Eur20/mt and estimated 2013 gross
earnings.
In contrast, Spain's Iberdrola--which has a high proportion of renewable
power--would pay an estimated 3%, and France's predominantly nuclear EDF would
pay an estimated 9%.

DASH FOR GAS, CONSOLIDATION

Cruciani said that gas was likely to be the short-term beneficiary of
full auctioning, as combined cycle gas turbine plants were less capital
intensive than clean coal, nuclear and most renewables, and provided quicker
returns.

Replacing coal plant early with CCGTs would be "a cost-effective
abatement solution" in the post-2012 ETS, he said in a supplementary handout.

Auctioning was also likely to encourage more consolidation in the power
sector, said Cruciani, as the growing uncertainties would increase the optimal
size of energy companies.

The commission's proposal for the post-2012 ETS is being debated by the
parliament and the Council of 27 EU governments. All three institutions have
to agree a common text before the proposal can become law.
--Siobhan Hall, siobhan_hall@platts.com