CRC trading simulation for the Public Sector: Outcomes and experiences

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1 CRC trading simulation for the Public Sector: Outcomes and experiences Tuesday 12 October 2010 Karen Lawrence Head of CRC and Consultancy Services, Local Energy

2 LGiU/Local Energy and virtual carbon trading Our virtual carbon trading projects Lessons learned from our most recent project, Carbon Trading Public Sector Beyond compliance: successful CRC strategies League table intelligence

3 Our virtual carbon trading projects Carbon Trading Councils local authorities Carbon Trading Yorkshire public and private sector organisations Carbon Trading Public Sector public sector organisations (And currently running Carbon Trading Public Sector with public sector organisations)

4 Carbon Trading Public Sector CTPS modelled phase II of the CRC in that: There was a sealed bid fixed price auction to set the clearing price of allowances A 5% cap was placed on the market Allowances could not be banked However, CTPS was more flexible than the CRC in other respects: Participants in CTPS could include some or all of their CRC emissions Participants could take part even if they would not qualify for full CRC registration

5 CTPS participants

6 CTPS in numbers 1,949,199 tonnes/co 2 were reported in carbon emission baselines 5% cap applied, leaving 1,851,739 allowances available in the market Auction oversubscribed at 8, 10 and 12; clearing price was 14/tonne 10 bidders bought more than their baseline amount 4 bidders bought exactly their baseline amount 80 bidders bought less than their baseline amount Average quantity of allowances purchased was 5.39% below baseline

7 Secondary market trading Summary of monthly trading and cumulative average carbon price

8 Final positions and performance analysis The final positions of participating organisations can be expressed in terms of two key measures: 1.Carbon emissions reduction, which is the main purpose of the CRC 2.Financial performance, including the degree of success of the auction strategy, trading strategy and emissions forecasting and monitoring

9 Carbon emissions reduction The results indicated a wide range of individual emissions reduction performance from a 56% reduction in emissions to a 32% increase over the 12-month period Across the group as a whole, there was an overall increase in emissions of 1%, probably due in part, at least to the very cold winter

10 Financial performance Lowest cost per allowance surrendered Highest cost per allowance surrendered

11 Strategies for success Carbon reduction you need to know your baseline emissions, identify cost-effective reduction projects and accurately forecast annual emissions Buying allowances you need a purchasing/auction strategy based on cost of carbon, risk, cash flow Trading allowances you need to know when you should buy and/or sell and have procedures in place to act quickly League table and recycling payments you need to understand the effect of variables on your league table position and recycling payments, and establish a strategy to maximise benefits Bring together colleagues to implement an integrated CRC strategy that considers all the relevant drivers to minimise risk and realise cost effective carbon reduction

12 Carbon reduction Identify cost-effective projects and include projected emissions reduction in annual forecast for buying allowances Monitor carbon emissions throughout the year, and check against target If emissions are above or below target, buy or sell allowances through the secondary market

13 Buying allowances: formulating your auction strategy

14 Buying allowances: joint purchasing power? A group of organisations worked together in CTPS Agreed an auction strategy Over-purchased to reduce risk Successful bidding resulted in the group purchasing 8% of the market Surplus was traded for free amongst the group Remaining surplus was sold at a profit at year-end Different models may work for different groups

15 Trading allowances Key issues: Availability of data, attitude to risk, cash flow

16 Trading lessons: a financial perspective All the best performers traded on the secondary market None of the top 15 performers needed to buy EU ETS safety valve allowances, as a result of carefully executed trading on the secondary market, which ensured they held the correct number of allowances at the end of the year Conversely, many of the poorest performers either did not trade at all or were unable to buy sufficient allowances on the secondary market, and had to use the safety valve mechanism The worst performers failed to sell excess allowances prior to the end of the project

17 League table and recycling payments Your league table position will determine the amount you receive as a recycling payment BUT It cannot be calculated using your own data alone We have collected forecast data from project participants, plus additional private sector clients, to compile a forecast league table for the first three years ( , 11-12, 12-13)

18 Latest league table forecasts Based on current forecasts for : Reporting 100% AMR coverage does not guarantee you a top-half position Almost 10% of participants score zero for both elements of the Early Action Metric so doing something, however little, will put you above the bottom of the table Public and private sector fare equally well

19 Latest league table forecasts (2) Based on current forecasts for : A reduction in carbon emissions of at least 11% is needed to head the absolute metric Based on current forecasts for : Fewer than 10% of participants predict an increase in emissions

20 To forecast your league table position... and potential recycling payment Contact Local Energy and supply your forecast data and we will send you a predicted table and overview of your position

21 In summary The CTPS project illustrated the importance of three key elements of a successful CRC strategy: Accurate baseline data and regularly updated emissions monitoring and forecasting reports Robust auction and trading strategies Clear decision-making responsibilities and an action plan to react to changes in forecast emissions and secondary market prices It also demonstrated the difficulty of stating a single price for carbon, especially for financial forecasting purposes. Although the initial auction price was 14, at the project s end the average price paid per allowance surrendered was between and Unknown recycling payments further complicate this calculation

22 Karen Lawrence Head of CRC and Consultancy Services