Insights from Other Energy and Emissions Markets Presentation to the PAT Mechanism Workshop August 2 nd, 2011 Anmol Vanamali and William Whitesell Center for Clean Air Policy Special thanks to our funder:
Outline Focus: market-related issues in light of efficiency/intensity programs in other countries Brief overview of other country programs Examples and lessons: NSW, Italy, and Alberta Advantages of market-based approaches Internationally considered approaches to market design Questions for discussion 2
Overview of Other Energy Efficiency Markets Schemes with EE Obligations on Electric/Gas Providers Australia (NSW, 2003), UK (2002), Italy (2005), France (2007) Gov t must approve projects that earn certificates E-cert trading» Limited in UK and France (suppliers work with end users)» More active in Italy (distributors buy from energy users or ESCOs) Schemes linked to REC markets Several US states Limits on portion of renewable obligation that can be met with energy efficiency credits Alberta (Canada) Scheme Greenhouse gas intensity obligations on industry 3
Italy s Scheme Compliance entities are Electricity and Gas Distributors National Regulator for Electricity and Natural Gas (AEEG) approves issuance of 3 types of certificates for each year of savings» Electricity saving» Natural gas saving» Saving on heating oil and other fossil fuels Potential recipients of Certs» Electricity and gas utilities» ESCOs and other energy service providers (got 80% of certs)» Industry and commercial end-users Limited project credit lives (5 yrs or 8 yrs for insulation) now being extended 4
Italy s Scheme (2) Energy markets regulated Tariff increases allowed to pass through to customers at 100/cert Cert market price: 60-80 Certs traded mainly OTC often under multi-year contracts Retrictions caused price divergence» Oversupply of electric, undersupply of gas certs» No tariff increase for fuel oil certs 5
Italy s Scheme - Successes Energy savings in excess of national target in first compliance period (+2.3%) Development of ESCO market and private sector capacity in energy efficiency projects Trading of Certs crucial to achievement of targets economically Direct benefits: Avoided energy cost for households = 6 to 15 times cost of regulation Indirect benefits: Reduction in GHG emissions for meeting EU target 6
Lessons from Italy s Scheme Project credits less available after short credit lives expire Separate requirements for electric and gas certs eliminated (to create larger market for better price discovery)» Previous cert prices: electric 30, gas 90» After restriction removed, both at about 65 Tariff relief allowed for fuel oil in 2009 (to create level playing field)» Fuel oil cert price jumped from around 35 to 80 OTC trades required to report price/quantity in 2008 (to improve transparency and information symmetry)» Improved price discovery for all in market» Info for regulator on project costs 7
Alberta s Scheme Requires reduction in GHG intensity (emissions in CO2- equivalent of 6 Kyoto gases) 100 facilities with more than 100,000 tons CO2e/year (electricity, chemicals, oil & gas, others) Firms can choose among methods to measure emissions (direct measures, historical, design, models, etc.) Facilities convert multiple products to common (SI) output unit Baseline intensity: average of 2003-05 No normalization factors applied Cogeneration reported separately with no required reductions in intensity 8
Alberta s Scheme (2) Uniform target for all facilities and all years: 12% reduction from baseline intensity Except: phase-in for new plants (2% reduction in fourth year of operation, etc., till 12% by year 9) Compliance methods and results (7/07 12/10):» Intensity reductions relative to baseline: 12 Mt (of which, performance credits for over-achievement: 6.5 Mt)» $15/ton payments to a climate change fund: 17 Mt» Offset credits: 12 Mt (offset projects: tillage, wind, small hydro, biomass, etc) Climate fund received $237M by end 2010, has allocated $110M to projects (energy efficiency, renewables, new oil/gas technologies) 9
Alberta Scheme - Successes Has allowed for growth in Alberta s industry while reducing emissions intensity/gdp Created valuable database on emissions intensity from various sectors Created offset project market that could be potential source of revenue for state s economy if linked with other schemes Received buy-in for ceiling price mechanism that generates funds for development of CCS and next generation technology 10
Lessons from Alberta s Scheme Complex administration» Offset program (now has 31 protocols. Credits not issued in a market, only approved at compliance stage)» Use of climate fund payments may help tech development, but could have transparency issues and uncertain results Reporting threshold initially set too high (allowed free riders)» Set at 100,000 tons so only obligated parties had to report» Changed to 50,000 tons in 2010, anticipating growth of smaller facilities Markets for performance credits and offsets undeveloped» No offset credits issued for trading purposes, all bilateral deals» Performance credits banked or moved between facilities of same firm» Some firms have difficulty finding credits 11
Unique objectives of the PAT mechanism vis-à-vis international EE schemes Focus on achieving energy savings in DCs» Compliance entity = End-user» Flexibilities related to offsets do not exist currently Focus on overall energy resource management in DCs» Not aimed at measuring project-level energy saving activity» DCs do not have to get each energy saving activity audited but only overall energy intensity of production» Allows for crediting for soft measures Focus on transparency and information symmetry» All ESCert transactions must take place on exchange with fulldisclosure of net positions» Non-DCs initially are not allowed to participate in trading 12
Advantages of Market-based Approach Over Command-and-Control Benefits from certificate trading:» Facilities with low-cost efficiency projects can sell excess certs and gain more profits» Facilities with high-cost efficiency projects can buy certs instead» The economy as a whole benefits from lower costs to achieve overall efficiency goals Example from one early environmental trading program: Sulfur dioxide trading since 1995 in United States: Trading cut compliance costs more than half; total cost savings: more than $1,000,000,000 per year* * Estimate by Harvard professor, R. Stavins, 2005. 13
Internationally Considered Approaches to Market Design Staggered compliance periods reduce burdens on the regulator and can provide earlier market information Allowing non-regulated entities to trade improves liquidity:» Provides regulated entities counterparties for any trade Information that assists efficiency project decisions:» Timely release of aggregate data on performance relative to target» Full information on prices and quantities traded» Early opportunities for trading and price discovery Some ways of providing early trading opportunities:» Obligation trading» Auctioning & reverse auctions» Average-based obligations 14
Obligation Trading Advantages Obligations are known before certs are issued Firms likely to over-achieve target could accept an obligation from other firms in return for a payment Some obligation trading has occurred under UK programs» Limited amount of trades (all OTC)» Occurred late in compliance period Disadvantage Might not generate enough early trading to facilitate price discovery 15
Auctioning and Reverse Auctions Some environment agencies (and all central banks and finance ministries) have experience with this Auctions early in compliance period» Adds certs and provides price discovery» Generates a cert fund for the government If prices drop very low late in the period, government could use the cert fund to buy back certs and help maintain prices Banking (ability to use this period s certs in later periods), especially if unlimited, would help boost cert demand Auctioning does not require daily intervention in private trading activity 16
Average-based Obligations This approach is used to balance supply and demand:» The average performance, relative to targets, would be the basis for compliance» Certs would be earned by all facilities with above-average achievement of reductions» Facilities below average would have to buy certs If no banking, the supply and demand for certs would be balanced exactly To allow banking, some certs could be auctioned early in the period, but auctions used much less here (and no reverse auctions) The aggregate banking limit would equal the number of certs auctioned 17
Questions for Discussion What lessons from international systems are relevant for the PAT scheme? Your views on the advantages of a marketbased approach that facilitates cert trading? Your views on international examples of market design approaches? Are there any features from other schemes that could be included in the PAT scheme? 18