Carbon as a Commodity Emissions Allowances and Carbon Constraints The Legal Straitjacket for UK Elec

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Carbon as a CommodityEmissions Allowances and
Carbon ConstraintsThe Legal Straitjacket for UK
Electricity Generation

• Robert Tudway
• Partner, Nabarro Nathanson

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The UK Draft National Allocation PlanUK Power
Generation

• The United Kingdom Dimension

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Power Generation Draft National Allocation Plan

• The UK has decided that the power generation
  sector will be responsible for the additional
  emissions trading savings which it expects the
  EU ETS to deliver beyond the U.K. Climate Change
  Programme projections. This reflects the fact
  that this sector faces limited international
  competition and is thought to have a relatively
  large scope for low cost abatement
  opportunities.
• draft National Allocation Plan, para 2.9

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What are the Effects of the Draft National
Allocation Plan on the UK Price of Power?

• EITHER
• Version 1
• Our suggestion is that industrial electricity
  prices will increase on a reasonably conservative
  set of assumptions by something like 6, not just
  in the UK but in major industrial economies, in a
  fairly uniform way. The comparable figure for
  domestic bills would be about 3, but it may
  actually prove to be rather less than that
• Steven Timms, draft NAP press conference
  19/01/04

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What are the Effects of the Draft National
Allocation Plan on the UK Price of Power?

• OR
• Version 2
• UK wholesale electricity prices rallied recently
  to reflect expectations of higher costs and lower
  output from coal power stations as a result of
  the trading scheme.
• Electricity prices could rise by up to 80 by
  2010.
• The Guardian 19 and 20/01/04

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The UK Draft National Allocation PlanUK Power
Generation

• The EU Dimension

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Some Key Criteria for National Allocation
Plans(Annex III EU ETS Directive)

• consistent with each Member States contribution
  to the Kyoto Protocol
• non discriminatory
• based on average emissions, but with potential
  for reduction
• anticipating early emission reduction measures
  and benchmarking
• reflecting how energy efficiency technologies are
  taken into account
• existence of competition outside the EU

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Are the Criteria a Straitjacket or too Flexible?
The Commission must accept/reject draft NAPs by
reference to their compatibility with Annex III
criteria and Article 10 of the Directive, but
there are variables in each Member State

• differing Member States emission levels under
  the Kyoto Protocol and domestic emissions
  programmes
• use of average (historic) emissions
• account taken of early reduction measures and
  benchmarking
• some Annex III criteria optional (see Guidance
  on Implementation).

The Commission will not reject a plan if
optional criteria or optional elements of
criteria are not applied (Guidance on
Implementation of Annex III Criteria).
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The Draft Allocation Plan as it Affects the UK
Power Industry

• will the special allocations position of the UK
  power industry create a market distortion for UK
  major energy users?
• will the Commissions power to reject a Member
  States allocation plan be sufficient to take
  account of any distortive effects on UK major
  energy users?

The Commission has an over-riding duty to avoid
distortion of competition under the Treaty
(Article 3) (reflected in pre-amble to the
Directive).
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State Aid
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State AidUK Allocation Plan

• The Government remains committed to its target
  of 10GW installed CHP capacity by 2010. In order
  to help achievement of the target, a proportion
  of the NER will be ring-fenced for CHP projects
  - to be based on current projections for CHP
  capacity para 110 Consultation Paper
• difficult to argue state aid - see Preussen
  Elektra AG v Schleswag AG. If NAP is a special
  advantage to CHP, very questionable whether the
  advantage is through a state resource
• also the practical merits of a challenge on the
  basis of state aid low
• CHP applicable to a wide spectrum of power
  generation activity
• The Directive on the promotion of cogeneration

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The Impact
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• the task of the Commission in judging Member
  States national allocation plans by reference to
  the Annex III criteria means managing the
  flexibility left to Member States, to avoid
  distortion in competition
• the UK Power industry is a case in point. The
  draft UK plan may not distort competition within
  the UK generating industry, but could place
  higher (uncompetitive) cost burdens on major
  energy users
• is the Government right about the modest
  effects of the NAP on power pricing?
• if not, have the competitive effects on UK
  industry been assessed?