Ad Hoc Group 3

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• Ad Hoc Group 3
• Energy-intensive Industry
• statement by Michael Engelhardt, German
  Non-Ferrous Metals Association (WVM)

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Energy-intensive Industry in Germany

• Cement
• Chemicals
• Glass
• Non-Ferrous Metals
• Paper
• Steel
• Other (minors)
• ca. 750,000
• Power ca. 100 TWh (20 of the
  total demand in Germany)
• Natural gas ca. 200 TWh (20 of
  the total demand in Germany)

Sectors
Workforce
Energy Demand
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Scope of the Energy-intensive Industry

• Could be defined as
• Purchases of energy products amount to at least
  3,0 of the production value

Source Council Directive 2003/96/EC of 27
October 2003 restructuring the Community
framework for the taxation of energy products and
electricity
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Power costs are the location decisive factor for
producing aluminium
Cost structure of an aluminium smeltery (Example
of a company)
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Cost structure in selected chemical processes

• Chemistry Chlorine Electrolysis
• Personnel 8
• Electricity 47
• Other Material 8
• Technical Gases (Oxygen, Nitrogen, Argon)
• Electricity 50 70
• Ammonia and Urea (Fertilizer)
• Natural Gas 40 50

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The power prices in Europe are not
internationally competitive
gt40 /MWh
30- 40 /MWh
20- 30 /MWh
lt 20 /MWh
Sales Price offered to big industrial consumers
in 2004, all taxes excluded
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Source Eurometaux, Uniden
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ETS is currently the biggest cost element
regarding power costs for the NF metal industry
among state-induced costs
Tendency
with a power price charge of 10 EUR/MWh
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Emissions trading (ETS)

• Demands
• No continuation of a non-
• working and competition
• distorting ETS
• Prevent adding free of charge
• CO2-emissions certificates onto
• the power price

• Reasons
• The current ETS has serious negative effects on
  the industry simply continuing it would result
  in relocation of companies
• Adding free of charge CO2-emissions certificates
  onto the power price is economically
  unacceptable leads to significant increases of
  power price andreallocation effects from the
  power users to the power generators

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Emissions trading (ETS)

• Demands
• No extension of scope via
• loopholes
• Appropriate regulation forsmall plants

• Reasons
• The emissions trading directive delib-
• erately includes only certain industries
• Extending the definition of combustion
• plants signifies extension of the directive
• to further industries by avoiding the
• regular legislation process
• Complexity of emissions registration is
  disproportionate to the amount of CO2
  estimation ca. 1,000 plants below 25,000
  t/year cause only ca. 2 of the total emissions
  of the emissions trading sector in Germany

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Power elements and wholesale power prices
Main cause of risen power prices are CO2 windfall
profits, lack of competition, and not political
charges.
90
Energy Tax
CHP
80
RES
State
70
Grid Charge
60
Balancing Energy
Power
50
Suppliers
EUR/MWh
40
30
Wholesale Power
Price incl. CO2
20
10
Wholesale prices for power (base load) and CO2
(pink) Power price has more than doubled since
2003
0
Source VCI
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Electricity exchanges
Power Suppliers Electricity exchanges work

• Power Customers
• EEX is unsuitable as guiding index for
  industrial customers
• Transparency at electricity exchange EEX must be
  improved
• The oligopoly dominates 90 of the generating
  capacities
• Structural differences between EEX and the
  markets for products of the energy- intensive
  industry

• Metals (LME)
• Global market
• Many producers
• High liquidity
• Metals are storable
• Metals can be substituted

• Power (EEX)
• Regional market
• 4 dominating producers
• Low liquidity
• Power is not storable
• Power cannot be substituted

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Electricity exchange prices twice as high as
production costs evidence for lack of
competition
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Main findings of the sector inquiry of DG Comp-
Summary of Preliminary Report -
Market concentration Most wholesale markets
remain national in scope with high levels of
concentration in generation, which gives scope
for exercising market power. Vertical
foreclosure Vertical integration of generation,
supply and network activities has remained a
dominant feature in many electricity markets.
Market integration The low level of
cross-border trade is insufficient to exert
pressure on (dominant) generators in national
markets. Transparency There is a serious lack
of transparency in the electricity wholesale
markets that is widely recognised by the sector.
Price formation Price formation is complex,
and many users have limited trust in the price
formation mechanisms.
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We need a fair, transparent and competitive market

• as the labour costs in Europe are very high, we
  need at least internationally competitive power
  prices
• there is no structural reason for the EU power
  markets to be uncompetitive as Europe has a
  favourable primary energy mix, including hydro,
  nuclear and coal
• the recognition of market failures and plans for
  improvements are essential
• however, until the market functions properly, our
  industries need an immediate remedy

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Initiate a dialogue process between power
generators and customers to find quick solutions

• Windfall profits from CO2-emissions trading by
  adding the free CO2-emissions certificates on
  to the power price must be prevented
• Conclusion that the exchange prices for power
  are no longer competitive for the
  power-intensive industry
• The power-intensive industry must have the
  possibility to secure the power demand with
  long-term contracts at fair conditions (e.g.
  France)
• - The real costs of power generation must be the
  base for pricing, i. e. no subsidisation of
  industry but also no windfall profits of power
  generators
• - A dialogue process shall be set up aiming for
  fair industry power prices
• - Politics is asked to support this
  process

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BACK UP
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European solutions for the power price problem

• 1) French model
• a) Methodology
• b) Conclusions (consensus
• between industries and
• power industry)

• Structured dialogue between power
• generators and users
• (commenced already in 2003, procedure
• not completed yet)
• All results are consensus-based
• Aim win-win-solution for generators and
• users
• Power prices at exchanges are no longer
• competitive for industry
• Electricity exchanges could get out of hand
• Power prices are significantly above the
• actual production costs
• Risk distribution between generators and
• users no longer in balance

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European solutions for the power price problem

• French model
• Solution
• Evaluation

• Possibility of long-term contracts up to 10 years
  and longer
• Base actual production costs without CO2
• Setting up an industry syndicate in order to
  obtain power
• Entry requirements
• - Power usage of at least 2.5 kWh per Euro added
  value
• - Balanced distribution over the year
• - Usage within low-peak periods must be 55 of
  the total
• annual consumption
• Special depreciation possibilities for
  participants
• Increasing the transparency via price-defining
  factors
• (production capacities, network load etc.)
• Abolishing investment restraints for new power
  suppliers
• Could be exemplary for Germany, if entry
  requirements would
• be set up similar to the RESA hardship
  regulation adaptation
• to Germany power mix required
• BDI could be a suitable panel for the process

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