Getting Value from the Market Carbon as a Commodity Steve Drummond CEO, CO2e'com

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Getting Value from the Market - Carbon as a
CommoditySteve DrummondCEO, CO2e.com
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Agenda

• Marketplace snapshot
• Market value drivers
• Extracting value pre-commodity markets
• Extracting value commodity markets
• Summary

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Snapshot of the marketplace
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Overview

• There is no single carbon market
• Multiple markets at multiple levels, each with
  their own drivers and prices
• International pre-compliance
• National and regional markets (UK, Denmark,
  proposed-EU etc)
• Corporate (internal trading schemes)
• Retail, or consumer-driven
• Related markets, renewable certificate trading

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Greenhouse gas market snapshot 2002
Financial pre-compliance
National Markets - Denmark
Retail Market
National Markets United Kingdom
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Greenhouse gas marketsnapshot 2006
National markets - Denmark
Financialpre-compliance
Regional Markets- EU
??
US Market ?
??
National Markets United Kingdom
Retail Market
??
Other National Markets ??
National Markets Japan ??
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Greenhouse gas market snapshot 2008-12
US Market ??
International Market
Retail Market
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Greenhouse gas and green energy markets

• Voluntary Renewable Energy markets
• Green Tag programmes
• European RECs

GHG Market

• Madatory Renewable Energy markets
• ROCs
• Australian RECs
• European RECs one day?

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Market value drivers
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Intrinsic value

• Greenhouse gas emission reductions and offsets do
  not have an intrinsic value
• This value is driven by legislation, and the
  expectation of legislation
• Carbon value is dependent upon political
  developments and commercial perceptions
• This changes as legislated markets emerge
• Carbon value can be enhanced through intelligent
  deal structuring

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Market structure

• Each market has its own characteristics
• Level of certainty (how developed is the
  legislation?)
• Type of transactions and instruments commodity,
  bilateral, mixed
• Transactions, how liquid is the market?
• Sophistication of participants
• Pricing depends on factors above, and balance
  of supply and demand
• Interactions between markets
• Important to understand each market in order to
  maximise value

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Supply and demand

• International pre-compliance marketplace
• Supply and demand under the Kyoto framework
  depends on negotiations
• Supply outweighs demand and will do so for a long
  time
• United Kingdom
• Voluntary scheme question mark over number of
  participants (but we will soon have more idea)
• Supply depends on participants, and rules for
  projects
• CCL participants definitely in
• Europe
• Growing supply from Eastern Europe
• Supply outweighs demand

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International project-based average offer prices
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Pricing nationaland regional markets

• UK Market
• Trading at exploratory stage
• Bids and offers at various levels range of 3-6
  / tCO2eq
• Dependent on vintage, volume, credit-worthiness,
  source of reductions (for projects)
• Europe
• Too early for forward pricing
• Economic forecasts have median prices circa 5.00

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Market behaviour simulation
2001-2
2003-4
2005-7
2008-12
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Extracting valuepre-commodity market
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Transactions

• Activity
• Transactions driven by expectation of legislation
• Limited rules and guidelines
• Buyers and sellers develop frameworks through
  discussion and negotiation
• Contract structures
• Spot
• Forward
• Options
• Direct project investment
• Payment profile
• Upfront
• Delayed

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Project considerations

• Ownership
• Additionality
• Surplus
• Baseline and monitoring
• Verification
• Liability and risk profile
• Price and volume

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What do parties bring to table?

• Supplier
• Emission reductions
• Other project output electricity, energy
• Potential customer for fuel, services etc
• Buyer
• Financing
• Credit rating
• Expertise
• Development financing

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How to maximise value

• Aim of buyer and seller is to maximise financial
  position, subject to acceptable level of risk
• Buyers want good value reductions
• Quality
• Price
• Suppliers want a good price, without giving away
  too many guarantees

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Seek win-win deal

• Identify value streams that allow a win-win
  situation for both parties
• For example, consider arbitrage opportunities
  that leverage differences between
  counter-parties
• Credit rating
• Tax treatment between jurisdictions
• Availability of investment allowances
• Can the the buyer provide other inputs (fuel etc)
  or purchase other outputs (energy) at a more
  favourable price if credits also purchased

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Extracting value commodity markets
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Nature of market

• The rules are fixed, though not always simple
• Instruments are defined
• Fixed compliance requirements
• Participants known
• Generally more liquid
• Generally clarity on pricing

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Strategies

• Participants take part in the market for
  well-defined reasons
• To meet compliance requirements
• Sell product for a profit
• Speculative purposes
• However, compliance and trading strategies not
  always straight-forward

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Complexities

• UK schemes result in complex interactions
• Emissions Trading Scheme absolute sector
• Climate Change Agreements relative sector
• Gateway
• Renewables Obligation ROCs
• Climate Change Levy exemptions
• Domestic energy efficiency programmes
• The same activities are worth different amounts
  in different schemes, for example
• Renewable energy - ROCs v ETS

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Not always a commodity

• Australian renewable scheme (tradable
  certificates)
• Fungible for compliance purposes, however,
  different shades of green (dead koala)
• Also, different technologies attract different
  prices despite compliance fungibility
• Renewable energy has a value in state-based
  schemes participants split instruments into
  value components then put them back together in
  a different way
• Currently a small market, but with parallels for
  the UK

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International arbitrage opportunities

• No linkages between the UK and international
  schemes yet
• However, there will be at some point in the
  future. EU scheme, CDM credits etc
• Is there an opportunity to take a speculative
  turn on this?
• Depends on your view on policy developments
• Expected price differences between the UK and
  international markets provides room for
  speculation

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Summary
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Summary

• The carbon market is far more complex than
  generally understood
• Opportunities for the well-informed market player
• International pre-compliance
• Commodity markets emissions trading, renewable
  energy
• Need a superior understanding of markets, trading
  strategies and politics of climate change to be
  successful

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CO2e.com
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Contact us
CO2e.com European Office
Steve Drummond, Chief Executive
Officer sdrummond_at_CO2e.com, tel. [phone]
7054 Stewart McCarthy, VP Business
Development smccarthy_at_CO2e.com, tel. [phone]
7550 Nicola Steen, VP Transactions nsteen_at_CO2e.
com, tel. [phone]
One America Square LONDON EC3N 2LS UK 44 20 7894
8333

Or simply visit our website at www.CO2e.com

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