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Climate Policy Energy 25 February, 2022 12:50 pm   
COMMENTS: Robert Jeszke

Jeszke: Climate policy reform should protect against speculation (INTERVIEW)

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The speculators, about whom there is so much talk recently, and who the EU agency does not seem to notice, are indeed present in this market. This is why it is necessary to implement a safeguarding mechanism. Only recently has this topic come up in the media, but we have been talking about it loudly for a long time – says Robert Jeszke, head of the Strategy, Analysis and Auctions Team and the Center for Climate and Energy Analysis (CAKE) at The National Centre for Emissions Management (KOBiZE), part of the Institute of Environmental Protection – National Research Institute.

BiznesAlert.pl: There are signs that the European Commission wants to reform the EU emissions trading system (EU ETS), to reduce the burden on the energy sector in times of crisis. The Polish Power Plants Association (TGPE) proposes three solutions: a price corridor, release of additional allowances and fight against speculation. Which of these solutions, or any others, have a chance of success?

Robert Jeszke: From the point of view of installations covered by the EU ETS, it is very important to reduce speculative activities, that can lead to manipulation, and to stabilise the price of emission allowances. Since it is the prices of allowances in the EU ETS that have a significant impact on production costs, their sudden and drastic increases can lead to disturbances in the market and unjustifiably increase costs. On the other hand, excessive speculative behavior in the market can also lead to sudden, large drops leading to its volatility. The importance of introducing appropriate safeguards in the market for emission allowances has been demonstrated by the recent 10% price correction (from a price close to EUR 100). As soon as it came out that the only currently functioning (but unfortunately very flawed – art. 29A) price mechanism in the EU ETS, which could release the EUA to the market will be reformed, a real sell-off has begun. This also shows that those speculators, about whom there has been so much talk lately, and who do not seem to be noticed by the ESMA (the EU agency that oversees the trade in CO2 emissions – ed.), are present on this market. This is why it is necessary to implement a safeguarding mechanism for the market. It is only recently that this topic has come out in the media, but we have been talking about it loudly for a long time.

In this context, many possible solutions exist and are being discussed. One of the mechanisms that could stabilize the price of allowances is the introduction of a price corridor. Within such a corridor, the maximum and minimum price of allowances shall be determined by law. For example, once a minimum or maximum price is reached, an immediate reaction in the supply of allowances would be triggered, resulting in an increase or decrease in auction volumes. However, it may be difficult to implement such a solution due to the already existing supply mechanism called MSR. Today, a better option, which the European Commission should first consider, is to amend the existing provisions of the EU ETS directive in art. 29A, allowing for the release of 100 million EUAs from the MSR reserve and their auctioning in the event of a sudden increase in the price of allowances. The reform of art. 29A is now widely discussed and supported by a number of member states. The current shape of this mechanism makes it virtually impossible to introduce it, as we explained in the last edition of the ‘CO2 Market Report’, primarily because the provisions establishing this mechanism are not entirely clear and there has long been no consensus on its interpretation. Investors, aware of the vagueness of the rules and the lack of willingness of the EC to intervene to reduce the price, enter this market without fear and invest in the hope of large profits. Therefore, the safety mechanism in the form of a well-designed art. 29A is essential for the EU ETS to counter uncontrolled fluctuations of the emission allowances prices. This issue seems to be particularly troublesome for the entities that participate in this system, and which, in order to be able to invest in low-emission technologies, need a predictable and stable emissions trading market. It seems that the simplest and fastest solution at the moment is to improve what is already in the system – that is, the adoption of art. 29A.

The Commission intends to present its ideas in July 2022. Considering the unofficial data according to which the energy crisis will last until the end of 2023, is this a quick or a slow reaction? And why did the European Council not take any action during the December 2021 summit?

In the communication from the European Commission, which we expect to be published next month, we can expect information based on long-term forecasts that gas and electricity prices may remain quite high until at least 2023. Although it is worth noting here that the situation is so dynamic that predictions of an energy crisis (whatever we mean by that) should be treated with some caution. Speaking of the energy crisis, the European Commission points above all to the persistently high prices of natural gas, which, although present across the world, in Europe are exacerbated by the deteriorating relations with Russia – the main supplier of gas to the member states of the European Union.

The recent gas crisis, which has had a significant impact on all member states, but also on other countries, has proved to be a more urgent and impactful issue during the Council summit. It should be borne in mind that such high gas prices mean that even at current prices for emission allowances, electricity generation from coal is more cost-effective than from gas, even though it generates about two and a half times more emissions per MWh. This is why once the natural gas prices come back to the regular levels, it will impact the prices on the EU ETS market, which means this problem is more pressing. Nevertheless, the issue of the EU ETS market itself, including rising prices for emission allowances, contrary to signals from Poland, was not considered during the recent talks, has been observed and analyzed for a long time. The debate on the reform of the EU ETS, in addition to its alignment with the new, more ambitious climate policy objectives included in the European Green deal and the Fit for 55 package, also includes mechanisms to protect this market from excessive price fluctuations.

The way the pace of the reaction on the rising EUA prices is perceived is a relative issue. On the one hand, changes to such a complex mechanism as the EU ETS should be systemic and long-term in nature, rather than an ad hoc response without appropriate impact analysis (it is worth mentioning the ineffectiveness of backloading introduced a decade ago). On the other hand, regulatory action in the EU is characterised by a certain inertia, largely due to the legal framework and decision-making procedures of the 27 member states. The most important thing is that the problem of price spikes has been noticed and is now being widely discussed. So far, rising carbon prices have been seen mostly as a positive phenomenon, increasing the pressure to reduce emissions. Now, even among enthusiasts of high carbon prices, there is a recognition that the cost of allowances should be more predictable.

In our view, the market for allowances will continue to be highly volatile in 2022. It is almost certain that quotations will be above EUR 100 in 2022, but the pace of these increases should not be as quick as we observed in 2021, given the potential risks to prices that may occur in 2022. This is not just about the persistently high gas prices – although the heating season is coming to an end, which should contribute to their decline, there is still an increasing risk of the Russian-Ukrainian conflict. This is compounded by the elements of the Fit for 55 package being negotiated by the states, such as the pace at which free allowances are to be phased out, the final shape of the MSR reform, or the introduction of these anti-speculation measures.

How can we reform the energy sector to adapt it to the ever-increasing price of emission allowances while the generation gap in Poland will be widening in the 2020s?

Poland should diversify its energy mix by focusing on the development of RES and gas capacity, which will be necessary to balance the system. It should also invest in nuclear power plants, whose presence would ensure stable and emission-free electricity production. Unfortunately, the construction of nuclear power plants is a complicated problem both technically and financially, and the launch of the first units of this type will most likely be possible only in the 2030s. We must be aware that investments in energy are necessary not only because of climate policy, but also because of the age of the generation infrastructure. No matter in which direction we transform the energy system, in the coming years the costs of generating electricity and heat will increase and, consequently, the bills of consumers will also go up. It must also be remembered that, for technical reasons, we are not in a position to modernise the energy system in the short term so as to avoid incurring high costs of emission allowances, but if we set our sights on a gradual transition, we will ultimately be less dependent on both – the cost of fossil fuels and the cost of purchasing emission allowances.

Both nuclear power and offshore wind power in Poland have huge potential, but the first wind power may appear in the system only in 2025/26, and nuclear in the 2030s. In the meantime, the development of PV and onshore wind energy may be a solution that partially reduces the cost of emissions.

In order to continue the transformation of Poland’s energy mix, it is also necessary to invest in high-voltage transmission networks, necessary for the development of large onshore and offshore wind installations, as well as low-voltage distribution networks, without which the further development of prosumer installations would be significantly impeded (as it would limit the possibility of bringing private power generation to the grid). Thanks to the dynamic development of the prosumer energy sector, at the end of 2021 we managed to exceed the capacity installed in PV as forecast in the PEP for 2030. Unfortunately, this is causing problems with balancing energy in low-voltage networks, therefore, it became necessary to change the support system for prosumers from April 1, 2022. The goal of the change is to increase the level of energy that is used by those who generate it. In practice, however, a significant increase in auto-consumption would be possible if relatively cheap and efficient battery systems, now unfortunately expensive, were available.

The further development of onshore wind energy largely depends on the amendment of the Distance Act – as we know, the bill should be submitted to the Sejm at the end of March 2022. According to the project, in 10 years the capacity of onshore wind energy is to increase between 6 and 10 GW.

A diversified energy mix will provide us, on the one hand, with energy security and, on the other, it will make it easier to keep the rise of electricity bills in check, especially since climate neutrality is based to a large extent on the widespread electrification of various sectors of the economy.

Interview by Wojciech Jakóbik