The Carbon Market:
Risks and the role of information
WWF/ CDP/ DVFA: October 10th, 2005 Frankfurt
Per-Otto Wold, Point Carbon
1) About Point Carbon 2) Market overview
3) Market risks 4) Price drivers
5) Role of information
Agenda
About Point Carbon
• Founded in 2000
• Provide critical insights to energy & environmental markets
• Focus: Carbon, power and gas markets
• Analysis, forecasting, consulting and news
• Currently 55 employees
• Oslo (HQ), London, Kiev, Hamburg, Tokyo
Selected Customers
o Oil, gas and Chemicals
– Shell (UK), BP (UK), DuPont (CAN), Gaz de France (FR), Statoil
o Electricity
– RWE (GER), Vattenfall (SWE), EPDC (JPN),
CHUBU (JPN), Nuon (NL), Essent (NL), Statkraft,
Finance
– Deutsche Bank (UK)
– Morgan Stanley (UK)
o Cement
o Holcim
o Metals
– Arcelor
o Pulp & Paper
– Norske Skog
o Governments/multilaterals
– Environment Canada, World Bank Prototype Carbon Fund, Danish Environment Ministry
Part II:
Market overview
Global carbon market
0 500 1 000 1 500 2 000 2 500
2000 2001 2002 2003 2004 2005
€ million
CDM JI EU ETS Other Source: Point Carbon (Forecast)
V olu m es
0 5 10 15 20 25 30 35 40
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Mt
OTCECXEEXNordPoolPowernext
Historic prices
Part III:
Market risks
Significant price risk
Assume +/- 10%
short/long and 50% price variation from current
level.
Value change on position for 5 largest EU ETS companies
Change (million €)
Short/long (mill EUA) Company
+/- 8.9 +/- 2.0
Powergen
+/- 14.1 +/- 3.2
Corus
+/- 20.1 +/- 4.6
E.ON
+/- 27.5 +/- 6.3
Vattenfall
+/- 46.7 +/- 10.7
RWE
0,00 2,00 4,00 6,00 8,00 10,00 12,00 14,00
08.01.2004 08.02.2004
08.03.2004 08.04.2004
08.05.2004 08.06.2004
08.07.2004 08.08.2004
08.09.2004 08.10.2004
€ per ton CO2 + 50%
- 50%
Low Medium High
High Medium
Low Risk*
Risk/trading Competency
* Risk defined by
• Volumetric uncertainty
• Relative size of carbon to total P&L
• Absolute size of emissions
Risk segmentation
MAC
Risk Management
Internal Abatement
Carbon Market Market Price Mangage Risk
Buy/ Sell EUAs Invest in CDM?
Part IV:
What determines the price of EUAs?
Key price drivers
Bullish/bearish?
Bullish/bearish?
Bullish/bearish?
FUNDAMENTALS
MARKET PSYCHOLOGY POLICY
OTHER
Bullish/bearish?
Short or long? Key concepts
• Emissions-to-Cap (E-t- C)
E-t-C = Emissions ÷ Cap E-t-C > 0 => Short
E-t-C < 0 => Long
• Gross Carbon Balance (GCB)
GCB = E-t-C ÷ CERs GCB > 0 => Short GCB < 0 => Long
0 50 100 150
Emissions Cap E-t-C CERs GCB
MtCO2
Source: Point Carbon's Carbon Market Trader
CO
2production: Key drivers
Annual changes in CO2 emissions 1990-2003
-40 -30 -20 -10 0 10 20 30
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 MtCO2
DNK ESP DEU UK Weather
Asian crisis
Weather and economic growth
Fuel prices
2005: Policy & fundamentals
Source: Point Carbon 0,00
5,00 10,00 15,00 20,00 25,00 30,00
3-Jan 10-Jan 17-Jan 24-Jan 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb 7-Mar 14-Mar 21-Mar 28-Mar 4-Apr 11-Apr 18-Apr 25-Apr 2-May 9-May 16-May 23-May 30-May 6-Jun 13-Jun 20-Jun 27-Jun 4-Jul 11-Jul 18-Jul 25-Jul 1-Aug 8-Aug
€/t
21-27 Jan:
Cold spells
Record-high power outputs 7 Jan:
Greece submits NAP Mild start of winter
14 Feb:
EC finds UK NAP unacceptable
25 Feb:
"Serious" cold snaps
8-11 Mar:
EC requires 51 Mt cut in Czech NAP EC requires 141 Mt cut in Polish NAP
UK accepts 736 cap 23 May:
EC slashes 69 Mt of Italian NAP 13 July:
Softening oil/gas prices
Adjusted CO2 estimates (Point Carbon)
21 July:
Oil/gas prices recover 21 May-11 July:
Soaring oil/gas prices
Outlook for 2005-2007 (1)
• Current status
– Trading around €20-24/t
– Fundamentals play a key role – But, fundamental analysis is
challenging!
Trading largely around intutitive correlations
• ”Equilibrium” prices above market prices
Price collapse unlikely
• Way forward?
– Fundamentals
• Cold winter 06?
• Fuel prices?
• CER supply?
• Sales of ”surplus”
allowances?
– Policy
• Treatment of NERs?
• NAPs for 2008-2012?
– Demand side response?
• High power prices
– Closures/disinvestments?
Part III:
Role of information
Role of information
• We help companies understanding market risk
– Primarily price risk
– Important in a very volatile market (30%/ 70%) – Effects on other markets
Role of information
• Why information is important?
– Understand financial exposure
• Allocated EUAs
• Investments in news plants
• CDM/ JI
• Effects on power prices
Carbon Market Trader
o News and updates
o Market outlook
o Fundamentals
o Policy & Regulatory issues
o Historic prices and volumes
o Equilibrium prices
o Technical analysis
o Methodology
o Evaluation
o Market alerts
Role of information
• Carbon Disclosure Project:
– Helps investors understand companies carbon exposure
• Strategic Awareness
• Management Accountability
• Emissions Management
• Emissions Trading
• Programs
• Targets
