Trading in the ETS - ccap.orgccap.org/assets/Amsterdam-Capital-Trading_Nick...Trading in the ETS •...
Transcript of Trading in the ETS - ccap.orgccap.org/assets/Amsterdam-Capital-Trading_Nick...Trading in the ETS •...
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Trading in the ETS
A look at the opportunities for compliance companies
- 5 and 6 November 2013, Wuhan, Hubei, China -
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Introduction ACT
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Agenda
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Trading in the ETS
• Factors that influence the CO2 allowance price • Factors that influence the CER price • Mechanisms of trading
- OTC - Through an Exchange
• Buying and selling allowances - Spot transactions - Futures/forward transactions
• Opportunities for compliance parties
- Optimizing the CO2 portfolio - Managing market risk
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Factors That Influence the CO2 Allowance Price
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Price forecasts...
October 2011
October 2012
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Factors That Influence the CO2 Allowance Price
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And the actual price development...
€ 5,00
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Factors That Influence the CO2 Allowance Price
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CO2 price
(1) Allocation of allowances (2) Banking of allowances (3) Commodity prices (4) Fuel switching (5)Macro economic conditions (6) Weather (7) Regulatory issues
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Factors That Influence the CO2 Allowance Price
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(1) Allocation of allowances • The main reason behind this structural change in the price of carbon may be found in the ratio of allocated allowances to actual emissions -> how much allowances does a company receive? (2) Banking of allowances • Banking means that participants can carry over of allowances from one phase to the next phase -> Companies need certainty on the validity of their allowances
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Factors That Influence the CO2 Allowance Price
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(3) Commodity prices • The influence of oil, gas en coal prices
(4) Fuel switching • The marginal fuel-switching costs from carbon intensive sources such as coal to lower carbon intensive sources such as gas
-> CO2 emission factor of Gas is smaller than Coal
(5) Macroeconomic conditions • General economic conditions influence production levels, which in turn results in a supply and demand balancing of CO2
prices
(6) Weather • The weather plays an important role in shaping the price of CO2
- Extreme temperatures increase the need for heating and cooling - Rainfall, wind and sun can influence the production levels from alternative electricity sources
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Factors That Influence the CO2 Allowance Price
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(7) Regulatory issues • In the EU-ETS regulatory uncertainty about intervention in the ETS (also known as backloading) is currently the main driver of CO2 prices • Renewable energy policy and subsidies influence price
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Factors that influence the CER price
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CER price forecast...
October 2012
Source: Pointcarbon
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Factors that influence the CER price
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And the actual price development...
€ 0,55
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Factors that influence the CER price
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Market • New sectors (aviation) • New participants (linkage to other schemes, such as New Zealand) • Regulatory rules of EU-ETS (how much CERs can be used to offset emissions?) • Countries which use CERs to reach their Kyoto targets • Carbon funds CER supply • New methodologies • ERU credits which can be used as a supplement for CER’s in the EU-ETS • Low CER price -> lower incentive to invest in CER projects -> less supply
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Mechanisms of Trading
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In the EU-ETS trading of allowances is done in two ways: - OTC (Over the Counter) - Through an Exchange
OTC An OTC trade is a trade done directly between 2 parties as opposed to a centralized exchange. Such a trade can be bilateral or brokered: Bilateral OTC deal Brokered OTC deal
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Mechanisms of Trading
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Emission Allowance Exchanges
• ICE: Intercontinental Exchange
- Most liquid exchange - Spot and Futures - EUA, CER and ERU
•EEX: European Energy Exchange
- The common platform for the auctioning of EUAs by the large majority of countries participating in the EU- ETS
-> in Europe only a small percentage of the companies covered in the ETS are members of an Exchange.
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Buying and Selling CO2 Allowances
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Spot and Futures/Forward transactions Spot transaction Is the purchase or the sale of CO2 allowances with immediate settlement. This means that CO2 allowances are delivered and paid for directly. Benefits: - Fast settlement - Small counterparty risk Drawbacks: - Immediate cash out
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Buying and Selling CO2 Allowances
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Spot versus Futures/Forward transactions Futures transaction Under a futures contract the buyer is obliged to purchase (and the seller to sell) CO2 allowances at a fixed price and date in the future. Benefits: - Standardized contract - More liquidity as it is traded on the exchange - Hedging position - Leverage Drawbacks: - Margin requirements - Higher risk because of leverage Forward transaction Non-standardized contract under which the buyer is obliged to purchase (and the seller to sell) CO2 allowances at a fixed price and date in the future. Benefits: - Tailor-made - Hedging position Drawbacks: - Counterparty risk - Poor liquidity
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Opportunities for Compliance Companies
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The ETS offers different opportunities and structures which companies can use to optimize their CO2 portfolio and manage the market risk. Optimizing the CO2 portfolio: • Using (C)CERs
-Premium swap -Ratio swap - Outright (C)CER purchase - Repo (Repurchase agreement)
Managing market risk: • Fixing prices
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Opportunities for Compliance Companies
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EUA – CER premium swap: Receive premium • Company A has an allocation of 1.000.000 EUAs • Within the ETS it is allowed to offset your emissions with CER’s based on 10% of the allocation Allocation: 1.000.000 EUAs CER limit: 100.000 CERs EUA price: € 5,00 CER price: € 0,50 Premium: € 4,50 Premium receivable: CER limit x € 4,50 € 450.000,00 The amount of allowances in the portfolio remains the same -> Most suitable for companies which have a surplus of allowances
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Opportunities for Compliance Companies
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EUA – CER ratio swap: Receive extra allowances • Company A has an allocation of 1.000.000 EUAs • Within the scheme it is allowed to offset the emissions with CERs based on 10% of the allocation Total allocation NAP phase II: 1.000.000 CER Limit: 100.000 EUA price: € 5,00 CER price: € 0,50 Premium: € 4,50 Swap ratio: 1:10 Amount EUAs to sell: 10.000 Amount CERs to buy: 100.000 Amount extra allowances created in portfolio: 90.000 Company A receives extra allowances in the portfolio without spending money -> Most suitable for companies which expect a small shortage of allowances
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Opportunities for Compliance Companies
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Outright CER purchase • Company A has an allocation of 1.000.000 EUAs • Within the scheme it is allowed to offset the emissions with CERs based on 10% of the allocation Allocation: 1.000.000 EUAs CER limit: 100.000 CERs CER price: € 0,50 Buy CERs: 100.000 x € 0,50 € 50.000,00 This transaction creates the maximum allowances at the most cost efficient manner -> Most suitable for companies which expect a significant shortage of allowances
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Opportunities for Compliance Companies
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Repo (repurchase agreement) When the market is in contango and thus the future price of a CO2 allowance (EUA) is higher than the spot price: • Sell on spot (directly) EUA allowances • And buy back EUA allowances with delivery in the future
-> This way you can ‘borrow’ money from your own stock of EUAs in your portfolio -> You buy back the EUAs just before you need to surrender them for compliance -> Only worth when the forward curve is less then cost of borrowing for the company An example will follow...
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Opportunities for Compliance Companies
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Repo (repurchase agreement) Example
Company A received 1.000.000 EUAs and has internal borrowing cost at 6%
Year EUA price Increase in %
Spot (now) € 5,00
December 2014 € 5,15 3 %
December 2015 € 5,35 3,9 %
• Sell on spot 1.000.000 @ € 5,00 • Buy back in December 2014 1.000.000 @ € 5,15 • Receive € 5.000.000 from the spot sale of EUAs directly • The ‘interest rate’ on this transaction is the difference between the December 2014 and the spot price
-> so when internal borrowing cost are more than 3% this transaction would mean an optimization of the company’s lending structure
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Opportunities for Compliance Companies
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Managing market risk There are a number of structures which can be used in order to protect against price volatility
Structure Reason behind Pros Cons
Fixing price through a forward transaction -Easy to budget -No direct cash outflow
Provides protection against extreme price movements
Limits potential in case price moves in the opposite direction
Setting a cap and a floor (maximum and minimum price set) Example, floor at € 2,00 and cap at € 4,50
Minimize hedging cost while allowing gains from favourable price movements
Flexibility in choosing moment to buy (within the cap and floor)
-Limits opportunities in both ways. - Buying price always between cap and floor
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Opportunities for Compliance Companies
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PR and marketing (C)CER’s can also be used as a marketing tool: • Offset emissions with allowances from a renewable energy project within your community • Invest directly in renewable energy projects within your community
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Conclusion
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Most of our clients looked at the ETS as an administrative burden which hampers there daily business...
-> However, by helping our clients understand the ETS and by showing them the different opportunities available, they are now using the ETS as a source of value.
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Thank for your attention!
Any questions?
Nick Soeteman Carbon trading
DIRECT + 31 20 8911 252 MOBILE + 31 646 008 345 EMAIL [email protected]
Amsterdam Capital Trading Herengracht 469 1017 BS Amsterdam The Netherlands www.ac-trading.eu