European Power and Carbon
Markets Outlook

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Fact Sheet (PDF) Subscription Form (PDF) Report Outline: Carbon (PDF) Report Outline: Power (PDF) Press Release Webcast

The current global economic downturn ended a bull run in European power, fuels, and carbon markets, which had fostered some of the highest commodity prices participants had seen in recent years. Since then, weak economic fundamentals and slashed year-on-year power demand have reversed the trend, and wholesale power prices crashed 50 percent in the second half of 2008, while the value of carbon allowances has declined 60 percent since June 2008.

At the same time, the recent approval of the European Union (EU) climate and energy legislative package provides ambitious long-term targets that will significantly alter the evolution of power and carbon markets in the coming years. Certainly, the tighter and extended greenhouse gas emission caps the package introduces are going to impact the demand from EU Emissions Trading System (ETS) participants for emission reduction options and carbon instruments. How is the EU and international climate policy framework going to change market fundamentals as the current focus on short-term signals gives way to post-2012 views? What are the shifts in markets fundamentals? How are they going to influence actual prices?

The power sector, the largest emitting sector within the EU ETS, is a crucial price driver for EU allowances (EUA) in both the short and mid term. Conversely, carbon is a major factor for power station investment and operating decisions. In addition to the EU ETS, power generators are having to react to a complex mix of both legislation and economic uncertainty. This legislation includes the Large Combustion Plant Directive (LCPD) and an ambitious Europe-wide target of 20 percent of energy consumption from renewable sources by 2020—potentially requiring more than 30 percent of electricity to be sourced from renewables. Generators have a widening set of credible new build options to choose from in order to meet future power demand, with large-scale renewable penetration and nuclear now on (or back on) the list. What should they choose, what will the resulting value of EUAs be, and what are the implications for coal and gas suppliers?

Key Issues Addressed

Power Chapter

• What will the build mix and future capacity mix look like across Europe, and how will it vary by region?
• What will higher levels of renewable (and nuclear) penetration and CO₂ pricing do to the operational patterns of coal and gas plants?
• How will the current economic crisis affect investments for new capacity?
• What does the future path of coal and gas consumption by the EU power sector look like?
• Do coal-fired power stations with carbon capture and storage cross the viability threshold as CO₂ limits tighten?
• How will power sector CO₂ emissions evolve?

Carbon Chapter

• What will be a fundamental EUA value over time under various scenarios, including a deep recession assessment?
• To what extent can market participants’ behavior cause EUA prices to depart from fundamentals?
• How many emissions reductions will be delivered within the EU under studied scenarios? What share will come from the power sector?
• How will EU ETS participants compete with other international buyers of international offset credits?
• How will the current economic downturn affect demand for electricity, fuel switching, and carbon prices in the short and long term?
• What impact will renewables support mechanisms have on EUA prices?

Our Approach

In order to assess developments in the European power and carbon sectors, ICF applies its expertise and modeling platforms to develop unified visions of power, fuels, and environmental markets going forward.

A key strength of ICF’s supply-side assessments stems from its use of the Integrated Planning Model (IPM®)—one of the world’s most widely used power markets model. Associated with its carbon markets forecasting platform, the International Carbon Pricing Model (InCaP™), ICF is able to uniquely capture and analyze the drivers and dynamics of the European power and carbon sectors.

IPM®

ICF’s proprietary Integrated Planning Model (IPM®) is designed to replicate the decisions made by power system operators when establishing how to best meet electricity demand and capacity reserve margins, and by utilities faced with a choice of capacity expansion options to manage the growth in demand.

The IPM® is a bottom-up linear programming model with a detailed representation of every generator operating on the integrated European grid. The model determines the least cost means of meeting electric energy and capacity requirements, while complying with specified financial, environmental, operational, and transmission constraints. Our European model includes information on more than 15,000 power plants across 32 nations and represented in 36 distinct but interconnected regional dispatch zones.

InCaP™

ICF’s proprietary International Carbon Pricing Model (InCaP™) assesses the implications of alternative policy and economic scenarios on carbon prices in existing and future emissions trading schemes around the globe, including the EU ETS.

ICF’s model forecasts allowance prices by determining the least-cost manner in which domestic and international offsets can be employed to meet the demand for emission reductions from ETS participants around the world, given the competition between participants generated by forecasted regional market and policy constraints (e.g., costs of abatement, limits on the use of international credits, fuel prices, etc).

A key strength of InCaP™ is that it builds upon ICF’s power markets model—the IPM®.

Table of Contents (both chapters)

• Executive Summary—condensed discussion of market developments, suitable for senior executives
  
  
• Regulatory Overview and Market Trends—review of existing and proposed policies, as well as a take on key market activity and trends
  
  
• Modeling Assumptions—model inputs used for the forecasts of European power and carbon market trends
  
  
• Modeling Results—detailed analyses of the European power and carbon market forecasts, under several scenarios
  
  
• Appendices

Deliverables

• The Power Markets volume (200+ slides of detailed graphical and text analysis) and the Carbon Market volume (150+ slides of detailed graphical and text analysis) can be purchased individually (in electronic PDF format) at a price of €4,500. The volumes are available together for €7,500.
  
  
• An on-site presentation of the study and discussion with ICF International experts can be arranged.
  
  
• Specific information on the operational and financial performance of particular power sector assets under the report scenarios are available at a discounted fee of €1,500 per asset (available with the purchase of the Power Market volume).