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The impact of carbon regulation on power


EU-ETS intended to create a continental market for emissions by attaching an economic value to the carbon externality thereby encouraging power utilities to shift their power generation mix towards less carbon intensive alternatives at the least cost. In practice, however, the current EU regulatory framework poses little threat or incentive for utilities to switch away from "dirty" generation.

*Sixty-day rolling correlation data and trends for day ahead gas/EUA spot returns and Brent spot/EUA spot returns for the 2005 to 2008 period.
*Three long-term oil, gas, coal, carbon and power pricing scenarios plus Datamonitor's estimation of the most likely long-term scenario.
*Analysis of power generation supply and demand dynamics for fossil fuels and alternative energies, both with and without carbon pricing.
*Insight into reasons why the current EU regulatory framework poses little threat or incentive for utilities to switch away from "dirty" generation.

To date, European utilities have gained more than they have "pained" from European carbon regulation. This is a trend which is likely to continue until and unless auctioning is introduced in the new EU climate package. Until then, and at current prices, a large scale switch from coal to gas appears unlikely, regardless of the pricing rule adopted.

The increasingly positive correlation between gas and carbon prices has been destabilized, in part, by the seasonality of gas. Oil, however, is acting as a positively correlated non-seasonal gas proxy for carbon prices. The dynamics shaping the interrelationship between gas, oil, coal and carbon suggest that carbon prices will rise long-term.

Fossil fuel commercial breakeven without carbon pricing is a function of total energy demand, not fossil fuel switch-off and will increasingly be impacted by the rapid scaling of 'green' energy sources, particularly as carbon policies and peak oil dynamics steepen the fossil fuels supply curve, making clean energy more attractive.

Assess the current and likely future degree of correlation between oil, gas and carbon prices and what it means for long term carbon and energy prices.
Identify how very different carbon prices can trigger the power switching threshold under different decision rules and pricing scenarios.
Understand why long-term substitutions between coal-fired units and CCGT plants will only take place under very restrictive conditions.

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