LONDON, Oct. 1, 2019 /PRNewswire/ -- The EU Emissions Trading Scheme (ETS) has potentially profound implications for power prices, critically impacting the competitiveness of domestic metals and fertiliser producers. With its unparalleled data and market insights, CRU is well-placed to advise on the implications of future changes to the ETS – including new indirect compensation rules for higher power costs – for your business strategy and operations.
Metals and fertiliser producers are heavily impacted by EU ETS regulations
The EU ETS scheme is fundamentally altering the economics of metals and fertiliser production in Europe. These industries are highly energy intensive, commonly accounting for 30-70% of total production costs. Higher carbon prices are therefore likely to increase production costs for a broad span of European industrials including steel, copper, nitrogen and aluminium producers.
More stringent compensation rules for producers are compounded by the effects of higher carbon prices. As regulators lay the groundwork for the next phase of the EU ETS post 2020, CRU believes prices for CO2 allowances will increase over the medium and longer term. This comes off the back of a 3-4 fold increase in the recent period (see here for details). Against a backdrop of higher prices, producers are subject to progressively less generous compensation rules.
Focus is shifting to rules governing power costs
Power generators have been disproportionately impacted by EU ETS reforms. Concerns around potentially adverse impacts on industrial competitiveness have meant that Europe's producers have historically been compensated for higher direct energy costs through the free transfer of emissions allocations. However, these rules have come to an end for power producers: any facility with a capacity of greater than 20MW now receives no free allowances, meaning the power sector is fully exposed to any carbon-related costs.
Compensation for downstream power users is treated separately from the ETS directive under state aid rules. Aluminium and copper smelters as well as EAF-based steel producers are among the industries impacted by higher power costs. The EU Commission issues guidelines permitting member states to compensate certain industries for the higher power costs resulting from the EU ETS, linked to the volume of revenues raised from the sale of emissions allowances.
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