Emissions Trading Potential North / South Impacts

1. Emissions TradingPotential North / South Impacts Eugene Coughlan Head of Generation & Environment

2. Context • EU pilot emissions trading scheme – 2005/7 for emissions of carbon • Applies to all power generators and large industrial installations • National allocation plans (Northern Ireland (UK)) & Republic of Ireland) remain to be finalised after consultation • Implications on North / South energy market therefore not clear at this stage

3. Elements of scheme I • Cap and trade approach • existing installations allocated percentage of required allowances free • based on historical emissions • must then purchase allowances to cover the shortfall • current carbon price – 12€tonne

4. Elements of scheme II • Allocations to generators in Northern Ireland and in Republic of Ireland are provisional • Those generators in Northern Ireland may receive a higher allocation of free allowances – potential impact on North / South energy market

5. Republic of Ireland - NAP • Consultation on NAP finished 10th March – plan to be finalised by 31st March • 14 million tonnes allocated annually to powergen sector • Taken from powergen pool of allowances - known powergen developments (Tynagh and AA), new peat plants • Assumed renewable targets will be met on time (13.2% of consumption by 2010 / 12) • Allowance for CHP developments also • Average of 77% of required allowances given free (historical emissions)

6. Northern Ireland - NAP • Part of UK National Allocation Plan • 90% free for existing generators • Coolkeeragh position unclear • Any update?

7. New Entrant Treatment • A factor in the location decision of a new entrant • RoI – 1-2% available allowances held for new entrants ( in all sectors industrial and powergen) • Restrictions on percentage of such allowances which can be used in one year • New 400MW CCGT requires 1.4 million tonnes (yearly base load) – this is less than available in new entrant pool • Northern Ireland –pool for new entrants expected to be larger

8. Treatment of Costs • Treatment of emissions trading costs by regulators is key • Incremental cost – cost of the ‘extra’ permits required – pass through to customers • Opportunity cost – cost of holding free allowances – pass through to generation price to reflect intent of Directive and to incentivise new entry

9. Costs of emissions trading - treatment • Recommendation from CER of full cost pass through • Why? • Need for generation in 2007 – prices need to be high enough to cover the marginal costs of the new entrant generator • Correct price signal to customers – renewable energy more attractive • Need for recycling to protect customers from very high retail tariffs – but maintain ‘carbon signal’

10. Renewables • Emissions trading beneficial to renewables • Conventional generation reflect true costs of generation (actual and external costs) • Renewables more competitive • Full costs pass through better for renewables

11. Potential Implications I • Increased wholesale and retail tariffs in Northern Ireland and Republic of Ireland • Relative increase will depend on allocation of free allowances AND cost pass through decisions of regulators / policymakers • Generators will wish to sell into markets which command highest wholesale prices • Estimates in RoI of 14% increase wholesale resulting in 7% increase retail (full costs pass through)

12. Potential Implications II • In Northern Ireland expected smaller impact on retail tariffs - 2% • In Northern Ireland depends on regulatory controls / developments in generation, distribution and supply • Shifts in merit order in both markets – less carbon emitting plants more attractive

13. Summary • Wholesale energy prices will rise – amount will vary depending on allocation decisions and decisions of cost pass through • Retail price impact a matter for regulator • New entrants may be more attracted to where there are more free allowances yet wish to sell where wholesale price is higher • Positive impact on renewables greater where there is full costs pass trough • At this stage potential impacts on exports and imports North and South unknown