Enterprises Generating Electricity And Thermal Energy Commerce Essay

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AS Latvenergo is dominant, vertically-integrated 100% state-owned electricity utility in Latvia. The enterprise generates electricity and thermal energy covering all processes from energy generation, distribution and transmission.

The company owns two heat and power plants - Riga TEC-1 and Riga TEC-2 which generate 2.067 MW, representing approximately 90% of the total electricity generation capacity of Latvia. [1] 

As of 2007, electricity market in Latvia is liberalized which means that in order to comply with the Electricity Market Law other power generation companies theoretically could enter the market. In reality Latvenergo remained monopoly until May 2008 when amendments of Electricity Market Law were adopted and Estonian national energy company Eesti Energia came in the market. Currently at the end of 2009 E.Energy has managed to obtain 5% share of the market.

The market liberalization still concerns only large costumers. Although, the Electricity Market Law allows free choice of electricity provider for any household, there are no other companies but Latvenergo who would offer their services to households. There are 1300 large companies that consume about one third of the total amount of electricity in Latvia. 90% of them are the clients of Latvenergo and only about 10% have chosen to purchase electricity from Estonian utility.

Although, in theory there should be much more competition in the electricity market, Latvenergo more or less remains the monopoly of Latvian electricity market. [2] 

1.2.3. Quota Data

In accordance with EU Directive on greenhouse gas quota both AS Latvenergo power plants Riga TEC-1 and Riga TEC-2 have a capacity that requires compulsory participation in the allowance trading scheme.

In January 2005 Latvenergo received GHG emission permits issued by Lielriga Regional Environment Board and the quotas confirmed by the European Commission for the first trading period (2005 - 2007) were allocated.

In the creation of Latvian quota distribution plan for the years 2005 - 2007 the base year of 1997 was taken into account. Given that a lot of improvements concerning greener technologies were implemented since 1997, AS Latvenergo was able to cover existing emissions with the allocated quota and sell the unused quota in the emission trading market.

The unused emission allowances of 2005 and 2006 were sold together in 2006 and it gave the company significant profit of about 19.5 million Euros (13.7 million Lats). The profits from emission trading accounted for more than a half of total AS Latvenergo earnings in 2006 that were around 34 million Euros (24 million Lats). [3] 

In 2007 Latvenergo intensity of the power generation increased, therefore more emission quotas were needed and compared to two previous years, smaller amount of allowances were available for selling on the market. From the total profit of 13.4 million Euros (9.4 million Lats) 1.02 million Euros (0.73 million Lats) were obtained by trading emission allowances. The year 2007 was the last one of the first trading period and unused allowances could not be saved and transferred for the second period, therefore companies with quota surplus traded them on the market. Supply was much bigger than demand causing allowance price to fall and as a result, AS Latvenergo collected significantly smaller earnings in 2007.

The first trading period showed that the market was flooded with surplus quotas, thereby in the second period the European Commission looked at the national allocation plans much stricter.The allowance allocation for the second trading period from 2008 to 2012 was in favor for of industry. The sector of industry compared to the base year received 6% more quotas and as a result, the amount of allowances that was granted to the sector of energy was cut by 20% compared to the base year. Consequently, AS Latvenergo production facilities were allotted 80% of the required emission quotas, but the largest power plant Riga TEC-2 only 20%. In order to comply with the Kyoto targets, for the second trading period the company is obliged to acquire missing portion of the allowances on the market. In 2008 AS Latvenergo was short 350 thousand allowances that were purchased on the market.

2006

2007

2008

Allocated quota at the beginning of the reference year

3 938 046

1 328 012

187 537

Used emission quota

(1 138 034)

(1 028 475)

(1 026 900)

Purchased emission quotas

-

-

350 000

Sold emission quotas

1 472 000

112 000

110 000

Revenue/loss from selling/buying of GHG emission quota ('000 Ls)

13 737 000

73 000

(1 914 000)

-lowered electricity generation => baltic countries have little opportunity to import electricity from other countries due to the lack of transmission lines

EUA price driver - supply and demand

- The second effect of energy intensity on costs affects non-ETS participants and is based on the fact that the system could induce higher electricity prices given opportunity cost reasoning of utilities. This refers to a special case of the general effect that for certain sectors or firms input prices may rise due to the introduction of an ETS. Such a rise of input prices is supposed to be especially relevant for electricity in the EU ETS case

-The second effect of energy intensity on costs affects non-ETS participants and is based on the fact that the system could induce higher electricity prices given opportunity cost reasoning of utilities. This refers to a special case of the general effect that for certain sectors or firms input prices may rise due to the introduction of an ETS. Such a rise of input prices is supposed to be especially relevant for electricity in the EU ETS case. The more effectively prices can be passed on, the less companies or sectors will suffer from losses of sales due to an ETS. Determining factors in this context are the price elasticity of demand and the competitive situation. The less elasticity and competition the less impact the ETS will have on sales and output

A partial equilibrium models of the energy market PRIMES, POLES, GETS 3, SIMAC s and general equilibrium models DART, GTAP-E, GTAP-ECAT were used to evaluate the impact of GHG emission trading on competitiveness of economy and other sectors

- Surplus of the allowances decrease effectiveness of the system

- A correlation can be found between electricity and emission allowance prices. This is natural as a company that produces electricity has to cover its emissions with emission allowances [9] Kruger J, Pizer WA. The EU emissions trading directive-opportunities and potential pitfalls, resources for the future discussion paper 04-24. Washington; 2004.[9]. This increases the production costs. Emission allowances have in fact become one of the major factors, besides the water level in the Northern reservoirs, which influence electricity prices in the Nordic market.

Kopenhagen conference - failure to commit to a binding agreement, price fall, targets are not reached

Pietrūka kvotas energouzņēmumiem, kad latvenergo pelnīja no pārpalikuma

One of the five major components of electricity prices is emission allowance price.

Chart X illustrates the Emission allowance price from August 2009 to November 2009.

CO2 Emission Allowance Price (Eur/t)

Source: Latvenergo

Electricity Price Components

Figure X shows the breakdown of the factors that influence the price of electricity that is manufactured by Latvenergo. Import and gas are the main contributors to electricity price. As the third one comes CO2, meaning that company in order to comply with the Kyoto Protocol targets must purchase emission allowances and these costs constitute 17% of the electricity price.

Source: Latvenergo

1.3.X. Latest Latvenergo deal on Emission allowances

1.2.X

Vejonis claimed that the revenues from allowance trading were not invested in electricity generations. Did not appear in prices.

Latvenergo denied these things.

2. second period - learned a lesson. Latvenergo has to purchase allowances.

1.3. Latvia selling AAUs

1. Latvia's Government trading GHG emission allowances

1.1. Overview

1.5. Planned vs. Actual revenues

Revenues

It was planned to sell 10 million emission allowances in 2008 and 2009. Assuming that the price of one allowance in the international market was 5 Euros, the estimated revenues for 2008 and 2009 would be 50 million Euros or 35 million Lats (according to exchange rate 1 Euro = 0.7028 Ls).

For the time period from 2008 to 2012 it is estimated to trade 40 million emission allowances that would give the revenues of 200 million Euros or approximately 141 million Lats.

1.6. Emission trading system costs

In order to implement emission trading system in Latvia, it was necessary to establish and maintain such institutional system that would ensure Latvia's ability to keep the rights to participate in GHG emission trading system according to the Kyoto Protocol, as well as ensure the analytical and administrative capacity for transactions of emission allowance preparation and realization, income monitoring, project application evaluation, monitoring of the projects' implementation, emission monitoring and verification, and other functions regarding emission trading system in Latvia. It was required to develop procedures for legal, institutional, commercial and credit risk management in compliance with Latvian legislative acts. In addition, the strategy for the marketing and negotiations with potential buyers was important. An establishment of such institution required 70 000 Lats in 2007 (one time costs). System maintaining needed 50 000 Lats in 2008 and starting with 2009 it costs 30 000 Lats annually. Additional costs of 3.5 thousand Lats (one time costs) and 24 thousand Lats annually starting from 2007 due to the two new job positions at the Climate and renewable energy department in the Ministry of Environment.

Thereby estimated total financial impact on state's budget is:

2007

94 thousand Lats

2008

74 thousand Lats

2009

54 thousand Lats [4] 

1.2. An Example of Individual Company selling emission quota

Latvia together with Czech Republic is the country that has had already five transactions with AAUs.

1.3.3. AAU trading with "greening"

Latvia and Hungary were the first two East European Countries that established frameworks for "green" AAU trading. The selection process of greening projects is usually stipulated in the AAU purchase contract. Latvia has decided to carry out selection with the help of tender processes.

Latvia has its own approach to GIS schemes. It has created country-driven schemes that put an emphasis on the details that ensures the integrity of these schemes. Buying countries can either accept the prepared schemes or choose not to cooperate with Latvia in AAU trading deal. It is not know for sure if this strict position helps in trading deals and it seams that buying countries value transparency of the schemes the most.

1.3.1. AAU Deals

Portugal - 4 mil

AAU Transactions

Latvia was negotiating contracts with buyer countries for several years. The contracts with Netherlands and Austria were closed in March 2009, then came the contract with Spain in September 2009 and finally in Oktober 2009 Latvia signed the selling contracts with Japan and Portugal. After the very successful 10 million Euro deals with Netherlands, Austria and Spain, Latvian government received a mandate which allowed it to negotiate further trading arrangements for 30 million Euros. [5] 

Seller

Buyer

Volume, AAUs

Price (€)

Estimated

Status

Latvia

Netherlands

3 000 000

10 € range

No

Projects Selected

Latvia

Austria

2 000 000

10 € range

Yes

Projects selected

Latvia

Spain

5 000 000

10 € range

Yes

Pending

Latvia

Japan

1 500 000

10 € range

Yes

Pending

Latvia

Portugal

4 000 000

10 € range

Hard greening

Pending

Source: Point Carbon

1.X.X. Impact on State's Budget

1.X.X. Investments

The new law states that companies must prove that the revenues form emission allowance trading are invested in green technologies, otherwise companies can get fines. These new restrictions are adopted in order to ensure that money is really used for intended to mitigate emissions not for other purposes. Latvian AAUs are backed by Green Investment Scheme (GIS) projects, thereby guaranteeing that revenues are spent for energy efficiency, green technologies and renewable energy projects. [6] 

Cik liela daļa no latvijas budžeta ir kvotu pārdošanas ienākumi

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