European Daily Carbon Markets Methodology

ICIS publishes European Daily Carbon Markets (EDCM) on every UK working day of the year. EDCM is a concise and easy to digest carbon news snapshot, providing readers with key OTC and exchange prices, UK and German clean spark and dark spreads and the latest European Union Emissions Trading Scheme (EU ETS) market developments. EDCM also tracks the wider global carbon market, with focus on Kyoto projects and their interactions with the ETS. The publication additionally provides regular updates on low-carbon technologies with emphasis on research, investments and competitiveness. Launched in February 2006, EDCM is tailored for the smaller market participants as well as those trading on a daily basis and aims to build a bridge between the ETS and the wider European energy markets.

EDCM Price Assessments

General definition

Over-the-Counter (OTC) contract prices for the EU ETS are assessed each working day during the period 16:00 to 17:30 London time, when ICIS  contacts by telephone active market participants.

Price assessments published in EDCM are formulated by ICIS  at the conclusion of this process and represent ICIS' close-of-day bid-offer ranges for carbon allowances, more commonly known as European Union Allowances (EUAs), for delivery in holding registry accounts in December of each quoted yearly contract. The spot contract price represents ICIS' close-of-day bid-offer ranges for EUAs with quasi-immediate (same day or Day+1) delivery in holding registry accounts. Price assessments are not based on deals done during the day.

“Bid” is deemed to be the highest price bid by buyers at the close of business on the trading day in question.

“Offer” is deemed to be the lowest price offered by sellers at the close of business on the trading day in question.

Units: All prices are in tonnes of carbon dioxide equivalent (tCO2e) with one EUA equivalent to one tonne of carbon dioxide equivalent (tCO2e).

Periods

Spot: The EUA spot contract allows the near-immediate delivery of EUAs into holding accounts and can be traded OTC on via an exchange.

Years: EDCM quotes closing bid-offer ranges for four yearly contracts, with relevant contracts from the first phase of the emissions trading scheme (2005-2007), as well as second phase (2008-2012) with delivery in December of each year. EUAs are interchangeable within each phase of the EU ETS but not between phases, implying an EUA can start its life as a 2005 EUA and can be used for compliance in 2007. The history of each EUA is tracked within the registry account.

EDCM Price Assessments - Price indication - Heren CO2

To give the reader a general overview of the daily movement of the front year contract, ICIS  averages the OTC front year contract price, the Nord Pool front year contract and the ECX front year contract.

Exchanges for Futures

European Climate Exchange (ECX): Part of the Climate Exchange Plc (CLE) group of companies, ECX manages the product development and marketing for ECX Financial Instruments (ECX CFIs), listed and admitted to trading on the ICE Futures electronic platform. Participants can trade listed monthly contracts until March 2008. Thereafter, December (delivery period) contract months are listed from December 2008 to December 2012. For more details on delivery dates, visit www.europeanclimateexchange.com.

Nord Pool: The Nordic exchange Nord Pool offers a carbon futures trading platform. Participants can trade listed monthly contracts (March and December from March 2006 to December 2012). For more details, visit www.nordpool.com.

Exchanges for SpotPowernext: The French exchange Powernext offers a continuous carbon spot trading platform. EDCM publishes the daily closing price as well as the total traded volume, including OTC cleared volumes. For more details, visit www.powernext.fr.

EEX: The German exchange offers a daily EUA auction as well as a continuous carbon spot trading platform. EDCM publishes the daily auction price and the total daily traded volumes, including both the auction and OTC trades.

Climex Alliance: The Alliance provides a cleared pan-European Spot market for ETS carbon allowances. Comprised of regional partners throughout Europe, the Climex Alliance includes:

• New Values (based in The Netherlands)
• SENDECO2 (based in Spain)
• Vertis Environmental Finance (trading as euets.com, based in Hungary)
• STX Services (based in The Netherlands)
• APX Power Limited (trading as APX Power UK, based in the UK)
• APX B.V. (based in The Netherlands)

EDCM publishes on a weekly basis the value weighted adjusted price for all transactions through Climex Alliance, both exchange and OTC, as well as a weekly total traded volume. For more details, visit www.newvalues.net.

Clean Spark/Dark Spreads

The UK and German gas and power prices cited in EDCM’s Spark and Dark Spread tables in EDCM are derived from the price assessment tables in EDEM. All the power prices quoted are for Baseload delivery. Gas prices cited are NBP for the UK and the Dutch TTF for Germany. The TTF hub is currently the most liquid gas market in the region and is widely used as a reference for German gas prices. For a full explanation of how the power and gas prices are derived please see the EDEM/ESGM methodologies. The coal price is based on the CIF ARA market and is derived from a number of market sources.

Clean Spark/Dark Spreads are a reflection of the cost of generating after taking into account fuel (gas/coal) and carbon allowance costs. A positive spread effectively means that it is theoretically profitable to generate electricity on a Baseload basis for the period in question, while a negative spread means that generation would be a loss-making activity. However, it is important to note that the Clean Spark/Dark Spreads do not take into account additional generating charges (beyond fuel and carbon), such as operational costs.

Clean Spark Spreads: Both the UK and German Spark Spread tables use a fuel efficiency factor of 49.13% for the gas conversion. In reality, each gas-fired plant has a different fuel efficiency, but 49.13% is used as a standard in the UK market because it provides an easy conversion between gas and power volumes (25,000 therms of gas = 15 MW of power). The spark spread value is therefore the power price minus the gas price divided by 0.4913, i.e. Spark Spread = Power Price – (Gas price/0.4913).

The Clean Spark Spread is calculated using a gas emissions intensity factor of 0.411 tCO2/MWh. Therefore the clean spark spread is calculated by subtracting the carbon price (multiplied by 0.411) from the ‘dirty’ spark spread, i.e. Clean Spark Spread = Spark Spread – (Carbon Price*0.411).

Clean Dark Spreads: Clean Dark Spreads are a reflection of the cost of generating power from coal after taking into account fuel (coal) and carbon allowance costs. A positive spread effectively means that it is profitable to generate electricity on a Baseload basis for the period in question, while a negative spread means that generation would be a loss-making activity. However, it is important to note that the Clean Spark Spreads do not take into account additional generating charges (beyond fuel and carbon), such as operational costs.

Both the UK and German Dark Spread tables use a fuel efficiency factor of 35% for the coal conversion, and an energy conversion factor of 7.1 for converting tonnes/coal into MWh/electricity. In reality, each type of coal has a different energy value and each coal-fired plant has a different fuel efficiency, but 35% is accepted as a broad standard. At the time of writing (March 2007) there is no liquid Dark Spread traded market in either the UK or Germany. However if a standard efficiency factor emerges for trading purposes EDCM will review its methodology. The Dark Spread value is the power price minus the coal price divided by 0.35, i.e. Dark Spread = Power price – (Coal price/0.35).

The Clean Dark Spread is calculated using a coal emissions intensity factor of 0.96 tCO2/MWh. Therefore the Clean Dark Spread is calculated by subtracting the carbon price (multiplied by 0.96) from the ‘dirty’ spark spread, i.e. Clean Dark Spread = Dark Spread – (Carbon Price*0.96).