ap-5-11.dvi Acta Polytechnica Vol. 51 No. 5/2011 Impacts of New EU and Czech Environmental Legislation on Heat and Electricity Prices of Combined Heat and Power Sources in the Czech Republic J. Vecka Abstract Inmyeconomicmodel I calculate the impact of thenewEUETSDirective, the IndustrialEmissionsDirectiveandthenew air protection law on future heat and electricity prices for combined heat and power sources. I discover that therewill be a significant increase in heat and electricity prices, especially because of the implementation of new so-called benchmark tools for allocating allowances. Themain problem of large heat producers in this respect is loss of competitiveness on the heat market due to emerging stricter environmental legislation, which is not applied to competitors on the heat market (smaller heat sources). There is also lack of clarity about the modalities for allocating free allowances, and about the future development of the whole carbon market (the future European allowance price). Keywords: district heating (DH), combined heat and power (CHP), benchmark, EU emissions trading scheme (EU ETS), industrial emissions directive (IED), uropean allowance (EUA), climate-energy package (Package), climate change committee (CCC), member state (MS). 1 New EU legislation 1.1 Emission trading TheClimate-EnergyPackage (Package)was adopted in June 2009. It consists of 4 parts. Themain part is the Directive 2009/29/EC (source [1]) amending ex- isting Directive 2003/87/EC(source [2]) establishing a scheme for greenhouse gas emission allowance trad- ingwithin the EU—the so-calledEU emission trad- ing scheme (EUETS).Directive 2003/87/ECwas al- ready amended in 2004 by Directive 2004/101/EC. The scope of the new Directive 2009/29/EC inter alia includes EU greenhouse gas targets to decrease GHG emissions by 20 % by 2020. The final text was adopted after longdebates, and it containsmany terms that need to be further defined by the rel- evant authorities. This task falls to the so-called “Climate Change Committee” (CCC), whichwas es- tablished by Directive 2003/87/EC. CCC acts as an implementing body for all EU ETS Directives (2003/87/EC, 2004/101/ECand 2009/29/EC). The most important aspect of Directive 2009/ 29/EC for all installations in EU ETS concerns the new allocation tool — auctioning of allowances, which should serve as a universal approach for dis- tributing European allowances (EUA) from 2013 on- wards. Auctioning means that all EUAs will not be distributed to producers free of charge (as they are now) but producers will have to purchase them in open auctions. There are several exceptions to this rule. • Free allocation will be given to sectors endan- gered by so-called “carbon leakage”— meaning sectors like steel or lime production,which could bemoved to countries outside theEUbecause of higher costs. This rule is not applicable to DH sources. • A transitional free allocation will be given for the modernization of electricity generation — fulfilling at least 1 of 3 criteria given by Di- rective 2009/29/EC, a Member State can ask for a partial free allocation of EUAs for elec- tricity producers. The market value of free EUAs has to be used for retrofitting and up- grading the infrastructure and clean technolo- gies. • A free allocation will be given to district heat- ing and also to high efficiency cogeneration, as defined by Directive 2004/8/EC on the promo- tion of cogeneration, for economically justifiable demand, in respect of the production of heating or cooling. In December 2010, a Commission Decision on determining transitional Union-wide rules for the harmonised free allocation of emission allowances (source [3]) was adoptedwithin the CCC body. This Decision introduces new rules for adjusting the allo- cation of free allowances in respect of heat delivered for private households. Unfortunately, it is still un- clear how this new toll will be implemented, and for this reason I have tried to cover all possible outcomes of these EU processes. 111 Acta Polytechnica Vol. 51 No. 5/2011 1.2 Industrial Emission Directive (IED) Industrial Emissions Directive 2010/75/EU (sour- ce [4]) was adopted after long negotiations inDecem- ber 2010 as a recast previousDirective on Integrated Pollution Prevention and Control (so-called IPPC). This newDirectivemerges 6Directives in the field of pollution control and in effect integrates environmen- tal management. The purpose of Integrated Preven- tion is to focus on the impact of industrial installa- tions on all aspects of the environment — including soil and ground water. The directive introduces new ambitious emission limit values for combustion plants (as listed in Ta- ble 1). These new limits are evolved fromBestAvail- able Technology (BAT) levels for each technology. Table 1: Emission limit values for combustion plants Fuel Hard coal or lignite Liquid fuels Biomass Gaseous fuels SO2 400 350 200 35 50–100 MW NOx 300/450 450 300 100 Dust 30 5 SO2 250 200 35 101–300 MW NOx 200 250 100 Dust 25 20 5 SO2 200 35 > 300 MW NOx 200 150 200 100 E m is si o n li m it v a lu e s in m g / N m 3 Dust 20 5 Member States can use various derogation tools from these Emission Limit values. • “Transitional national plans” for large combus- tion plants with individual emission limits until 30 June 2020, • Exception for district heating plants (installa- tionsupto200MWthermaloutput)until 31De- cember 2022, • Limited life timederogation for sources in opera- tion nomore than 17500 operating hours, start- ing from 1 January 2016 and ending no later than 31 December 2023. Inmy economicmodel I use the exception for dis- trict heating plants. 2 New Czech legislation Air protection law In the CzechRepublic there is a new proposal on the government’s agenda for a complex amendment toActno. 86/2002Coll., onair protection. This pro- posal includes a new version of pollution fees for all sources (as listed in Table 2 — comparison between current fees and proposed fees) with a vast increase by about 10 times until 2022. There is huge oppo- sition from industry stakeholders to these new fees because in the context of IED (with strict emission limits onBAT levels) there is no additional economic incentive for producers to aim for even lower emis- sion levels. The definition of BAT itself means that there is no technologicalpossibility (or at least only a very narrowpossibility) to go further. Consequently, pollution fees will only become a new pollution tax. Table 2: Pollution fees — current and proposed in CZK per ton Pollutant Dust SOx NOx VOC Current 3000 1000 800 2000 2012–2016 4200 1350 1100 2700 2017 6300 2100 1700 4200 2018 8400 2800 2200 5600 2019 10500 3500 2800 7000 2020 12600 4200 3300 8400 2021 14700 4900 3900 9800 2022 and further 29400 9800 7800 19600 3 Future of heat prices in the Czech Republic after 2012 In the respect of emission trading, I have focused on the third exception (free allocation of allowances for district heating), which is crucial for my eco- nomic model. According to the text of Directive 2009/29/EC, there should be a free allocation for heat producers. The rules of this free allocation are presented in the Decision (source [4], as men- tioned above), but the detailedmodalities have to be discussed within the CCC bodies. The benchmark value, which is the ratio between GHG emissions and heat production, was set at levels for a natural gas source with 90 % heat production efficiency — this leads to 62.3 allowances per TJ of heat delivered to consumers. There has been significant opposition to this proposal, mainly from new MSs, which are strongly dependent on coal-fired DH systems. Old MSs were neutral or in favour of this proposal, be- cause their heat systems mainly use natural gas as fuel (see Figure 1). Fortunately because of organized pressure from the new MSs, the Commission has proposed a new tool to improve free allocation for DH systems in re- spect of heat delivered to private households (see de- scription below). 112 Acta Polytechnica Vol. 51 No. 5/2011 Fig. 1: Heat production fuel mix in the EU in 2008 (source [5]) In terms of IED, it is necessary to implement all possible derogation tools for local sources. The new emission limitswere correctly set atBAT levels. Reg- ulators however should bear in mind local circum- stances — local fuel sources, the huge improvement in air quality within last 2 decades, and the energy security of the Czech Republic (the “cleanest” natu- ral gas is imported via a 4500 km long transit gas- pipeline from the Yamburg gas fields). In terms of new pollution fees, the national au- thority should take into account that going below BAT is not economically and technically possible, and therefore pollution fees will become a “tax”. There is no necessity to introduce a new “pollution tax”. IED forms a sufficiently deep and demanding framework for cleaner production of energy. 4 Description of the economic model I have created an economicmodel for calculating the implementation of the new EU and Czech environ- mental legislation and its influence on future heat prices. I used the following approach: • The model calculates the influence caused by Emission trading, IED and pollution fees. • The model can be applied only to installations which fall into IED (thermal input 50 MW or higher); smaller sources will not suffer from all new EU and Czech legislation. • The model assumes combined heat and power generation. • Certain inputs were set by expert estimation (e.g. efficiency of coal boilers, grid losses, etc.) • A basic presumption is that heat and electric- ity production for the period 2013–2027 will be the same (or without significant changes) as av- erage production during the period 2005–2008, which is the basic period for historical data ac- cording to Decision to Directive 2009/29/EC (source [4]). • I have calculated the simple influence on the en- ergy price (1 GJ of energy produced) for the whole Czech Republic based on fuel source in two scenarios. The real impact on energy prices has to take into account the fuel mix used for energy generation in real CHP sources. 4.1 CO2 emission factors I have used CO2 emission factors from the Ministry of Industry andTradeweb site (as listed in Table 3). Table 3: CO2 emission factors Emission factor Fuel t CO2/MWh of fuel calorific value t CO2/GJ of fuel calorific value Brown Coal 0.360 0.100 Hard Coal 0.330 0.092 Liquid Fuels 0.260 0.072 Natural Gas 0.200 0.056 Biomass 0.000 0.000 4.2 Main indicators I have determined the values of the main indicators through expert estimations (see Table 4). Table 4: Main Indicators Indicator Value in % Coal Boiler Efficiency 85 Gas Boiler Efficiency 90 Fuel Oil Boiler Efficiency 87 Heat Production Efficiency 95 Grid Losses 13 There are several presumptions in these figures. • The efficiencies of Boilers are true for ideal op- erating circumstances (installed capacity, high base load etc.) • The Heat ProductionEfficiency is true formod- ern technology, but it canvarygreatlyacross the district heating (DH) sector. • Grid Losses are true for hot-water grids; there will be a higher figure for steam grids (approx. 5 % higher) All these presumptions aremade in respect of the objectivity of the model outcomes. There are signifi- cantdifferences among installations in theDHsector, so there are no “correct values” in this respect. 113 Acta Polytechnica Vol. 51 No. 5/2011 4.3 Benchmarks According to the text of Decision to Directive 2009/29/EC, the allocation of free allowances will be determined by so-called “benchmarks”. A bench- mark is a fixed ratio between GHG emissions and a unit of production (in the case of the district heating sector, 1 GJ of heat). Benchmarks will be used for free EUA allocation, as follows: • In 2013 there will be a free EUA allocation of 80 % of the benchmark value, with a linear de- crease to 30 % in 2020. • In 2027 there should be no free EUA allocation. The benchmark value was set within Decision [4] on 10 % of the best installations using as a fuel nat- ural gas with 90 % boiler efficiency. The final value of the so-called heat benchmark is 62.3 kg CO2/GJ of produced heat. 4.4 Free allocation for heat to private households Free allocation for heat delivered to private house- holds is a new tool introduced by Decision [4] — the so-calledhousehold rule. This tool provides for an in- crease in the free allocation forDHsystemsaccording to their emissions related to the production of heat exported to private households from 1 January 2005 to 31 December 2008. This means that the free allo- cation forheat forprivatehouseholdswill be adjusted by the difference between historical emissions related to heat for households and the allocation according to the benchmark. However, this application of his- torical emissions is lowered each year, starting from 90 % in 2014. Heat for other customers will be allo- cated only according to the benchmark (as described above). Detailed rules of this tool have not yet been approved, and there are still many modalities to be developed. There are about four possible interpreta- tions of the household rule. 4.5 Derogation for electricity producers Free allocation in respect of production of electric- ity is enabled by the text of Directive 2009/29/EC. This allocation is possible mainly for new MSs. The CCC body adopted the Decision on the rel- evant part of Directive 2009/29/EC in November 2010 (source [6]). Unfortunately, this Decision was very short and narrow, and left a major part of this allocation tool unclear. In recent months, the Commission tried to adopt a Communication on implementing measures of this free allocation, with very restrictive conditions and requirements for producers. This situation can be seen as an al- most clear attempt to breach the subsidiarity rules of the EU, because the modalities of this alloca- tion tool should be on the shoulders of the CCC bodies. Fortunately, there was opposition to this Communication even within the Commission itself. Derogation rules and their applicability for elec- tricity producers have therefore not yet been final- ized. 4.6 IED implementation Implementation of IEDwill involve significant invest- ment in the technology of existing sources in terms of lowering emissions of pollutants (especially NOx and SOx). In my model, I assume that the derogation rule for DH systems will be used. Concerning the fulfillment of emission limits given by IED, sources should invest in the following tech- nology: • Lignite/Hardcoal source—deSOx, deNOx tech- nology,dust ismanagedatemission limits in cur- rent technology systems (could be managed by minor adjustment of the system) Total investments: CZK2bln three years before emission limits are applied (e.g. in 2019 in order to meet emission limits in 2023). • Liquid fuel source— deSOx, deNOx technology, dust/solid residues is covered by quality man- agement of the fuel that is used (high quality heating oil) Total investments: CZK 1.5 bln three years be- fore emission limits are applied. • Gaseous fuel source — DeNOx technology, dust/solid residues and SOx is not applicable, covered by quality management of the fuel that is used (mainly natural gas) Total investments: 0.75 blnCZK three years be- fore emission limits are applied. 4.7 Future CO2 price There is lack of clarity in respect of the future CO2 price (future price of the EU allowance). According to various EC studies, and according to the opinion of the Ministry of Environment of the Czech Repub- lic, the future price of EUA will be in range of EUR 20–30. However I have also used the “opinion” of the carbonmarket itself, which estimates the futureEUA price at aroundEUR 16 (this is the average price for buying EUA with delivery 2013–2015). 4.8 Scenarios I have constructed two possible implementation sce- narios of the described environmental legislation. Each of these scenarios has two carbon price values (as the carbon price is the most important parame- ter). 114 Acta Polytechnica Vol. 51 No. 5/2011 Scenario 1 — Strictest implementation Emission trading—nohousehold rule, no derogation for electricity producers, just free allocation accord- ing to the benchmark. IED — without any derogation for district heat- ing, full application from 1 January 2016. Air protection — highest pollution fees with no applicable fixation at lower levels (current proposal for a complex amendment to Act no. 86/2002 Coll., on air protection). Scenario 2 — Pragmatic implementation Emission trading — household rule (most probable interpretation, 60 % of heat is delivered to house- holds), derogation for electricity producers (most probable application with benchmark according to the proposal for the national plan by the Ministry of Environment proposal (source [7])). IED—with a derogation for district heating, full application from 1 January 2023. Airprotection—pollution feesfixedat2012–2016 levels (meaning an increase of about 40 % of current fees). 5 Model outcomes The following tables showthe outcomes frommyeco- nomic model. The listed figures reflect the impact on energy prices after the implementation of bench- marks on heat. Table 5: Impact on energy prices based on fuels used for Scenario 1 and EUA price EUR 16 Fuel Year Lignite Hard Coal Liquid Natural Gas 2012 0.47 0.47 0.18 0.18 2013 42.32 37.81 24.56 13.62 2014 47.34 42.83 28.78 16.65 2015 49.07 44.55 30.52 18.42 2016 50.50 45.99 32.11 20.03 2017 52.25 47.73 33.79 21.72 2018 53.93 49.41 35.40 23.36 2019 55.57 51.05 36.98 24.96 2020 57.14 52.62 38.49 26.49 2021 58.15 53.64 39.43 27.44 2022 59.85 55.33 40.58 28.60 2023 60.67 56.16 41.41 29.45 2024 61.47 56.95 42.21 30.26 2025 62.23 57.71 42.99 31.04 2026 62.96 58.44 43.72 31.79 Im p a ct o n en er g y p ri ce s in C Z K p er 1 G J 2027 63.66 59.14 44.43 32.50 Table 6: Impact on energy prices based on fuels used for Scenario 1 and EUA price EUR 30 Fuel Year Lignite Hard Coal Liquid Natural Gas 2012 0.47 0.47 0.18 0.18 2013 64.59 57.53 37.31 20.70 2014 70.61 63.55 42.55 24.75 2015 73.30 66.24 45.27 27.51 2016 75.68 68.62 47.80 30.08 2017 78.33 71.27 50.40 32.71 2018 80.89 73.83 52.90 35.25 2019 83.38 76.32 55.33 37.71 2020 85.78 78.72 57.67 40.08 2021 87.29 80.23 59.12 41.55 2022 89.46 82.41 60.76 43.21 2023 90.76 83.70 62.06 44.53 2024 92.00 84.94 63.31 45.80 2025 93.19 86.13 64.52 47.02 2026 94.33 87.27 65.67 48.18 Im p a ct o n en er g y p ri ce s in C Z K p er 1 G J 2027 95.43 88.37 66.78 49.30 Table 7: Impact on energy prices based on fuels used for Scenario 2 and EUA price EUR 16 Fuel Year Lignite Hard Coal Liquid Natural Gas 2012 0.47 0.47 0.18 0.18 2013 14.74 12.04 4.52 −1.16 2014 21.69 18.64 10.16 3.67 2015 28.09 24.72 15.39 7.79 2016 33.95 30.31 20.24 11.21 2017 39.29 35.43 24.39 14.58 2018 44.15 40.09 27.74 17.89 2019 48.10 43.59 31.04 21.15 2020 53.65 49.13 35.99 25.21 2021 57.78 53.27 39.32 27.33 2022 58.64 54.12 40.19 28.21 2023 59.23 54.72 40.92 28.96 2024 60.03 55.51 41.73 29.77 2025 60.79 56.27 42.50 30.55 2026 61.52 57.01 43.23 31.30 Im p a ct o n en er g y p ri ce s in C Z K p er 1 G J 2027 62.22 57.71 43.94 32.01 115 Acta Polytechnica Vol. 51 No. 5/2011 Table 8: Impact on energy prices based on fuels used for Scenario 2 and EUA price EUR 30 Fuel Year Lignite Hard Coal Liquid Natural Gas 2012 0.47 0.47 0.18 0.18 2013 22.76 18.55 6.97 −1.92 2014 33.62 28.86 15.77 5.63 2015 43.62 38.37 23.95 12.07 2016 52.78 47.10 31.52 17.41 2017 61.13 55.09 38.01 22.67 2018 68.72 62.38 43.25 27.85 2019 74.90 67.84 48.40 32.95 2020 82.29 75.23 55.18 38.81 2021 86.92 79.86 59.01 41.44 2022 88.26 81.20 60.37 42.81 2023 89.32 82.26 61.57 44.04 2024 90.56 83.50 62.82 45.31 2025 91.75 84.69 64.03 46.53 2026 92.89 85.84 65.18 47.70 Im p a ct o n en er g y p ri ce s in C Z K p er 1 G J 2027 93.99 86.93 66.29 48.81 All listed figures are in CZK and per 1 GJ of en- ergy supply—in the caseof heat, the impact onprice for customers for 1GJ of heat; in the case of electric- ity, the impact on the price of 1 GJ of electricity supply to the electricity grid. The major difference between the two scenarios is in the first years, where Scenario 1 models a severe price increase. Scenario 2 offers much more flexibility for producers through a gradual increase in energy prices. Fig. 2: Impact on energy prices in different scenarios for future EUA price EUR 16 6 Summary Ashas been presented in the figures above future en- ergy prices from CHP sources under EU ETS and IED will be heavily influenced mainly by the im- plementation of Directive 2009/29/EC, which intro- duces a new tool for allocating free allowances. So- calledbenchmarkswill be used for all EUETS instal- lations in the district heating sector. Estimating the future EU allowance price is also very problematic. The European Commission guesses an EUA price of around EUR 30, while the carbon market itself guesses around EUR 16 (average price of EUA with delivery after 2013). There are still many unclear modalities concerning free allocation of allowances after 2013. Implementation of IED (new emission limits) and new pollutant fees will not have major impacts on the energy prices themselves, but could be seen as a reason for a fuel switch or closure. As is described by my model, there are several ways by which the ultimate target in terms of lower- ing emissions could be attained. However, the chosen path to the target could mean “price shocks” in the event of strict application or a gradual price increase in the event of a pragmatic approach. Implementation of the new environmental legisla- tion will lead to an increase in the energy prices of CHP sources. In the case of heat prices, therewill be no direct impact on costs or revenues for these com- panies because of the heat price structure (regulated by the Energy Regulatory Office). The most severe impact in this respect is the loss of competitiveness of heat producers in EU ETS. Customers in the Czech Republic do not care much about the environmental backgroundof heat production—theirmain concern is about the total price of heating. The main com- petitors on the heatmarket (local heat sources below EUETS thresholds) are in amuch better position in this respect. They are not influenced by EU ETS, IED, pollution fees or an ecological tax (in the case of local boiler houses). The new environmental legislation is shown to distort competition on the heatmarket. A new “car- bon tax” for sources outside EU ETS needs to be established as soon as possible to take this issue into account. In the case of electricity prices, implement- ing the environmental legislation will involve a loss of profit for producers (especially for producers from coal sources). Acknowledgement The research described in this paper was supervised by doc. Ing. Jaroslav Knápek, CSc., FEE CTU in Prague. 116 Acta Polytechnica Vol. 51 No. 5/2011 References [1] Directive 2009/29/EC of the European Parlia- ment and of the Council of 23 April 2009 amend- ing Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community. [2] Directive 2003/87/EC of the European Parlia- ment and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emis- sion allowance tradingwithin theCommunity and amending Council Directive 96/61/EC. [3] Commission Decision on determining transi- tional Union-wide rules for the harmonised free allocation of emission allowances pursuant toAr- ticle 10a of Directive 2003/87/EC. [4] Directive 2010/75/EU of the European Parlia- ment and of the Council of 24 November 2010 on industrial emissions (integrated pollution pre- vention and control). [5] Eurostat: Combined Heat and Power (CHP) in the EU, Turkey, and Norway — 2008 data. Eu- ropean Union, Brussels, 2010, http://www.eds- destatis.de/de/downloads/sif/qa 10 007.pdf [6] Commission Decision on guidance on the met- hodology to transitionally allocate free emission allowances to installations in respect of electricity production pursuant toArticle 10c(3) ofDirective 2003/87/EC. [7] Ministry of Environment, Application of the Czech Republic for allocation of free allowances for investments in retrofitting and upgrading of the infrastructure and clean technologies and na- tional investment plan, November 2010. About the author Jiř́ı Vecka born in 1982, is a graduate of FEE CTU in Prague. He is currently a Ph.D. student of the Dept. of Economy, Management and Humanities, FEE CTU in Prague, working in the Association for District Heating of the Czech Republic (ADH CR), an interest group of legal entities and entrepreneurs in the field of heat supply (91 members approx. 87.8 PJ of heat produced in 2009), dealing with environ- mental issues — emission trading, IED, air quality, etc. Jǐŕı Vecka E-mail: vecka.jiri@centrum.cz Dept. of Economics Management and Humanities Czech Technical University Technická 2, 166 27 Prague, Czech Republic 117