Chinese Curse“May you live in interesting times,” is a traditional Chinese curse that could be applied to today’s energy markets.  There is a conflation of events consisting of rising demand, uncertain supply, infrastructure constraints, shifting global environmental policies, and changes in technology. Taken together, they create the conditions for a “perfect storm” in energy trading. So what are these events, and why should they concern us as a CM system vendor?

Firstly, let us consider the supply-demand balance of the main energy feedstock – oil.  In a number of market reports, including those produced by the oil majors, there is talk of a permanent return to “$100+ oil” as an increasing shortfall in global supply is brought about by the emerging economies’ increasing appetite for energy. Putting to one side the debate on “peak oil”, it is clear that recession or not, absolute levels of demand are rising and the only short-term response the market can make is to increase price. Adjusting for inflation and currency fluctuation, there is no reason why we shouldn’t see $150, $200, and $500 oil in the near future.

These oil price increases will ripple through the other commodities of the energy complex, with significant real price rises in coal and gas – especially those commodities whose price is directly indexed to the price of oil. We shall also expect to see more bouts of extreme price volatility as various economic sectors suffer dislocations as a result of rising energy prices.

Secondly, the environment is back on the political agenda again after it was announced at the end of May 2011 that Carbon dioxide emissions are at their highest ever, creeping inexorably closer to crisis “tipping point” levels entailing “dangerous climate change.” Even without this extra stimulus, and no firm lead from a “Son of Kyoto”, the European Union is setting more stringent emissions reductions targets. Phase III of the flagship EU ETS starts to bite in 2013, imposing very real and costly emissions reduction obligations. Power generators will suffer a double whammy, as they suffer disproportionately higher reductions targets and have to bid for scarcer Allowances in an auction process.

The European power sector is also being hit with additional Directives aimed at the de-carbonisation of generation. EU policy on increasing generation capacity from renewable fuels is seeing a big rise in power generated from “intermittent” sources, leading to wild swings in the power grid’s supply-demand balance, and causing extra price volatility. Grid operators are expecting to be compelled “constrain off” fossil fuel plant on windy days, and some argue that this will increase maintenance costs of coal and gas stations as they are forced to operate outside their optimal mechanical and thermodynamic performance envelope.

All this points to substantial rises in the prices of Carbon and electricity, and a knock-on effect on the prices of all goods where energy is a significant proportion of their cost-base. To make matters worse, some countries, e.g. the UK, are proposing to give the current price of Carbon “a little helping hand” by setting a floor price. For some economic sectors, this amounts to a double taxation and higher costs again.

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BurglarSpot trading in Europe’s flagship emissions trading scheme (EU ETS) recently ground to a halt, following the theft of 2m Allowances from the Austrian, Czech and Greek National Registries. Valued at around €30m, this theft is the latest in the series of embarrasments for the European Union, following on from a theft of 1.6m Allowances from the Romanian Registry last year. It appears that the thieves managed to acquires the Account passwords of legitimate users and effect transfers to Accounts of their own choosing.  To make matters worse, the EC was aware of an imminent hacking threat, but didn’t order a lockdown of the Registry system before the theft. The EC maintains that Registry security is a matter for individual Member States. That’s technically true, but a little like failing to tell your neighbour he’s left his front door open, and he promptly gets burgled.

There is little doubt that the missing Allowances will be recovered, as each has a unique ID number and no Allowance ever actually leaves the Registry system. The whole Registry system is now on the lookout for the missing IDs, and many have already been found, but at the time of writing, 1m Allowances were still missing from the latest heist.  However, with 27 EU Registries currently operating, plus numerous others which support EU Allowance transfers, the thieves have had plenty of opportunities to cover their escape through a myriad of transfers.  Point Carbon, the leading industry publication on emissions trading, have spoken to a number of Registry officials, and got quotes like :

“We’ve heard the EUAs went to (an account in) Poland, then to Estonia, then to Liechtenstein, and the latest is they have left Liechtenstein, but we have no idea where they went after that.”

This sorry episode calls in to question the security protocols governing the operation of the Registries. For those of us involved in the EU ETS since its inception, the recent spate of thefts is remarkable not because they occurred, but because they did not occur much earlier and on a bigger scale, and the EU only has itself to blame.

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