30/10/2006 MARKET BASED MECHANISMS TO FIGHT CLIMATE CHANGE Jean-François Conil-Lacoste Chief Executive Officer, Powernext SA APEX Conference October 30,

30/10/2006

MARKET BASED MECHANISMS TO FIGHT CLIMATE CHANGE

Jean-François Conil-LacosteChief Executive Officer, Powernext SA

APEX ConferenceOctober 30, 2006

Seoul

30/10/2006

CLIMATE CHANGE IMPLIES A POLITICAL ANSWER

Concentration and fossil fuel CO2 emissions have increased greatly since pre-industrial periods because of human action.

To mitigate the human impact, the Governments have set up an international climate change policy.

1979: First World Climate Conference

1992: “Earth Summit” in Rio

1997: Kyoto Protocol (binding agreement reached on emissions reductions for developed countries)

2005: Kyoto Protocol is implemented, launch of the EU ETS

Kyoto protocol sets up tools to reduce CO2 emissions through market based mechanisms:

Emissions trading (allows countries with an emissions reduction target to trade with other countries)

Joint implementation (JI) and Clean Development Mechanism (CDM): a country with an emissions reduction target can get credit by funding emissions-reducing projects other countries

30/10/2006

THE EU EMISSION TRADING SCHEME : HOW DOES IT WORK?

CO2 emissions from European industries have been capped;

Each industrial plants has got allowances corresponding to its cap (one allowance = one ton of CO2);

The allowances are tradable all around Europe;

Every year, industrial installations have the obligation to restitute as many allowances as actual CO2 emissions;

Two market periods: 2005-2007 and 2008-2012;

Free banking and borrowing during each period;

Limited possibilities of banking and borrowing between the two periods.

30/10/2006

MORE THAN 50% OF THE ALLOWANCES TO POWER AND HEATING ACTIVITIES

Germany23,7%

Poland11,4%

Italy10,6%UK

10,5%

Spain8,3%

France7,4%

Others28,1%

Refining8,0%

Others9,0% Paper

3,0%

Power and

cumbustion56,0% Metals

12,0%

Cement glass and

lime12,0%

Total : 2.2 billion CO2 (50% of the EU CO2 emissions)

11000 industrial sources

Breakdown per country Breakdown per industry

30/10/2006

THE STRUCTURE OF THE EUROPEAN CO2 MARKET

Directive 2003/87/EC established a scheme for greenhouse gas emissions allowance trading (1rst period 2005-2007) in Europe.

Bilateral Market

Exchanges

OTC Broker Market

InstallationsNAP

Bilateral MarketBilateral Market

ExchangesExchanges

OTC Broker MarketOTC Broker Market

InstallationsNAP

InstallationsNAP

30/10/2006

A GROWING LIQUIDITY FOR THE EU ETS

A very important growth of the OTC market between 2004 (10Mt) 2005 (250Mt) and 2006 (800Mt).

50 to 80 counterparties negotiate regularly on the market (source : Fortis Bank)

Share between Exchanges and OTC market : 60/40

Share between Futures and. Spot Markets : 90/10

Share of Powernext : 60% among European spot CO2

Exchanges

Record volume in October 2006 : around 3Mt on Powernext Carbon

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Mt

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€ p

er t

on

OTC Clearing via ExchangesExchangesOTCMonthly average price (EEX Index, Pow ernext Carbon Closing Price)

30/10/2006

WHAT WE HAVE LEARNT: 4 MAIN MARKET DRIVERS

Temperature and rainfall

Long term

Short term

Economic growth

Energy relative prices

Level of carbon constraint

30/10/2006

CO2 PRICE : THE CORNERSTONE OF THE ENERGY PRICES (1/2)

A strong correlation between CO2 and power prices.

With 65% of its CO2 emissions produced by the combustion of fossil fuels, the European power generation sector is the largest emitter and is allocated about 30% of the allowances.

Consequently, the power producers add to the production cost of the fuels the price of the allowance multiplied by the quantity of CO2 emitted per MWh generated.

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€/M

Wh

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Powernext Futures (Calendar baseload contract)Powernext Carbon clos ing price

30/10/2006

CO2 PRICE : THE CORNERSTONE OF THE ENERGY PRICES (2/2)

Power generation plants are managed on the basis of “spreads”, which represent their operating cash flow calculated as the difference between the selling price of electricity during peak hours and the price of the fuel used, weighted by the energy output of the power plant.

If a power plant burns natural gas, the spread is called the “spark spread”,

And if it burns coal, the spread is called the “dark spread”.

All other things being equal, the higher the price of carbon dioxide, the more the operators have an incentive to switch from the power plants with the highest emissions to those that produce fewer emissions.

Power prices and dark/spark spreads

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€/M

Wh

Powernext Futures™ m onth ahead Peak (€/MWh)

Clean French dark spread (€/MWh) - powernext carbon

Clean French spark spread (€/MWh) - powernext carbon

30/10/2006

THE 2005 DIFFERENCE BETWEEN EMISSIONS & ALLOWANCES

Sum of shorts179,4 Mt [ 9,1% ]

Sum of longs254,0 Mt [ 12,9% ]

Net 74,6Mt[ 3,8% ]

Millions tons – CO2 EUAs

0 100 200-100-200

30/10/2006

SUMMARY ON EU ETS

A significant technical and political achievement The only real CO2 market, emerging standard for carbon credits; Easily the most important global climate policy development; A price on 10% of global emissions.

A multinational emissions trading system 25 sovereign nations of widely differing circumstances and

commitments to climate policy; Successful allocation of common burden among EU15 and

between EU15 and 10 accession states of Eastern Europe.

Global implications An example for others; A “fact on the ground” in global climate negotiations; Creating predisposition to and interest in CO2 trading in China,

India, Brazil and others.

30/10/2006

POWERNEXT: AN ENERGY EXCHANGE AS A LINK BETWEEN ENERGY PRICES

Powernext is an exchange with:

stable and European shareholding with 11,5 M€ capital

solid market models and IT systems

provides several price references and indices:

short term electricity to hedge balancing needs and volume risks: Powernext Day-Ahead™ since November 2001

medium term electricity to hedge price risks: Powernext Futures™ since June 2004

CO2 allowances to hedge greenhouse gas emissions non-compliance risks: Powernext Carbon since June 2005

in cooperation with Météo France, a full range of weather indices taking into account the economic reality of the zones considered: Powernext Weather since November 2005.

6,8%

6,8%

6,8%

6,8%

6,8%

5,0% 5,0% 5,0%

34,0%

17,0%

53,3%

22,2%

24,5%

HGRT

30/10/2006

POWERNEXT CARBON: THE LEADING SPOT MARKET IN EUROPE

Powernext Carbon is:

An anonymous, centralized and transparent market

Secured by a real time payment versus delivery guarantee

Powernext Carbon has a European and diversified membership of 60 members

30/10/2006

CONTACTS

www.powernext.fr

+33 1 73 03 96 00

[email protected]