Reducing the Financial Impact of EU-ETS in the Aviation Sector

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  • 1. European Emission Trading Scheme (EU-ETS). Reducing the Financial Impact. Aviation Experts Premium Consulting Services Moscow, 10th February 2010
  • 2. Agenda The Impact of EU-ETS A closer look on the cost parameter Exemplary Business Cases Counteractions Exemplary Saving Potential 2 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 3. The challenge of EU-ETS at a glance. Description Composition of Allowance Stock The free allowances allocated for the second Unknown Expansion Uncovered Gap period 2013-2020 will be based on the operated +X% Factor X flights of 2010. Gap of uncovered The amount of free allowances will not change 17% emissions in trading period during the whole trading period from 2013-2020. Any expansion after allocation will reduce the portion of free allowances whereas the unknown Free Allowances expansion factor X increases. The arising gap has to be closed by additional Free allowances 83% allocated by EU for acquired certificates. reports of base year For the second trading period (2013 – 2020) every airline will receive free allowances for ~83% of their emissions in 2010. 3 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 4. The portion of additionally required allowances will increase in line with your airline‘s expansions. Example Calculation Example Illustration Taking a mid-sized airline with 1.5 Mio. 2 535.000 Million Tonnes of emissions in 2010 and an 350.000 annual growth of 2%. The quantity of additional required allowances will increase from 350.000 in 1 2013 to 535.000 in 2020. Under consideration of the current price per allowance (~14 €) additional costs of 4.8 Mio. € in 2013 and 8.1 Mio. € in 2020 will arise. 0 The complete trading period from 2013- 2013 2014 2015 2016 2017 2018 2019 2020 2020 will cause costs of 50 Mio. €. Free Additional The more ambitious your airline’s growth plans are, the more you should focus on the gap of allowances that you require to cover all emissions. 4 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 5. Agenda The Impact of EU-ETS A closer look on the cost parameter Exemplary Business Cases Counteractions Exemplary Saving Potential 5 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 6. ETS cost can be distributed in two major cost pools: Adminstrative & Certificate Cost. Description Estimated composition of ETS-related cost (2012) Airlines will face additional administrative cost Small-sized Airlines and cost for the acquisition of certificates. The allocation of ETS costs mainly depends on two factors: Size of the airline Small Price per allowance. 0% 25% 50% 75% 100% In all cases cost for certificates will be Administrative Costs Certificates accountable for the bigger part of ETS-related Major Airlines efforts. 0% 25% 50% 75% 100% Administrative Costs Certificates At bigger airlines administrative cost will be accountable for only 5% - 10%. 6 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 7. Administrative and Certificate Costs can be further drilled down. ETS Cost + Adminstrative Cost Certificate Cost Labour cost + Work load + IT Costs Highly depends on the country The effort correlates with IT IT costs not necessarily occur. the airline is based. Costs and Certificates Cost. Not all airlines need a complex Shows nearly no saving The higher the IT costs the suite for managing ETS potential. lower the effort (i. e. for activities. preparing annual reports). The higher the price per certificate an airline is willing to pay the lower the related effort. 7 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 8. Certificate Cost are influenced by price and amount per allowance. ETS Cost + Adminstrative Cost Certificate Cost Price per Allowance x Amount of Allowance From today’s view the it is very difficult to The amount of allowances highly depends on estimate the development of price per allowance the number of flights to/from European airports in the next years. and the used trip fuel. Market analysis differ from optimistic estimations As a reduction of flights to Europe is not (12€) to very pessimistic (>60€).* reasonable in most cases only a reduction of The price per allowance will be the crucial factor fuel consumption can lead to a cost reduction. for airlines with only limited possibilities to influence. *Source: Businessgreen.com 8 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 9. Influencing factors and reduction potential of introduced ETS- cost. Adminstrative Cost Certificate Cost Price per Amount of Labour cost Work load IT Cost Allowance Allowance Influencing Labour cost As described the Especially mid-sized The future Assuming a future Factor indirectly work load will and major airlines development of the increase of traffic influence ETS especially impact have the need for IT- price per allowance the amount of cost. small-sized Systems, but the will mainly influence required allowance airlines. effort will be limited. ETS-cost. will steadily grow. Reduction Potential Reduction Reduction of the Reduction of IT cost Well-defined trading The leverage to potential is out overall workload can will increase work strategies will reduce the amount of scope. be conducted load and related enable airlines to of cert. is limited to through en- costs. reduce the price per the reduction of fuel hancement of IT allowance. consumption. 9 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 10. Agenda The Impact of EU-ETS A closer look on the cost parameter Exemplary Business Cases Counteractions Exemplary Saving Potential 10 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 11. Business cases to demonstrate behavior of ETS cost. Information Restrictions The following slides show exemplary business It is not possible to consider all complex factors case of two exemplary airlines: of EU-ETS in the following business case. Due to this reason the business case shall only Airline 1 Airline 2 give a first overview of expenses airlines will face in the next years. Size Major Mid-sized The business cases consider different allowance prices based on current price CO2 emissions on flights 300.000 30.000 forecasts. to/from Europe (t/2010) The shown expansion factor only reflects the expansion on routes to/from Europe. A detailed business case is part of an ETS strategy and considers numerous additional constraints and influencing factors. 11 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 12. Business Case 1: ETS cost with regard to expansion factor. Major airline, price per allowance 25 €. Annual ETS-Effort with regard to expansion (in Mio.)* Average and complete effort* 2,00 Average costs Complete Expansion (p. a. €) Effort (in Mio.) 1,75 Administrative 22.500 200.000 1,50 Certificates 1.4 Mio. 13 Mio. 1,25 Total 1.4 Mio. 13.1 Mio. Administrative 22.500 200.000 1,00 2012 2013 2014 2015 2016 2017 2018 2019 2020 Certificates 1.6 Mio. 14.5 Mio 2% 4% Expansion factor Total 1.6 Mio. 14.8 Mio. *The calculation is based on a average price of 25 Euro per emission allowance. An 1% expansion on European routes causes annual additional cost of 850.000 Euro. 12 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 13. Business Case 2: ETS cost with regard to price per allowance. Major airline, expansion factor 2%. Annual ETS-Effort with regard to expansion (in Mio.)* Average and complete effort* 3,0 Average costs Complete Expansion 2,5 (p. a. €) Effort (in Mio.) 2,0 Administrative 22.500 200.000 1,5 Certificates 750.000 6.7 Mio. 1,0 Total 770.000 6.9 Mio. 0,5 Administrative 22.500 200.000 2012 2013 2014 2015 2016 2017 2018 2019 2020 Certificates 2.3 Mio. 21 Mio. 13 40 Certificate Price Total 2.3 Mio. 21 Mio. *The calculation is based on a average annual expansion of 2%. An price increase per allowance only of 1 Euro leads to an increase of 500.000 Euro with regard to total cost. 13 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 14. Business Case 2: ETS cost with regard to expansion factor. Mid-sized airline, price per allowance 25 €. Annual ETS-Effort with regard to expansion (in Mio.)* Average and complete effort* 200000 Average costs Complete Expansion (p. a. €) Effort (in Mio.) 150000 Administrative 11.000 100.000 Certificates 115.000 1 Mio. 100000 Total 126.000 1.1 Mio. 50000 Administrative 11.000 100.000 2012 2013 2014 2015 2016 2017 2018 2019 2020 Certificates 130.000 1.1 Mio. 2% 4% Expansion factor Total 141.000 1.2 Mio. *The calculation is based on a average price of 25 Euro per emission allowance. An 1% expansion on European routes causes annual additional cost of 50.000 Euro. 14 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 15. Business Case 2: ETS cost with regard to price per allowance. Mid-sized airline, expansion factor 2%. Annual ETS-Effort with regard to expansion (in Mio.)* Average and complete effort* 300000 Average costs Complete Expansion (p. a. €) Effort (in Mio.) 200000 Administrative 11.000 100.000 Certificates 75.000 672.000 100000 Total 86.000 775.000 0 Administrative 11.000 100.000 2012 2013 2014 2015 2016 2017 2018 2019 2020 Certificates 230.000 200.000 13 40 Expansion factor Total 241.000 2.1 Mio. *The calculation is based on a average price of 25 Euro per emission allowance. An price increase per allowance only of 1 Euro leads to an increase of 50.000 Euro with regard to total cost. 15 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 16. Conclusion. Regardless of an airlines’ size EU-ETS will become a significant cost pool in the next years. The distribution of administrative and certificate cost depends on the size of the airline. ETS-related cost will mainly be driven by the price per emission allowance. As the reduction of an airlines’ ETS-cost will directly lead to competitive advantages in the future it is of eminent importance to set up a thoroughly planned management environment in this area. 16 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 17. Agenda The Impact of EU-ETS A closer look on the cost parameter Exemplary Business Cases Counteractions Exemplary Saving Potential 17 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 18. The price per allowance is a powerful lever to reduce overall ETS cost. Adminstrative Cost Certificate Cost Price per Amount of Labour cost Work load IT Cost Allowance Allowance Influencing …. Labor cost As described the Especially mid-sized The future Assuming a future Factor indirectly work load will and major airlines development of the increase of traffic influence ETS especially impact have the need for IT- price per allowance the amount of cost. small-sized Systems, but the will mainly influence required allowance airlines. effort will be limited. ETS-cost. will steadily grow. Reduction Potential …. Reduction Reduction of the Reduction of IT cost Well-defined trading The leverage to potential is out overall workload can will increase work strategies will reduce the amount of scope. be conducted load and related enable airlines to of cert. is limited to through en- costs. reduce the price per the reduction of fuel hancement of IT allowance. consumption. 18 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 19. Reducing the certificate price requires two activities. 1 Definition of required certificates 2 Definition of acquisition channels Basis for all activities aiming to Reducing the financial impact of ETS is reduce the financial impact caused by mainly based on the selection of proper emission allowances is in defining the acquisition channels. required amount of certificates. The proper acquisition channels Therefore it is necessary to establish depend on internal and external factors: a long-term forecast and develop an Internal: Size of airline, future ETS strategy. expansion, overall strategy, etc.. External: General market development, Price development of different emission allowances, etc. The definition of the amount of required certificates is already an important part of an ETS strategy. 19 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 20. To get best prices it is important to monitor and operate in different trading channels with different products. Energy Exchange (EEX) CER Market Stock market trading EUA’s at market Cap of CER usage is 15% of all allowances price. paid (2008/101/EC Art .11a). Spot market for buying and selling. CER’s are cheaper than EUA’s. Derivative market with good rating via Investment in project can also have clearing house function. marketing value for. Your airlines Requires access fee. Trading channels Acts on spot and derivative market. Direct trade with another participant in Futures are risky as broker can not the EU-ETS. guarantee for the delivery of his clients. Difficult to find participant intending to sell. Requires good business relations. Brokerage prices are expected to be higher Expected to have good prices also for a swap than at the exchange. of certificates. Broker OTC 20 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 21. The Energy Exchange serves as a spot and derivative market for long-term and short term portfolio optimization. EEX Illustration European Energy Exchange EEX is located in Leipzig, Germany To buy EUA’s you need to be a licensed member. EUA prices change daily according to market Cash demand (Spot market). EUA’s and CER’s are also traded at derivative market. Self-registration as a member to buy EUA’s cost’s €10.000 and includes a training for one specialist. EEX is an easy way to simply purchase allowances directly. Short-term portfolio optimization. EEX Allowances EEX performs clearing function. 21 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 22. CER’s from CDM/JI projects are a good lever to reduce purchase costs although capped at max 15% of all allowances. CER‘s Illustration Cap of 15% of total allowance amount. Money CER’s are generated by environmental projects as form of ROI. Companies hold project portfolio and offer CER’s at CER‘s different prices. Opportunity to set up own project usable for marketing also. CER’s are cheaper than EUA’s. Trader CER’s can be traded on spot and derivatives market. Return in form of CER‘s Investment in Projects Environmental Projects 22 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 23. Most direct way of purchasing allowances is to buy from another ETS-member who has excess allowance in stock. OTC Illustration Over-the-Counter (OTC) is direct form of purchase Identify possible seller on own behalf. Spot market deal, direct EUA’s/CER’s in Find & Pay exchange for money. Need for clearing house to book values. Only short-term portfolio optimization. EUA‘s or CER‘s 23 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 24. A broker is a one-stop-shop, offering all channels as standardized products with high leverage but also higher risk and cost. Broker Illustration Service provider with fixed products. Mostly derivatives (futures). Higher risk of non-delivery as broker trades with options By contract broker has to pay penalties in case of non-delivery. EUA‘s Cash Risk of high courtages on trades. or CER‘s Requires additional clearing house to book allowances Buy Buy to your airlines’s account. Broker can be used to buy at EEX if he has Broker membership. No membership fees for your airlines EUA‘s or CER‘s EUA‘s or CER‘s Long –term portfolio management. Buy at today’s prices and receive allowances tomorrow independent from future prices! Broker speculates with allowances higher risk. Give certificates to broker for trade and demand a EEX minimum return of 100+X%. 24 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 25. Agenda The Impact of EU-ETS A closer look on the cost parameter Exemplary Business Cases Counteractions Exemplary Saving Potential 25 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 26. Basic information about calculated business cases. Facts & Constraints Alternative 1 In Alternative 1 all additional required allowances are The following slides show exemplary developed bought to the standard price at the end of each year. business cases. The alternative does not consider a dedicated ETS The displayed efforts & savings are only estimated Management or Strategy. numbers based on the current level of information. A reliable business case in a first step requires the development of an ETS Strategy. The business case is based on the following Alternative 2 constraints: Annual growth rate: 2.5% Alternative 2 combines all possible activities to acquire emission allowances. Base allowance price: 25 € Annual growth rate per allowance: 12.5% CO2-Emission: 300.000 / 30.000 26 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 27. Business Case – Major Airline Year Efforts Alternative 1 Efforts Alternative 2 Savings Savings in % Savings accum. 2010 30.000 -30.000 -30.000 2011 30.000 -30.000 -60.000 2012 881.589 802.022 79.568 9.0% 19.568 2013 1.016.583 921.769 94.814 9.3% 114.302 2014 1.172.247 1.059852 112.395 9.6% 226.777 2015 1.351.747 1.210.079 132.668 10.0% 359.445 2016 1.558.733 1.402688 156.045 10.2% 515.490 2017 1.797.415 1.614.412 183.002 10.3% 698.492 2018 2.072.644 1.858.557 214.087 10.3% 912.579 2019 2.390.017 2.140.086 249.931 10.5% 1.162.510 2020 2.755.989 2.464.724 291.265 10.6% 1.453.775 Total 14.996.963 13.543.189 1.453.775 *Currency = Euro 27 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 28. Business Case – Mid-sized Airline Year Efforts Alternative 1 Efforts Alternative 2 Savings Savings in % Savings accum. 2010 7.000 -7.000 -7.000 2011 7.000 -7.000 -14.000 2012 88.159 83.202 4.957 5.6% -9.043 2013 101.658 95.177 6.481 6.4% -2.562 2014 117.225 108.985 8.239 7.0% 5.678 2015 135.175 124.908 10.267 7.6% 15.944 2016 155.873 143.269 12.605 8.1% 28.549 2017 179.741 164.441 15.300 8.% 43.849 2018 207.264 188.856 18.409 8.9% 62.258 2019 239.002 217.009 21.993 9.2% 84.251 2020 275.599 249.472 26.126 9.5% 110.377 Total 1.499.696 1.389.319 110.377 *Currency = Euro 28 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 29. AviationExperts facilitate evaluation, decision-making and implementation of the optimum trading strategy for your airline.. Exemplary project approach: Acquisition Decision & Strategy Business Cases Monitoring Channels Implementation Define amount of Analyze and assess Develop possible Select business case. Improvement required certificates. possible acquisition business cases with channels. regard to different Implement necessary Adjustment Define general business processes Activities acquisition channels. Quality assurance. acquisition strategy. Contact and assess and interfaces. possible trading Analyze and assess partners. business cases. Develop performance indicators. ETS Strategy Assessment of Business Cases. Performance Indicator. Deliverables acquisition channels. Implemented processes Assessment of & interfaces. trading partners. 3 – 8 weeks 2 – 8 weeks 1 – 3 weeks 2 – 8 weeks Effort* * Required manpower depending on airlines size, resources available, existing strucutres, etc. To be evaluated during setup phase. 29 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 30. We combine in-depth aviation know-how with profound ETS- knowledge – Aviation Experts… …are consultants with several years of aviation experience gained in operations, line management and consulting projects. …have been working in the area of ETS since the start of ETS in 2008 and are continuously developing new ETS-solutions. …are providing a full service ETS Management from strategy and trading management to IT solutions. 30 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February
  • 31. For further information please contact us. Your contacts: Christian Lambertus T +49 (0)176 830 233 87 Managing Partner clambertus@aviationexperts.de www.aviationexperts.de 31 10.02.2010 Reducing the Financial Impact, EU-ETS Conference “Facing the Challenge”, Moscow, 10th February