Fit for Purpose?

How will traders respond to the European Commission’s legislative package of renewable energy and EU ETS reforms due later this month?

Listen to a discussion with the CEO of the European Federation of Energy Traders on the so-called “Fit for 55” proposals and a plea for policy coherence and consistency. The podcast will then take a short summer break, returning on 6 August.

Guest: 

• Mark Copley, CEO, European Federation of Energy Traders (Efet)

Transcript

0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:28

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. This week we chat to a former regulator who also worked for NOE, the European Association or transmission system operators, as well as the UK government. So given his cv, Mark Copley, CEO of the European Federation of Energy Traders will provide us with relevant and insightful views. About the flurry of legislation currently being leaked and prepared by the European Commission. A warm welcome to you, Mark.

Mark Copley, CEO, European Federation of Energy Traders (Efet): 1:01

Thanks, Richard. Lovely to be here. It's interesting you say I'm the CEO of Efet. It's absolutely the case, but I've yet to actually meet any of my members or my colleagues due to the pandemic.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:12

Oh, really?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 1:12

So I hope all your listeners are doing all right.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:14

Yeah, absolutely. I I hope you get to, to meet them in the coming months, mark. How is life in London? Things are opening up and we hear that they're not gonna extend any lockdown periods.

Mark Copley, CEO, European Federation of Energy Traders (Efet): 1:22

So this is. This is certainly the word on the street at the moment. But one has to take, I shouldn't be too critical of my former employers in the UK government, but one has to take everything with a slight pitch of salt at the moment. But it'd be nice to think we're on a positive course.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:37

Absolutely. And you, mark, you joined EFE earlier this year, didn't you? In February.

Mark Copley, CEO, European Federation of Energy Traders (Efet): 1:41

That's right. So still reasonably new in the job, although the topics are relatively familiar. I've spent around half of my career in two different spells. As a regulator. I spent a few years in Brussels with the European Network of Transmission System operators for electricity, which is NOE, to you and me, and most recently I was involved in the. Negotiations of the trading cooperation agreements between the UK and the eu, which to everyone else is the Brexit negotiation. So seeing the different issues we're talking about from a number of perspectives, but very pleased to be working on the issues relating to the European internal energy market, which I think is a. Important and a particularly good idea, as I'm sure we'll come onto.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:32

You've had a fascinating background there and you're able to view it from all these different perspectives, as you say and with these different hats on. But today you are from the European Federation of Energy Traders Hats, so I think, what we're planning to talk about today is the fit for 55 package that is due in some weeks from the European Commission. We've seen some leaks already, so I think it'd be quite interesting to discuss that in more detail. But Mark, before I start, there's the green recovery, masses amounts of money flowing into the post pandemic, recovery fund in various countries. What's your view here? Are there any concerns or do you think everything is planned and is likely to boost the this green transition?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 3:12

My small question to start with a few reflections of that. At the risk of stating the obvious, the European Federation of Energy Traders exists to try and make markets work as effectively as possible. So what we want to see. Is well functioning markets for electricity, for gas, for hydrogen energy course, and for carbon. And we don't want that for its own sake. We want that because those markets, I think, have a really big role in ensuring we have a green transition. And in ensuring that happens, at least cost. And as a former regulator, I think both of those are important. So I think it's great that people are recognizing that green growth, but there isn't a trade off, if you like, between growth and decarbonization, which I think was certainly a myth we saw in the UK a few years ago. So I think the focus on decarbonizing through the recovery is a really positive one. But I do think it comes with challenges and when every country individually and the European Commission from a pan-European approach are trying to put in place new initiatives, there is obviously a danger that those initiatives, while well intentioned, pull in different directions. And therefore I do think sort of policy consistency is incredibly important. And if you get that right, you could have a really positive decarbonizing effect. And if you don't, unfortunately the cost of decarbonization can be greater, which then. Causes, which then makes it harder to maintain public support. So from our perspective, it's great to see the initiatives being put in place, but they need to be built around a number of market pillars. And I would say those pillars are, first of all, the ETS, which I know will come onto second is competitive gas and power markets. And thirdly. Is a system of certificates, guarantees of origin, whatever you wish to call them, which contain evidence of the carbon content of different fuels and allow customers to make informed choices. So for us, actually harnessing markets to drive decarbonization can be something which unifies all of these different policies, and I think therefore. Can be a pretty positive thing, but overall I'm not gonna complain about the urgency of the decarbonization issue being seized and lots of effort being made to get us on target for now legally binding 2050 and 2030. Objectives.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:54

Are you seeing this policy consistency at the European and the national levels? At the moment,

Mark Copley, CEO, European Federation of Energy Traders (Efet): 5:58

I can see the foundations of it. If we look at something like BETS. That's that's something I really think Europe should be proud of. That's a, oh, it's the largest carbon trading system in the world, and it's something which in my opinion, particularly in the year of COP 26, could be extended to other. To other geographies, both in Europe and beyond. So I think you could really build your decarbonization policy around the ETS. I think you could also build it around competitive markets, and I'm pleased to see that events like the Florence Forum could continue to focus on the importance of fully delivering the target models for electricity. And the Madrid Forum delivering the target models for gas. However, there is clearly a patchwork of measures at national and European level, and I'm not sure that overall vision for decarbonization is quite there as yet to answer your question fairly bluntly.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:56

Okay. That's fair enough, Mark. I think, let's stick with ETS. So there are several aspects here. On the table, what do you think is the most important? Is it the MSR? Is it the linear reduction factor? Is it increasing the cap? What, in your view, is the most important aspect of ETS reform?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 7:13

I'm not sure I could choose one part of the ETS as the most important. I think overall what is important is that there is stability and predictability in that system, and that parties could trust it. In terms of the factors you mentioned, I think there's a lot of positives coming out of the noises around what the commission's likely to do. From an EFA perspective, the rebasing of the cap, the increasing the linear reduction factors and calibrating the MSR are all really positive moves, which should help meet the 2030 climate targets. We also like the progressive approach, which is being mooted. Of systems for. For maritime and pilot schemes for road transport and buildings. I think when you've got a system like the ETS, which has begun to work effectively and really promote decisions which switch away from higher carbon processes, it's important to move reasonably carefully. And that idea for a separate scheme possibly transitioning into the main ETS at some point in the future. Feels to us like a good direction to be moving in. So cautiously positive around what we've heard so far, I think.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:31

And what about the carbon border tax? What's the e effort position here?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 8:35

This is a rather interesting one where. I would say the general thrust, I think is positive, but there are some quite significant implementation questions, so it's clearly sensible to try and address, address carbon leakage to make sure there's a level playing field between Europe and elsewhere, and obviously if that can lead to the phase out of free allocation in due course. That's something I think we'd support. But then if you think about some of the wider policies which Europe's putting in place, things like market coupling, I do struggle a little bit to, to understand the interaction between a carbon border adjustment mechanism applied to electricity and something like market coupling in say, the Western Balkans. In that region, there are attempts to integrate many of the energy community countries into the internal energy market of the eu. And to do that you use a system called Market Coupling, which essentially allows power to flow to wherever prices are highest, and that improves efficiency for all concerns and has been something that's been a success across much of the rest of the continent. Now, I'm not entirely sure how you do a market coupling process if you are trying to levy a carbon border adjustment on electricity as well. And to be fair to the commission, that is something that some of the leak drafts, no, clearly I never read leak drafts. It's something that those drafts do point to and I know they're thinking about. There are also, the risk of revealing by true geek credentials. One needs to think about how you're going to assess. The amount of carbon in the electricity, which is crossing borders. Are you using averages? Are you using specific figures? Who's getting hold of those? How are you verifying them? In some ways I see the biggest opportunity of carbon border adjustment mechanisms is in driving a conversation about how carbon pricing regimes can align beyond Europe. Now, some of that is perhaps reflective of the fact that. I come from the UK and we obviously used to be part of the ETS and no longer are. And I think there is a real opportunity for the new standalone UK emissions trading system to link to the EU emissions trading system with benefits for both parties. And I think that logic of trying to ru to expand carbon pricing to different geographies, both geographically close and much further away. May actually be something that the carbon border adjustment mechanism discussion can kickstart to some extent. So design challenges. Understand the core driver, but it's gonna be a tough one to implement. But I do hope it leads to a conversation about linking to other systems and because I'm biased, particularly to the UK because the opportunities there are pretty sizable.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:33

You mentioned, the Western Balkans area, but how, the Ukraine, Russia, these board, these are important borders as well. Russia, certainly for Finland, Norway for other more for Finland rather than Norway, but, and also Ukraine for Eastern Europe. Are these the kind of areas you'd like to see going more towards carbon pricing?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 11:51

Generally speaking the further you expand carbon pricing and the more alignment you've got in your system. I think the more effective your policies are likely to be and but certainly the borders you mentioned there will need to be considered specifically, Ukraine. Ukraine is an interesting one. I used to live there for a little while actually.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:09

Okay.

Mark Copley, CEO, European Federation of Energy Traders (Efet): 12:09

So country quite close to my heart. But again, you look at that border, you need to think about how you are going to calculate flows across it where there are multiple lines. You've got part of the European electricity system. Which is connected to the rest of Europe, which is actually in Ukraine. And so focusing specifically on the electricity dimensions of the carbon border adjustment mechanism, you do get some real complexities from the fact that systems are highly interconnected and that simply averaging the carbon values of systems as large as somewhere like the Ukraine is going to give you some. Perhaps some slightly perverse results. So I guess what I would like to see is the carbon border adjustment mechanism conversation leading to discussions between politicians and as I've said, it is the year of COP 26 rolling out carbon pricing policies. Is the kind of thing that could really tackle decarbonization at the global level. So it'd be nice to think that the proposals for the CBAM perhaps then allow colleagues in DG Kleer and their counterparts in Ukraine or Russia or wherever it is to come together and see what we can do on carbon pricing on those borders.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:22

Absolutely. I think it's interesting you've mentioned. Some of the design elements here and the complexity, but for example, when you say averaging out the carbon content could give some perverse results. What do you mean there, mark?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 13:34

So I'll be brutally honest and say I'm not convinced I've thought about it quite enough. But when a megawatt of an electricity crosses a border, you need to know. For the purposes of a carbon border adjustment, how much carbon there is within it. And at the moment we don't have a particularly robust way of knowing that is the case. You do not know whether it's carbon intensive or renewable electricity that flows across a particular border. So what you need to do at some level is use an average. Of the carbon intensity of a given system. Now that doesn't necessarily mean that it is that form of power that is flowing, so anytime you're averaging something, you're losing a certain amount of accuracy. I was thinking about the inaccuracies that could create as well as the difficulties in calculating. The carbon intensity of a grid for potentially every half an hour of a day across the year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:30

And this is where, we return to a discussion on guarantees of origin, but that's maybe, potentially somewhere where they could help. Moving on from the ETS reform and to the renewable energy directive, what changes would you like to see here? What reforms would you like to see put in place?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 14:45

I think what I'll say here is that. That much of what needs to, what we think needs to be put in place relating to renewable energy probably also applies to low carbon energy sources as well. So while it's absolutely reasonable for the commission to be focusing on renewables, we are keen that they take a kind of cross fuel, cross European view of this. But I think I would point to a couple of specific areas where the revised red or red three, whatever you wish to call it, could focus. I think the first of those, perhaps we've began to touch on already, and that's defining EU wide standards for validating. The renewable origin or sustainability attributes, which I apologize is a dreadful title, but the the renewable origin or the sustainable attributes of renewable and low carbon energy carriers. And I think in English, what that means is having a standard way for a customer to know. What is in the energy they're buying, and then to make that tradable in some way, we would like to see at the revised red two, making the issuance of guarantees of origin mandatory, and we'd like to see it promoting the uptake of power purchase agreements. If I can spend just a second on power purchase agreements, because these are something that I'm pretty proud of, the work that efis done on now, a lot of people. Say, oh, you lobby in favor of competitive markets. And that's absolutely true, we do. But I like to think we also put our money where our mouth is. And EFE has developed standard trading contracts. It's developed an IT language to exchange data. And since about 2017, our legal committee working with resource has come up with a. Standard PPA to bring down transaction costs for anyone striking deals across Europe. So that is designed to help corporates contract with renewable providers in a safe and secure way. So this is a shameless plug for the EFE CPPA, which I really do think is a useful tool in promoting the uptake of more renewables in this area. So renewable and low carbon attributes, making sure Gus are issued in all areas, and then promoting the uptake of PPAs will be the things towards the top of our wishlist.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:07

But in terms of geos, guarantees of origin, some would say they're not a sort of tradable commodity as such. They're just merely, provide an indication of the renewable attributes of a facility or a unit that generates power. What's your view here?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 17:20

It won't surprise you. As an association of traders, our view is that they could well be tradable and that there will be value to making them tradable. What's the rational for that? I think really it's about, it's about customer choice and about trying to allow customers to make informed decisions which allow them to play a role in helping the planet and in decarbonizing, and when I say customers, corporates particularly, but perhaps in future even something like. Domestic consumers. Now, I don't know about you, but in the UK market, when I'm thinking about which supplier to go with, I look at the different offerings and sometimes, I will go with a supplier who sources renewable energy. More often than not, or claims to be giving me a hundred percent greed, energy and so on now, and frankly, I will sometimes pay a price premium for that. I say sometimes because as a good former regulator, I switch supply nice and regularly. But actually if we had a robust way of knowing. When something was produced, where it was produced, how much carbon was embodied in the lifecycle of it, I then think you could make much more informed decisions, both about the energy that you use directly, but also about some of the products that you might buy, which use energy. And I think that comes from a standard. Of how much carbon is embodied in these processes. So red two, and then following up with the hydrogen and market the hydrogen and. Gas decarbonization package, which is due in December, I'll get my terminology right in a second. Could both be opportunities to create this framework to think about what those systems might look like and frankly to, to work out some of the design features because there are some detailed design questions to look at. Tradeability is one of them, but for me, I think there isn't. A clear reason why bundling the energy and the GOO is required. There will be times when parties will want to buy both together. There will be times when people want to trade them separately, and fundamentally, if you allow them to be traded separately, the chances of increased revenue flowing to renewable projects or low carbon projects, which is ultimately the point, is likely to be higher. Now, I should say here that Efe will be putting out a couple of positions on this in the next week or so, and I'd strongly suggest people visit our revamped website and have a look at those. And obviously there is a debate to be had. We're quite happy to have conversations with anybody who's interested in this area. As we're currently doing with parties like issuing bodies, the commission, and many others.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:09

It's interesting as well'cause the GOs or goos or whatever you like, Regos or whatever you like to call 'em, there's also an element of controversy there, isn't there? I think for some they feel that. Why should the UK supplier be designated green if it's buying Nordic hydros, hydro guarantees of origin. What's your view here?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 20:28

Look, I think that's an entirely legitimate point. I think about the ETSI said the most important thing is that people have confidence in the system, and clearly any system you create here needs to inspire confidence as well. So I do think design plays a critical role. What I will say is that a grid, the system, a gas grid or an electricity grid is a extremely heavily regulated closed system. So you know how much goes in and you know how much comes out, which gives you a very good way of auditing any flows. And I do think therefore there's a. Good opportunity to create clear and simple safeguards, to make sure there isn't double counting and to put in place things which do mitigate the risk of fraud. And I understand why people draw parallels from kind of tankers, which have been filled up with a particular fuel and then misreported and so on. But I do think it's important to recognize that. The grids are pretty different to that. So I'm not gonna sit here and claim that Iceland seg a guarantee of origin to Italy at that party, claiming that's green is the sort of thing that a customer is going to readily understand. And therefore, I think it's important that there is a concerted effort. To think about those questions of how to build trust and how to measure these things. I think that starts with robust monitoring, reporting and verification regimes, making sure you're canceling certificates at the right time, that you can't get multiple certificates for one transaction, and who knows? Perhaps you need to look at things like. To, to synchronous areas IE where grids are interconnected. I would finish by saying simply because this is a risk, I don't think is a rationale for not trying to put in place a system that can unlock a lot of benefits. But equally it would be silly to say these concerns are illegitimate and not try and address them in design.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:31

Maybe it's it's leave that headache for the regulators and the people you know, who are, they're designing the regulation there Mark

Mark Copley, CEO, European Federation of Energy Traders (Efet): 22:37

As a former regulator, I have to say some of these questions do interest me a fairly large amount. I know, I think actually at the risk of free styling a little, I think what we need here is, and I was about to say everyone getting round a table, which would be a lovely thing to do in this pandemic, wouldn't it? But absolutely I do. I do think it needs parties from lots of different perspectives to come together and to thrash these things out, to get beyond some of the. Perhaps high level, this is greenwashing or this isn't gonna work. Kind of concerns and actually work out what might be feasible. And we'd be quite happy to either play a leading role or to facilitate that if that was something people were keen to do.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 23:15

Excellent. Mark, I think, you mentioned earlier the future linkage between the UK a TS and the eu a TS. What's the situation with GOs? Is there a reciprocal deal between the EU and the uk? Is that being worked on at the moment for. The import and export of geos from the UK to the EU and vice versa.

Mark Copley, CEO, European Federation of Energy Traders (Efet): 23:32

It's gonna be quite embarrassing if I can't answer this question given my previous job, isn't it? Look, so the UK regime recognizes EU guarantees of origin, but it's said, I believe it will do a review of that. It was something classically government, so in due course or at an appropriate juncture. Now the EU doesn't recognize UK guarantees of origin at present. Certainly in the fullness of time, you just as linking ETS is as beneficial. I think you would want to see good goos from other countries perhaps being recognized, but maybe that's a number of steps down the line. In terms of the critical path, I think one needs to start with a standard European approach, trying to promote convergence, making sure that the different systems that exist in different member states. Could move perhaps over time towards a European system. And then once there's that European system, perhaps trying to bolt systems like the UK on ramp. So I would see the European actions being the priority. Conscious that my colleagues, my former colleagues in UK government might have a slightly different perspective.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 24:41

I think you are returning to the core of our discussion, mark, about the fit for 55 package. And our final question really on, you have the ETS reform, you have the renewable energy directive. You have the energy efficiency directive as well, which we haven't touched upon now, but do, is there a risk that these will run against each other? That they'll be battling it out and, for example, due to increased energy efficiency or more renewables on the system, that actually the demand for eua would fall substantially?

Mark Copley, CEO, European Federation of Energy Traders (Efet): 25:10

I can see you've done this before. That sort of loops back to where we started in a very nice way, doesn't it? The point I tried to make at the start was that policy consistency and making sure that all of the different levers that are being developed pull in the same direction, is probably a bigger challenge than any of the individual aspects of this and. What you said there about energy efficiency is absolutely critical. If you think about the ETS, the way you set the caps, the way you set the linear reduction factors needs to take into account the amount of heavy lifting you expect other policies to do. And if you don't calibrate that with those other policies in mind, you are going to either get a price signal, which is not actually representative of. Situation as it stands so yes, the simple answer to your question is yes, coherence and alignment is incredibly important and it's also, incredibly difficult. So that ETS review, which is coming up, which is hard enough already trying to look at parallel systems and convergence pathways, also needs to take into account national policy measures. Including things like bans on un fuels and really work out how those policies are going to do their share of the decarbonization effort so that the ETS is then sending a price, which is, which means that it can do as much of the remainder of the effort. So at the risk of trying to make something which is exceptionally complex, far too simple, it comes back to that idea I tried to set out at the start, which is the ETS has been exceptionally successful. And is your prime kind of mechanism for driving decarbonization. Then you've got competitive electricity, gas, and hydrogen markets, and then you've got this kind of development of certification schemes for renewables and low carbon. Now I think each of those is a market in itself, and each of those will take you some way towards decarbonizing. What I'm not saying here is that you're not gonna need other subsidies, supports r and d incentives over time, but generally the way we see it is we should get those market mechanisms to do as much of the heavy lifting as possible. We should then look Europe wide at how to design the other subsidies that are needed and we should try and bring these national schemes together to create a simple framework as possible. Because as you said at the start, the amount of investment we need here is phenomenally high at investors tend to like a framework which they understand, which they can predict and which is stable. So I think there's a lot to do, but also I think Europe's in pretty good shape. I really do the ETSI think it's a, it's an impressive measure. I also think it's vital we carry on with the work to liberalize markets and implement the full extent of the internal energy market legislation and gas and power. And I would really like to see kick starting of this certificate discussion.'cause I think each of those do have a role to play.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 28:15

Absolutely. And I hope the listeners, if they want to they know who to approach if they want to sit around the table and discuss these issues. Mark, thank you ever so much for your views on the Fit for 55 package and much, much more. And we've discussed this for over half an hour and we didn't even mention Brexit, so Perfect. Well done us. Excellent. Excellent. Mark, thanks ever so much.

Mark Copley, CEO, European Federation of Energy Traders (Efet): 28:33

Thank you so much. Appreciate your time.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 28:35

That's about all from the weekly podcast this week. We will now take a short summer break and we'll return on the 6th of August. Look forward to welcome you all back then. So listeners, you can now follow the podcast on our own Twitter account. Aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.