Operating and Financial Investments by European Utilities Over 2004-2009: What Role for European Mitigation Policies?

Abstract

One of the objectives of the European Union Emissions Trading Scheme (EUETS), the EU’s flagship cap-and-trade policy, is to give an incentive to carbon-constrained entities to invest in a production apparatus that emit less carbon. So far, analytical work and related evidence has been limited to rather short-term impacts (operations and carbon trading). This paper investigates longer-term impacts considering both operating investments and financial investments in power generation.The paper surveys corporate investor communications over 2004-2009 for the five most carbon-constrained European utilities (RWE, E.ON, EDF, Enel and Vattenfall). We ask ourselves to what extent has the EU ETS actually given the proper incentive to invest in low-carbon generation and what is the impact (both incidental and voluntary) of external growth investments on the ETS profile of the European utilities under scrutiny. Have the changes of ownership altered the EU ETS compliance perimeter?The paper concludes that in the early years of the EU ETS, European utilities investments were considerably more influenced by non-climatic considerations, notably (1) the strategic repositioning of the industry towards a regional energy utility business and (2) environmental and competition-related regulations. In the absence of a consensual counterfactual investment scenario over the period, we can only highlight that some investments performed and planned are clearly in favor of mitigating carbon emissions without attributing this solely to the EU ETS but also to the flurry of direct support mechanisms to renewables or energy markets developments. The beginning of a tighter constraint in phase II and expectation regarding phase III triggered clearer investment-related responses on the part of regulated entities: highly carbon-emitting plants cancelled in favor of plants emitting less CO2 or regulated entities fully using offset project mechanisms to foster investments in lower carbon power plants. However, some responses are rather creative, require further monitoring and need to be addressed by the policymakers (risk of carbon leakage and plant commissioning unduly postponed). This calls for more transparency requirement in the reporting exercise.