Challenges and Opportunities for Energy Utility Companies Post-Copenhagen

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Challenges and opportunities for energy utility companies post-Copenhagen

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Introduction

The Copenhagen Accord is the manifestation of domestic, political and economic realities in Washington and Beijing. It disappointed many observers of the negotiations, having failed to deliver little more than a statement of intent and no specific emission reduction targets. The implications for the energy utilities industry and for investment in clean technology are nevertheless significant.

Scope

*An overview of the Copenhagen Accord, its comparative successes and the key structural challenges it fails to address.

*A review of the latest US climate bill, US support schemes for renewable energy and efficiency and the outlook for US RGGI & CCX carbon markets.

*Projections of EU carbon prices and the possibility of uncertainty over post-2012 CER trading rules leading to a two tier carbon offset market.

*Reasons why trends towards renewable energies and energy efficiency will remain unbroken in 2010 and our 'top 10' clean energy predictions for 2010.

Highlights

In Europe, the Copenhagen talks will have knock on effects on carbon markets and levels on investment, mainly in the near-term. The absence of any language on CDM reform and the lack of specificity concerning carbon finance mechanisms are causing jitters in the offset market and are undermining demand for post-2012 CERs and new project development.

Copenhagen gave the energy cleantech community the sense, if not the tools, that private investment will drive the transition to a low carbon economy. Levels of low-carbon investment and deployment will grow in 2010. Alternatives to cap and trade will emerge in the form of sub-national mandates and incentives for 'clean' energy.

Life will not be breathed into the Copenhagen Accord at COP16: Mexico City will deliver more stalemate. Progress on new global and US climate regimes will be slow and unconvincing. The 'global' carbon market will fail to materialize in 2010, as will outright carbon border taxes and an EU-wide carbon tax.

Reasons to Purchase

*Profit from first expert analytical insight into the outcome of the world's most significant climate change talks.

*Re-assess your company's strategy based on your new understanding of how Copenhagen will affect the world's carbon and energy cleantech markets.

*Review how and where your company interacts with low-carbon or renewable energy markets, based on longer-term trends and developments.

DATAMONITOR VIEW 1

CATALYST 1

SUMMARY 1

SOURCES 1

ANALYSIS 3

The implications of the failed Copenhagen Accord are significant for energy utilities the world over 3

The Climate Change Conference in Copenhagen failed to deliver the meaningful negotiated outcome the world was hoping for 3

While a new, credible and binding climate change framework was never really up for grabs, some semblance of a deal has emerged 3

The Copenhagen Accord took a small, albeit voluntary and provisional, step forward on international climate policy 4

The Copenhagen Accord left too many key structural challenges unresolved 5

While the accord made no explicit mention of energy, the implications for the energy sector are wide ranging 6

US levels of low-carbon investment and deployment will rise, despite Copenhagen's failure to excite the carbon and renewable energy investment community 7

Something for everyone: Kerry-Graham-Lieberman is the primary vehicle for US federal climate policy, no thanks to Copenhagen 7

The latest Senate climate bill places new emphasis on national security as a rationale for cap-and-trade 8

'Lesser of two evils': the recent EPA endangerment finding makes a strong case for the prompt passing of a US climate bill 9

US carbon markets will remain deflated until the economy or the odds of a federal cap-and-trade program being passed pick up 10

Much like their RGA counterpart, 2010 CFI contracts will remain deflated and are unlikely to drive utility innovation in clean energy 11

Alternatives to cap-and-trade will emerge in the form of sub-national mandates and incentives for low-carbon energy 12

In the absence of a carbon market, utilities can still benefit from a wide range of sub-national support schemes 13

Kerry-Graham-Lieberman does present significant opportunities for utilities operating across the energy value chain in the US 15

In Europe, the Copenhagen talks will have knock-on effects on carbon markets and levels of investment, mainly in the immediate term 16

Sentiment bounce: failed Copenhagen talks have affected EU carbon prices, but fundamentals will quickly regain the upper hand 16

China and India were the largest markets for CDM projects in 2010 17

Failed Copenhagen talks coupled with the pre-existing limitations of the CDM are causing jitters in the market for carbon offsets 18

The lack of regulatory certainty post-2012 will constrain CDM financing to the severe detriment of new offset projects post-2010 19

Without a successor to Kyoto, CER could become a two-tier commodity market made up of pre- and post-2013 CDM projects 20

Copenhagen has given the energy cleantech community the sense that cleantech investors will drive the transition towards a low carbon economy 21

Investment in cleantech in 2009 declined less than in other sectors 21

The energy cleantech industry will look past the failures of Copenhagen to opportunities at home and in developing countries 22

Energy cleantech investment will keep growing in 2010 and beyond, despite great uncertainties in US and EU carbon markets 23

China will remain a market leader in energy cleantech and could overtake the US as cleantech leader in 2010 24

From the point of view of Chinese renewable energy firms and manufacturers, cleantech is a golden export opportunity 25

Life will not be breathed into the Copenhagen Accord at COP16* - Mexico City will deliver more stalemate 26

Datamonitor's 10 clean energy technology predictions for 2010 concern players across the entire energy value chain 27

APPENDIX 28

Glossary 28

Ask the analyst 32

Datamonitor consulting 32

Disclaimer 32

List of Figures

Figure 1: COP15 OUTCOMES: Energy is at the core of most developing countries' ongoing climate change activities 6

Figure 2: POST-COP15 IMPLICATIONS: Copenhagen has put into question many key aspects of EU and US environmental policy 7

Figure 3: The EPA will target heavy polluters: companies emitting more than 0.25mtCO2e a year will be affected, including many multi-nationals 9

Figure 4: 2010 RGA prices will remain deflated: alone, they will not meaningfully further utility-driven innovation in clean energy 10

Figure 5: The Chicago Climate Exchange Carbon Financial Instrument (CCX CFI) is suffering a tremendous lack of price tension 11

Figure 6: The vast and growing number and types of government, utility and non-profit financial incentives for renewable energy and energy efficiency in the US help explain growth levels in these markets 13

Figure 7: A review of government and utility rules, regulations and policies that promote renewables and energy efficiency in the US reveals a complex patchwork of state-based climate regulations 14

Figure 8: With nuclear, more oil and gas drilling, and a secure future for coal (through CCS) celebrated alongside renewables, the Senate bill provides a strong basis for the IEA's 450 scenario 15

Figure 9: Post-Copenhagen, the EU carbon market slumped: short-term sentiment is bearish, but any impact will be transitory; longer term, fundamentals will dominate 16

Figure 10: The number of CER contracts issued globally increased in the run-up to 2009 17

Figure 11: At a time of increased economic and program uncertainty, there is a strong case to be made for utilities avoiding new investments in Kyoto-based global CDM markets in the short term 18

Figure 12: A lack of clarity over emission liabilities and international abatement mechanisms post-2012 will perpetuate carbon market uncertainty and a drop in the number of new CDM projects in 2010 19

Figure 13: Copenhagen's committed spending obligation on clean technologies and projects in developing countries is only one of the several reasons why the sector is expected to continue to grow 20

Figure 14: 2009 cleantech venture capital investment totaled $5.6 billion*, despite a non-binding climate change accord in Copenhagen 21

Figure 15: Copenhagen's committed spending obligation on clean technologies and projects in developing countries is only one of the several reasons why the sector is expected to continue to grow 22

Figure 16: Investment in renewable energy increased from $22 billion to $155 billion between 2002 and 2008 23

Figure 17: In 2008, China commanded the greatest level of renewable installed capacity globally (inclusive of small hydro), followed by the US 24

Figure 18: Three of the top five cleantech IPOs of 2009 took place in China 25

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