The European Union has just kicked off consultations over diminishing the amount of free permits for CO2 emissions in 2013-2015. The European Commission wants to reschedule the allocation of some of them until the 2018-2020 period. It has not been agreed so far how many permits would be available for free in 2013-2015. There is currently an overly supply of certificates due to economic slowdown, which pushes the prices down. As a result, the core idea behind the policy - high prices of CO2 emission permits should encourage energy companies to reduce emissions - is ineffective. The Commission expects the agreement to be reached in October.
Our view:
The outcome of the negotiations is yet uncertain, however we suspect it may lead to manual reshaping of the CO2 permits market by the European Commission which in turn would lead to increase in CO2 prices. At present, the CO2 prices hoover around the all-time bottom of EUR 7/t which is caused by the economic slowdown and expectations of the decrease in the electrical energy production in Europe in general. On average we assume the CO2 price permit to stay on EUR 12/t in 2013. The EUR 5/t deviation from this level would alter our 2013 EBITDA forecast by 9.5%. Our model is shaped in a way that the increase in CO2 prices is transmitted onto the end-clients. We believe that at present the price of electric energy in Poland covers full cost of CO2 for the energy producers. However, we recognize the risk of this mechanism failure given the domestic economy slows down more deeply than anticipated which would force the energy producers to decrease own profitability and not to pass part of the CO2 price increase onto the end clients in order to preserve market share.