10th November 2003 - JP Morgan Utilities Report: CO2 emissions - No windfall expected for European Utilities

JP Morgan Securities today released their report on the EU Emissions Trading Scheme and the European Utilities sector, which is published in conjunction with Trucost. Trucost provided much of the data in the report and some additional analysis (included as an appendix to the report). Trucost quantifies environmental impacts in financial terms.

You can find a summary of the report below. To download the report, scroll to the bottom of this page.

Summary of Report:

CO2 emissions trading scheme (ETS) starts in Europe in 2005 as one of three mechanisms to reach Kyoto reduction targets.

JP Morgan Securities expect no windfall profit for utilities:

- This is a non-consensus view as the market talks of windfall on utilities
- JP Morgans Securities view is that governments will not allow industry or customers to suffer while utilities gain
- We expect cost recovery through a slight increase in wholesale prices but no windfall

UK, France and Germany are well on their way to reach their CO2 reduction targets

Spain and Italy have substantially overshot their CO2 reduction targets

Thematic conclusions: ON TIME FOR 2005

JP Morgan Securities expect Emissions Trading Scheme (ETS) to start on time by 2005 despite market talk otherwise

The proposed accounting treatment of ETS would lead to increased earnings volatility

Kyoto ratification is not critical to CO2 ETS given that ETS has become European law

JP Morgan Securities forecast emissions rights prices to rise from 6Euros to 28Euros per tCO2 between 2005 and 2010

Company conclusions: We evaluate 5 factors to assess CO2 exposure for each company

1.

Carbon factor: pollution content of current generation portfolio (tonne CO2/MWh)

2.

Country effort: how close countries (where utilities operate) are to their Kyoto target (ie. will governments pressure more or less?)

3.

Capacity flexibility: can utilities make up coal loss with CCGT (ie. will they loose market share in generation?)

4.

Passthrough: how likely are customers to pick up the bill

5.

Potential Cost: maximum cost of CO2 to the utilities (relative to its current market cap)

Best Placed utilities:

Scottish & Southern (0.3 tCO2/MWh) and Iberdrola (0.3 tCO2/MWh) due to their relatively clean generation mix and capacity flexibility

Most Exposed utilities:

RWE (0.7 tCO2/MWh) and Union Fenosa (0.6 tCO2/MWh) due to their relatively large emissions and lack of alternative clean capacity

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