Energy market barometer report 4 - Summer 2015

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Report #4 - Summer 2015

Project team:

Joachim Schleich (Coordinateur), Melodie Cartel, Olivier Cateura, Corinne Faure, David Grover, Jojo Jacob, Laurent Javaudin, Greg Molecke, Mark Olsthoorn, Azadeh Shomali, Anne-Lorène Vernay

The GEM Energy Market Barometer Report (Baromètre GEM du Marché de l'Energie) is a twice-yearly survey of energy market experts from industry, science, and public administration in France. These experts are asked to provide their assessment of short, medium and long term developments of national and international energy markets. Typically, some survey questions are designed in close collaboration with the ZEW, the Center for European Economic Research, which has carried out a similar barometer for Germany. This report is based on a survey that was conducted in June 2015 and included 135 participants from France. The reported responses neglect " don't know " answer categories.

Key findings

• 62 % of the French energy experts do not expect a legally binding agreement to emerge from the Paris Climate Summit – this share was 77 % among the German experts.
• A majority of the French energy experts think that failing to reach a legally binding agreement at the Paris Climate Summit would not change the French climate policy targets.
• A legally binding agreement would have positive effects on investment in the energy sector and, in particular, the electrical industry.
• Two-thirds of the French energy experts believe that an agreement in Paris would generate a momentum for climate innovation in OECD countries, but less so in non-OECD countries.
• CO2 certificate prices rise only in the medium to long term but levels remain rather low.
• The announced intention of the G7 to phase out all fossil fuels by the end of this century did not affect the experts' expectations about CO2 certificate prices or medium-term fuel prices.
• Electricity and coal prices are expected to remain stable over the next six months.
• The majority of the experts consider the current low oil and gas prices to be a rather temporary phenomenon.

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Low expectations regarding the Paris Climate Summit

The next Conference of Parties to the United Nations Framework Convention on Climate Change (COP21) will take place in Paris from 30 November to 11 December. The Paris Climate Summit, announced as one of the biggest climate negotiations in history, holds considerable promise in achieving commitments to mitigate climate change enough to limit the average global temperature increase to below 2°C. Participating countries are supposed to agree on a binding global agreement succeeding the Kyoto Protocol. As part of the process, countries have agreed to announce what post-2020 climate actions they intend to take under a new international agreement, known as their Intended Nationally Determined Contributions (INDCs). Based on the INDCs published so far, it is clear that existing proposals will not suffice to constrain global emissions within a pathway that will limit the global temperature increase below 2°C.

The Paris Climate Summit is also expected to agree on a review process which leads to more ambitious INDCs. In addition, the summit is anticipated to yield commitments regarding adaptation to climate change, financing of mitigation and adaptation in developing countries, technology development and transfer, capacity building, and transparency. A successful Paris Climate Summit may also affect companies' investment and innovation strategies toward a low carbon economy.

A majority of the French experts don't expect the Paris Climate Summit to lead to a legally binding agreement – German experts are more pessimistic about the outcome than French experts In this version of the GEM Energy Market Barometer we asked the energy market experts, whether they expected the Paris Climate Summit to lead to a mandatory international agreement on climate. The findings suggest that 62 % of the French energy experts do not expect any legally binding agreement at the Paris Climate Summit (we aggregated the answer categories " rather no " and " no "). In response to the same question asked in the ZEW Survey, 76 % of the German experts were more pessimistic about the outcome of the next climate summit.

Failing to reach a legally-binding would not change French climate policy targets

France adopted ambitious carbon mitigation targets in July 2015. The French bill on energy transition enacts a 40 % emission reduction target by 2030 (compared to 1990 levels) and sets up a CO2 tax that reaches 100 €/ton in 2030. Such domestic targets reflect the national strategies behind the EU's INDC put on the table for the Paris Climate Summit. We asked our experts whether they believe that these targets are likely to evolve with the negotiations.

More than 80 % of the French experts think that French climate policy targets will not change if the Paris climate summit does not lead to a mandatory international agreement. This share is identical for the German experts. France and Germany adopted national climate targets which are more ambitious compared to most other countries’ targets. Arguably, a successful Paris Climate Summit would therefore not call for a readjustment of their national targets, because they reflect strong support of citizens. 

A mandatory climate agreement would benefit the investment climate in the French energy, electricity, and services sectors.

In light of the potentially variable economic consequences of an international climate change agreement, we further asked our experts what the effects of a mandatory climate agreement in Paris would be on the investment climate in several economic sectors.

According to the energy French experts, a mandatory agreement would have the greatest positive effect on the investment climate in the energy, electrical industry, and services sectors. In particular, the French energy experts expected a mandatory climate agreement to be beneficial for the French energy sector specifically : 77 % expected a positive or very positive effect on investment for this sector. In contrast, negative impacts on the investment climate are mostly expected for energy-intensive industries.

Arguably, a substantial part of our experts might fear that differences in national climate policy targets would translate into competitive disadvantages for export-oriented energy-intensive companies from the steel industry or the chemical industry, for example. A climate agreement is mostly expected to have little-to-no effect in the investment climate in the mechanical engineering and other industry sectors. A comparison with the results of the ZEW survey suggest, in particular, that only 50 % of the German energy experts believe a climate agreement will be beneficial for the investment climate in the German domestic energy sector. This difference might be explained by the fact that the German energy sector is significantly more fossil-fuel dependent than the French energy sector. While the share of fossil fuels in gross domestic energy consumption in Germany in 2013 was 82 % it was " only " 50 % in France. In addition, while the French energy transition bill has just been adopted, the responses by the German experts could take into account experiences from the German " Energiewende ", which is typically associated with the 2011 law phasing out nuclear energy.

The Paris climate summit will have a strong impact on industrial innovation strategies

The transition to a low-carbon economy involves private investments in energy supply and demand technologies which are characterized by high capital costs. Climate policies may enable this transition by providing predictable, robust, and long-term signals.

More than half of the experts believe the climate summit in Paris will provide business with policy certainty which create momentum to drive investments in climate innovations within France and other Organization for Economic Cooperation and Development (OECD) countries. However, only about one-third expected this to be the case in non-OECD countries. This result is somewhat surprising since one major expected outcomes of the Paris Climate Summits was to stimulate innovation dynamics that are currently taking place in non-OECD countries such as China and India. Nevertheless, despite recent efforts, non-OECD countries still lag behind in the development of climate-friendly technologies and industrial processes. Indeed, whereas non-OECD countries are responsible for 60 % of CO2 emissions, they currently account for only 10 % of patents in climate-friendly technologies.

The price of CO2 certificates will rise only in the medium to long term

The median price of CO2 certificates is in the 20-25 €/ton category in the long term

By regulating the greenhouse gas emissions of large energy and industry installations (and also airplanes) the EU Emissions Trading System (EU ETS) is the EU's main instrument to meet its climate targets. Yet, the current prices of CO2 certificates (about 8 €/t in late July 2015) are rather low. The current survey shows that experts expect the price of CO2 certificates to remain low over the next six months and to increase over the next 5 and 10 years. The median price is in the 5-10 €/t category for the short term, in the 10-15 €/t category for the medium term, and in the 20-25 €/t category in the longer term.

The recent political decisions and announcements did not affect price expectations

In general, current expectations on CO2 certificate prices are almost identical to those of the previous barometer carried out in December 2014. Thus, the agreement between the EU council and the European Parliament of May 2015 to introduce a market stability reserve which is meant to stabilize the market price by removing surplus allowances (temporarily) from the market, did not markedly affect our experts' expectation of future CO2 certificate prices. Interestingly, in the midst of our survey, i.e. on June 8 (3.00 p.m.), the G7 leading industrial nations announced that they had agreed to cut greenhouse gases by phasing out the use of fossil fuels by the end of the century.

About 58 % of the responses had been locked in before June 8. The share of experts who thought the long term price of CO2 certificates would exceed 35 €/t increased from 15% before the announcement was made to 24% after the announcement was made (however, the difference is not statistically significant). It will be interesting to see in the winter GEM Energy Market Barometer whether the European Commission proposal of 15 July 2015 – which foresees a reduction of the overall amount of certificates to decline by 2.2 % every year from 2021 on (instead of 1.74 % until then) – or the outcome of the Paris Climate Summit will affect our experts' prediction of future certificate prices.

The development of energy prices

The GEM Energy Market Barometer regularly surveys the expectations of energy market experts on the development of energy prices in the wholesale market. For the energy prices, we distinguish between the short term (6 months) and the medium term (5 years), and between the four main energy carriers: electricity, natural gas, oil, and coal.

The electricity prices expected to remain stable in the short term but increase in the medium term

For electricity prices the short and medium term expectations of the energy experts in our panel are very similar to those of the previous survey carried out in December 2014. That is, most experts in our panel expect the prices of electricity to remain stable over the next six months. Over the next five years, the vast majority of experts expect the price of electricity to increase. It is worth noting that the shares of experts who expect stability of electricity price over the next six months, decreased from 74 % to 59 % after the G7 announced its plans to phase out all fossil fuels by the end of the century. At the same time, the share of experts who believe the power price will increase over that period, increased from 19 % to 33 %. However, the G7 announcement did not appear to have an effect on our experts' assessment of the medium-term development of electricity prices or on the short- or medium-term development of fuel prices.

The price of coal remains stable in the short term but is uncertain in the medium term

Most experts predict coal prices will remain stable in the short term, but the medium term development has become uncertain. About a third of our experts each expect coal prices to increase, remain stable or decrease over the next 5 years.

Oil and gas prices are expected to remain stable in the short term but increase in the medium term

The strong downward trend of the oil price in dollar, which had started in June 2014, continued until March 2015. This 30 % drop of oil price was mainly due to sluggish economic growth, increased supply of cheap substitutes (e.g. exploration of unconventional oil and gas in North America), and OPEC's (mostly Saudi Arabia's and Iraq's) refusal to cut output in order to maintain market shares.

While a majority of experts in our previous survey in December 2014, predicted the oil price to remain stable over the next six months, the price did start to climb back up since March 2015 but has again taken a downward trend in response to low growth perspectives for China, and the recent Iran nuclear deal, which restrains Iran's nuclear ability in return for lifting international oil and financial sanctions. In the current survey, more than three quarters of the experts expected the price of oil will remain unchanged over the next six months, and about 70 % predict it will increase over the next five years. For natural gas the French energy market experts expect a similar price development as with oil. That is, 72 % of the experts think that the price of natural gas will remain constant over the next 6 months and 62% believe it will increase in the next 5 years.