58 in turn, the central power generator whose electricity had been replaced by the CHP plant is likely to have to bear far less additional costs. Due to the free<8ı allocation ofallowances under the grandfathering principle, and the limited technical potential of thermal power plants to reduce CO, emissions, operators of these plants are likely to largely obtain the allowances to cover their CO, emissions during the 2005-08 pilot period. The pressure to invest into emission abatement measures would be limited and they could continue with "business as usual" for some time. Because some of their electricity production has been substituted by the CHP plant they even would have freed up allowances from the avoided CO 2 eınissions worth € 844,019 for the industrial exaınple and € 1,012,331 in the District Heating example per year which they would seli on the market (see Annex). These amounts correspond to the value of the CO2 savings realised by the CHP installations and would constitute the total fınancial penalty for having installed the CHP plants in the exaınples calculated in the Annex. They would increase the costs of producing electricity from CHP by €c 0.77/kWh in the industry example and €c 1 .65/kWh in the District Heating example (see Annex). This would reduce even ınore the conıpetitiveness of CHP, which already suffers from current distortions on the electricity market, and have a disastrous inıpact on new projects. 4.2 CHP could raise fuel input above 20 MW For conıbustion installations in industry and District Heating, the upgrade to CHP nıay increase their thernıal input above the threshold of20 MW and the installations would then beconıe a "new entrant" to the enıissions trading reginıe. Because an operator nıay not wish to change status and be a player in the scheme -especially under the conditions outlined in the previous section - he may therefore decide not to install CHP. Similar situations could occur when a conıpletely new site with CHP on it is built. This nıay be related to fınancial disadvantages which he would have under the scheme. But it could also bejust a result ofuncertainty, if the national allocation plan does not make it clear how CHP in such cases would be treated. Operators could therefore not make a cost-benefıt calculation and assess fınancial risks, which nıight dissuade them from installing a CHP plant or in the worst case convince them to install all-electric factories. 4.3 Possibility of closure or reduced output from CHP installations For existing CHP installations that are already struggling under current (not necessarily fair and ecologically sound) market conditions, operators might have an additional incentive to switch back froın CHP to heat-only and purchase electricity externally. By externalising its electricity supply, the site would reduce its direct fuel consumption and therefore emit less CO2 . This would free up allowances worth € 560,000 for the industry example and € 554,000 for the District Heating case which could then be sold on the market (see Annex). it is envisaged to prevent operators froın selling unused allowances resulting from a planı shutdown. lnstead, they would have to surrender these to the responsible authority. But it remains unclear whether switching from CHP to external electricity, or perhaps only reducing the CHP output, could be considered a closure of operation. CHP operators might therefore have an incentive to switch back to heat-only. Whether this occurs in practice wi'II depend on many interdependent factors, including the power to heat ratio of the CHP plant, the market price of allowances, the price for electricity supply, the profıtability of the CHP plant ete. The probability of it is therefore difficult to predict. Yet, the fınancial disadvantage which CHP operators potentially suffer under the Emissions Trading Scheme could ınake it ınore likely. 4.4 Competitive disadvantage for District Heating on the heat market With regard to District Heating schemes, the majority ofschemes with CHP meet the 20 MW fuel input tlıreshold and will tlıerefore be subject to the Emissions Trading Sclıeme. These schemes may have to compete on tlıe lıeat market with small domestic gas- and oil-fıred heat-only boilers, which will not be covered by the Directive. Ifthe Eınissions Trading Scheme increased the price of production of District Heating, this could iınply a competitive disadvantage vis-iı-vis the smaller boilers. This disadvantage ınay prevent both the conversion from heat-only to CHP District Heating, and tlıe construction of new heat networks. 5. POTENTIAL SOLUTIONS AND MECHANISMS it has been shown tlıat, without additional mechanisms, the proposed Emissions Trading Scheme risks during its pilot phase 200508, creating a paradoxical situation where the investor into CHP faces a hefty fınancial "penalty" although he reduces CO2 emissions, whilst a fınancial "reward" makes it at least ınore bearable for the power plant operator to lose a client. Tlıis is a consequence ofthe sclıemes focus on direct eınissions from specifıc sites, combined with tlıe initial free allocation ofallowances based on lıistorical emission records. in fact, the pilot phase will not put a price on ali direct emissions, which would remove the distortion, but only those which exceed the free initial allocation. it is therefore essential to amend the Emissions Trading Scheme and create coınplementary mechanisms which make the scheme fully retlect carbon savings froın CHP instead ofpenalising them between 2005-08. These should be fair, i.e. retlecting the actual savings achieved; take particularities of different CHP installations into account; be as simple as possible in order to avoid unnecessary red tape; and be harınonised across the EU to avoid emissions market distortions and unequal treatınent of CHP in different Member States. Two mechanisıns which, in principle, could have corrected the schenıe distortions identified, can practically be ruled out in view of the advanced stage ofdecision-making on the eınissions trading Directive: 1 . lnclusion ofdirect and indirect CO2 emissions from a specifıc site in tlıe Emissions Trading Scheme. Designing the sclıeme that way was initially discussed but was tlıen not taken furtlıer. Also, tlıe technical and economical feasibility of such a scheıne is unclear. 8 Tlıe proposed aııctioııiııg of 15% of ılıe allowaııces woııld /uıı•e 011/y ıııi11or effecıs. ECOGENERATION WORLD
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