Risk Managing carbon exposure – don’t let your opportunity go up in smoke
March 30th 2009

If you are operating in the UK energy markets and your organisation consumes more that 6,000 MWh per annum, even if you don’t have a carbon exposure now through the EU-ETS carbon trading scheme you will have in 2010 under the Carbon Reduction Commitment (CRC).

The EU ETS opportunity

For many years company’s have only looked at their EU-ETS exposure in terms of the amount of carbon excess or shortfall they have for the current year; however this limited focus is not maximising the opportunity that your allocation of Carbon credits affords your business. In these times of economic hardship every organisation needs to make sure it’s making the most of every asset within its portfolio and it is our belief that your organisation has been given a free asset in terms of EU-ETS allowances. For the next four years until the end of 2012 if you fail to optimise it you are missing out on a valuable opportunity.

Delivering value from volatility

The first challenge is that your organisation does not measure the value of this free asset you have been given. If you did, you would see that from the time of its launch the value of your carbon asset more than doubled before falling by over two thirds. If your organisation had an EU ETS allowance of 50,000 tonnes then this would have seen the value of the asset for the next four years increase to €7m (€1.75m per year) before falling to €2.4m(€0.6m per year). The evolution of carbon prices for each year of the scheme is illustrated in picture.

The price volatility created an exposure for your company, but with risk comes the opportunity to maximise the value of your carbon asset in the context of the overall business needs. In order to exploit this opportunity whilst protecting yourself from this risk you need to:

• Create a daily measurement process which tells you the market value of your carbon asset and also what the risk of this value changing is
• Systematically determine what proportion of your portfolio should be fixed in order to remain consistent with your target value for the carbon asset
• Recognise that this proportion needs to be able to be reduced as well as increased
• On a 50,000 tonne portfolio this process has the potential to deliver in excess of €2m

How can you achieve this?

You can achieve these benefits by implementing a measurement and control process that allows you to track the opportunity, and then you need this process to be monitored every day and take the appropriate action to capture the opportunity. Invariably your organisation will not have the resources to do this so you may need some external support to run the operation for you – good providers should be able to do this largely on a performance basis.

While obtaining permission for any incremental spend in the currant climate may be challenging, this prize is simply too big to ignore.

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