Enel sees profits, cost cuts from CO2 offsets

MILAN (Reuters) - Italy's biggest utility Enel will make considerable profits and cut costs under emissions trading schemes in Europe and the Kyoto Protocol, even while it boosts its coal plant fleet, its head of carbon strategy told Reuters.

The European Union's emissions trading scheme is the bloc's main policy to fight climate change and imposes caps on industrial emissions of greenhouse gases.

It allows companies to buy carbon offsets from outside Europe -- by funding emissions-cutting projects in developing nations -- to help cut the cost of staying within those EU emissions limits.

It is from this trade that Enel, a major carbon market player, stands to make profits of hundreds of millions of euros in 2008-2012, under the Kyoto Protocol's clean development mechanism (CDM).

The company has bought twice as many cut-price offsets, called certified emissions reduction (CERs), as it expects to exceed EU emissions limits from 2008-12, Eliano Russo said in a telephone interview.

"Based on completed contracts and referring to potential volumes, we have more than 100 million tons (of CERs) in our portfolio," said Russo.

"Instead of buying (European Union) allowances on the market we will swap CERs for them. This will allow us to cut sharply the cost of compliance," Russo said.

After allowing for delivery risks and excluding offsets used to meet the EU carbon caps, Enel would still have a surplus of about 40 million CERs, worth 780 million euros ($1.09 billion) in international markets at Thursday price of 19.5 euros each.

Selling the surplus would make "important margins" for Enel which were difficult to quantify at present, Russo said.

Enel has bought CERs cheap and by swapping them for allowances (EUAs) it "will not spend more than 14-15 euros a ton," compared to the current market prices of EUAs at 23-25 euros a ton, he said.

That implies Enel paid about 9-10 euros for the CERs, valuing its profits on the surplus at about 400 million euros at current prices, according to Reuters calculations.

European utilities are also collectively making multi-billion euro profits from the EU emissions trading scheme by passing on to electricity consumers the price of EUAs most of which they get for free.

Russo stood by emissions trading, saying it had made power companies more aware of carbon costs.

EU lawmakers will vote next week to establish the EU Parliament position on how many offsets companies should be allowed to use to help them meet their EU emissions caps.

SURPLUS

Enel expects to face a shortage of 40-50 tons of EUAs through 2008-12, the present trading cycle of the EU emissions trading scheme.

In 2008 it expects to be short by about 1-2 million tons, but has fully covered the potential shortage with CERs, Russo said.

The company in March estimated its offset pipeline at 75 million ton CERs, discounting the risks related to project approval and performance -- "(Excluding risks), we think it is reasonable to expect that we will have about 75 million tons available from now to 2012," Russo said.

Under EU rules, the company can use no more than 35 million tons of offsets to make up its EUA shortage in 2008-2012.

Enel is converting its oil-fired power plants in Italy to coal -- the highest carbon-emitting source of electricity.

Earlier this year it launched its first coal-fired 660 megawatt (MW) unit in Italy, at Torre Valdaliga Nord power station in Civitavecchia near Rome. The other two units at the station are expected to be operational by the end of 2009.

The 2 billion euro conversion would add a total of 1,980 MW of coal-fired capacity to Enel's fleet.

Enel said CO2 emissions by the converted station would drop by 18 percent compared to the old oil-fired one, due to new clean coal technology, higher efficiency and a total capacity fall from the previous 2,640 MW.

(Writing by Svetlana Kovalyova and Gerard Wynn; editing by James Jukwey)