New State aid Guidelines in the context of the amended EU Emissions Trading Scheme

Response by Zinc smelter Boliden Kokkola Oy to the

Consultation paper

9 May2011

QUESTIONNAIRE ABOUT YOU For the rules on personal data protection on the EUROPA website, please see http://ec.europa.eu/geninfo/legal_notices_en.htm#personaldata Specific privacy statement: Contributions received, together with the identity of the contributor, will be published on the Internet, unless the contributor objects to publication of the personal data on the grounds that such publication would harm his or her legitimate interests. In this case the contribution may be published in anonymous form. Otherwise the contribution will not be published nor will, in principle, its content be taken into account. Please provide your contact details below. Name Organisation Represented Location E-mail address: Panu Talonen; Manager R&D Boliden Kokkola Oy Kokkola, Finland panu.talonen@boliden.com

Boliden Kokkola Oy agree with the statement and the provided information sent earlier by The International Zinc Association Europe (IZA Europe). This statement mainly lay on the statement sent by IZA added with some site specific information and arguments Boliden Kokkola Oy also want to show out regarding to New State aid guidelines and EU Emission Trading Scheme. SECTION A: ELIGIBLE SECTORS FOR SUPPORT FOR INDIRECT EMISSION COSTS & INABILITY TO PASS-THROUGH A1 Sectors eligible for aid for indirect emission costs in ETS-3 According to the ETS Directive, the beneficiaries eligible for aid for indirect emissions should be those sectors for which a significant risk of carbon leakage exists due to increases in electricity costs (indirect emissions). In the non-paper addressed to the European Parliament and the Council, the Commission stated that it would identify at EU level a list of sectors deemed to be exposed to the risk of “carbon leakage” due to indirect emissions. The Commission also stated that it would use the method developed in the context of direct emissions, but adapt it in order to take into account cost increases related to indirect emissions. "Carbon leakage" could occur when, in the absence of binding international agreement, global greenhouse gas emissions increase in third countries where industry would not be subject to comparable carbon constraints and at the same time could put certain energyintensive sectors and sub-sectors in the Community which are subject to international competition at an economic disadvantage. Financial support should therefore be limited to those electricity intensive sectors which are unable to pass through the electricity cost increase stemming from CO2 to their customers into product prices without significant loss of market share and which are likely for this reason to relocate to less carbon-constrained zones outside the EU. 1. Please specify the sectors (at NACE 4 level) that, according to you and the requirements in the Directive, are exposed to a significant risk of carbon leakage due to costs relating to greenhouse gas emissions passed on in electricity prices which will stem from ETS3. According to Commission Decision of 24 December 2009 (2010/1/EU) the zinc metal production is exposed to a significant risk of Carbon Leakage based on the criteria set out in paragraph 15 and 16 of article 10a of Directive 2003/87 at NACE 4 Code: 2743 Lead, Zinc and Tin production, Boliden Kokkola Oy is located in Kokkola Finland and is the one and only Zn smelting operation in Finland. Boliden Kokkola is with 530 employees also one of the biggest private employers in Kokkola. Zinc metal is a commodity and is traded daily on the London Metal Exchange (LME). Boliden Kokkola (later BKO) buy the zinc contained in the concentrates (input material) and sell the products (refined zinc metal) on the basis of the LME price. BKO’s profitability is not directly linked with the zinc market price but determined by the treatment charges (TC), which is the rate payable for processing concentrates, and the conversion costs incurred in processing concentrates into metal. Therefore, the

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competitiveness of a zinc refinery will mainly depend on its conversion costs, that is, the operating costs incurred for processing zinc concentrates into zinc metal. BKO’s electricity costs currently represent over 40 % of the total conversion costs. If depreciations are taken into account the share of electricity costs in year 2010 was 43 %, if depreciations is not taken into account the share was 49 %. Cost distribution is defined below in figure 1. Fig.1: Boliden Kokkola Oy Cost distribution in year 2010

Other; 13 % Labour; 21 %

Other; 15 % Labour; 23 %

External services; 12 % Energy; 43 % Depreciations; 12 % Energy; 49 %

External services; 13 %

Total cash conversion costs include all operational costs “inside the fence”, i.e. costs related to the conversion of concentrates to metal. It does not include any costs for raw material, freight of concentrate or metal, sales or depreciation. A net-energy cost represents the balance of smelter purchases and sales of energy. “Other cost” include maintenance materials, consumables and on-site services.

Due to electricity being such a significant proportion of conversion costs, BKO, like other zinc refineries, will in the future put a high level of focus on energy efficiency improvements. Currently BKO is one of the most energy efficient Zn-producer in the world. Fig.2: Electricity Costs per produced ton of zinc in 2000-2010 at BKO

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0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fig.0 140.200.0 160.3: Electricity Costs per produced ton of zinc in 2010 Source: Brook Hunt a Wood Mackenzie Company Fig.0 20.0 80.4: Tankhouse power consumption of zinc smelters (kWh/t Zn) 4 .0 €/t Zn 120.0 100.0 180.0 40.0 0.0 60.

which only become worse under ETS-3. this leading position in energy efficiency cannot make up for the negative impact of high electricity costs on EU27 conversion costs.In terms of energy efficiency. the European zinc industry shows the lowest total energy consumption per tonne of zinc production worldwide and Boliden Kokkola Oy shows one of the lowest total energy consumption amongst all Zn-operations. 5 . Indirect CO2 cost pass through in electricity prices therefore has a significant impact on the global cost competitiveness of EU producers already under ETS-2.5: Energy consumption of RLE (Roast-Leach-Electrolysis) smelters in 2010 Source: Brook Hunt a Wood Mackenzie Company However. BKO’s tankhouse power consumption in year 2010 was 3 325 kwh/t Zn. Fig.

Similar affect would result if BKO’s 6 . transferring production from EU to non-EU zinc refineries would result in carbon leakage as non-EU plants are on average more energy intensive and have a higher CO2 content in the electricity they use. BKO’s energy mix consist like following: Nuclear power 32 %. Boliden Kokkola Oy is located in Nordic countries and use The Nordic energy mix which has quite a favourable CO2 footprint compared to that of most other regions of Europe and world. despite low CO2 intensity. the price of all power consumed would be affected by the CO2 cost.Fig.7: Shift in production away from EU27 RLE smelters would result in Carbon leakage Source: International Energy Agency Therefore. Due to the pricing mechanism of power market.6: Weighted average cash conversion costs of RLE zinc smelters in 2010 (per produced ton of saleable zinc) Source: Brook Hunt a Wood Mackenzie Company GHG emissions from electricity production depend on energy mix used and are strongly regionally bound. renewals 43 % and fossil fuels only 25 %. Fig.

If the EC does not achieve equal implementation across the Community. in view of the overall EU cap on emissions? The revised Directive 2009/29/EC in article 10a6 recognizes serious issues for energyintensive industries due to the effect of indirect cost increases in the electricity price which is an unavoidable consequence of the emissions trading system. EC should use all its legal power to enforce Member States to adopt the indirect compensation system in order to fulfill the mandate of the ETS Directive to avoid further carbon leakage. The effect of transferring the cost of purchasing emission rights and passing it on in the electricity price is likely to increase even further in the future as the nuclear crisis in Japan implies that EU will be ever more dependent on fossil fuels to provide the necessary base-load power1. 1 Already the nuclear crisis in Japan has had the effect to close down several nuclear reactors in Germany which has had a direct impact on the electricity price and the price of emission allowances. has a significant cost pass through of emissions rights as coal is typically the marginal price setting plant in the area.production was transferred to non-EU. It has to effectively protect industries which are electricity intensive for all CO2 costs in the electricity price irrespective of geographical location. The measures included in the Directive to safeguard against the significant cost increase and resulting carbon leakage by allowing compensation of CO2 costs passed through in electricity prices for eligible sectors is highly inadequate unless it is mandatory enforced across the entire EU. If this may not be possible for any reasons. predictable long term consumer providing stability to the electricity system. The problem is exacerbated by the lack of auctioning revenues for the Member States as the clean power does not generate any revenues for the Nordic Member States. the mandate of the Directive and modified Guidelines should be used to enforce Member States to develop equivalent national or European measures to avoid further carbon leakage and deindustrialization of Europe for the eligible sectors. How do you reply to the view that granting compensation to some sectors of the economy and insulating them from the EU ETS indirect costs would be at the expense of other sectors of the EU economy. which despite its highly clean energy production. The situation is the most critical in Northern Europe. The cost of emissions trading is thus almost fully passed through to energy-intensive industries even though the majority of the power comes from CO2-free hydro and nuclear power production. the EU risks creating a system where electricity intensive industries that purchase clean power suffer a double-burden with a high costpass through but low chance of receiving compensation. Several industries buy clean power but pay the full cost of CO2 which will reach unsustainable levels. which would have to make stricter emission reduction efforts or be under a larger cost burden. This will create a higher demand for emission rights and lead to a significantly higher cost-burden that will seriously threaten energy-intensive industries. This will potentially imply a loss of electricity intensive industries in the regions where we have a stable supply of clean base-load power and where electricity intensive industries provide a key resource as a stable. Carbon leakage would be significant while BKO is one of the most energy efficient Zn-operations in the world and it has an energy mix with low CO2 intensity. 7 . Burden sharing / efficiency of ETS-3 2.

Because of the global price setting of their products. assuming it were to be based on an electroefficiency benchmark. The granting of compensation to electro intensive installations would not lead to a higher cost burden for other sectors of the EU economy. be provided at NACE 4 level. The reason is that the total European electricity costs for these consumers are already very high compared to other regions. compensating electro-intensive industries such as BKO and other zinc metal producers for indirect CO2 costs in electricity prices will not contribute to the insulation of any consumers further downstream from ETS indirect cost. the percentage of overall European electricity consumption that would be eligible to receive compensation for the indirect costs under the New State aid guidelines is expected to be very small and therefore the influence on the prices of emission allowances and on burdens for other sectors will be negligible. If the closure of Europe’s basic industries is not prevented. in principle. you are invited to also compare the situation today (under ETS-2) with the future situation under ETS-3. maintain the incentive to reduce product consumption (in this case electricity) and lead to an overall reduction in direct emissions in the power generation sector. International context 3. or emission reduction mechanisms with similar effect on production costs as the EU ETS. there would be a reduction in electricity demand and in direct emissions from these sectors. A2 Inability to pass-through increased indirect emission costs due to ETS-3 Please answer the questions below for each of the sectors you have identified under question 1. The intended effect of the compensation for indirect CO2 costs in electricity prices is preventing the closure of a large share of Europe’s basic industries in the absence of a global level playing field. if any. General cost structure 4. However. should be viewed as having a similar effect on production costs as the EU ETS? According to BKO’s view. or emission reduction mechanisms with similar effect on production costs. at present no other significant regions outside Europe are confronted with costs associated with direct or indirect GHG emissions. in other parts of the world? Which emission reduction mechanisms. what percentage of which electricity sources is used in your industry. Information and data on sectors should. How large are the fixed costs of operations? What investments are required to a new entrant and how much can they represent of the new entrant’s turnover? Please indicate how much electricity costs contribute to the overall costs and. Is the sector in question capital intensive? Does the sector face (unrecoverable) sunk and exit costs? Please identify them and indicate how much they represent in terms of the industry’s turnover and value added.Compensation for indirect costs would. For all the questions. 8 . To what extent are producers outside the EU also confronted with a cost for indirect emissions? Are you aware of the existence or imminent implementation (before 2013) of emission trading systems. if appropriate.

That conversion efficiency is governed by physical laws and at BKO there is not much potential for improvements anymore. however there is a physical limitation to energy reduction measures. At an increased EUA cost of 30 and 50 €/t CO2. It is not relevant to attempt to ascertain a “trigger price” at which the risk of carbon leakage may occur as any CO2 price above zero will have a probability of risk of carbon leakage associated with it. Almost 90 % of electricity consumption at BKO and other Zn refineries is used in the electrolysis stage where dissolved zinc is converted to zinc metal using electrical current. Table 1: Impact of indirect CO2 costs on EU27 RLE smelters conversion costs 9 . Due to the fact that BKO and other EU zinc producers being more energy efficient and the energy mix in the Nordic countries and EU having a more favourable CO2 footprint than most other regions of the world. Only in Europe does the price of electricity embed a CO2 cost. and the fact that zinc refineries compete globally on cost of production (‘conversion costs’) and not price. As electricity is a significant operating cost. The risk of carbon leakage arises when BKO and Zn-producers in Europe are faced with a unique cost under the ETS that cannot be passed on to consumers. the risk of carbon leakage exists. Please explain. Therefore. therefore the risk of carbon leakage from Europe can only be mitigated by compensating for the indirect CO2 cost. and will continue. as from which level of CO2 price would you consider that companies in your sector are faced with a real and significant carbon leakage risk due to indirect cost increase? Please substantiate your answer. indirect CO2 costs are estimated to make up 13% of total zinc smelter conversion costs (based on a EUA cost of 15 €/t CO2). the primary differentiator between all Zn-producers will be the cost of electricity. Under ETS-2. energy represented for BKO 49 % (see figure 1) of conversion costs. In 2010. this would increase the impact of the pass through of CO2 costs in electricity prices to 23% and 33 % of total zinc smelter conversion costs. Existence of carbon leakage risk due to indirect emissions 5. Due to the cyclical nature of zinc prices.The zinc industry is highly capital intensive. BKO and other zinc refineries have. to have a high level of focus on energy efficiency. investment decisions are made for the medium to longer term. At prevailing CO2 costs in Europe the risk of carbon leakage is already both real and significant. during the ETS-3. The competitiveness of a zinc smelter will mainly depend on its conversion costs and energy is the greatest proportion of conversion costs for BKO like also for other EU refineries.

There are two methods of smelting zinc: the pyrometallurgical process and the electrolysis process. reducing zinc oxide using carbon. The pyrometallurgical process. Please substantiate your answer. and industry will slowly fade away with the consequent loss of: • direct and indirect jobs. • innovation capability.Electricity consumption (MWh/t) CO² emissions (t CO²/MWh) EUAs (€) Total CO² cost/t Zn (€) Total CO² cost/t Zn (USD. The decisions taken within Europe on curtailment of production will be specific to the economic circumstances surrounding the installation. largely in countries outside Europe with lower electricity prices. • entire value chains.9 30 108 144 480 624 23 4 0. The primary driver for taking decisions to curtail production in Europe or to construct new facilities outside Europe will be the cost of electricity and the availability of long term contracts. Relocation outside Europe is the long-term consequence of two rather independent processes: Firstly. Zinc smelting is the process of converting zinc concentrates (ores that contain zinc) into pure zinc.33 USD/€) Cash conversion cost (USD) . and • new product development. • know-how. Secondly. then distill the metallic zinc from the resulting mix in an atmosphere of carbon monoxide.incl EUAs Share of EUAs (%) 4 0. no further investments will be made in Europe. The price of electricity in Europe is higher than that available outside Europe as a direct consequence of the EU ETS. is a thermal process and consists in 3 steps: roasting.9 50 180 239 480 719 33 As the EU27 produces nearly two million tons of zinc metal annually (23% of world output) the effect of carbon leakage due to pass through of indirect CO2 costs under the EU ETS would be significant. capacity to cover expected market growth as well as replacing closures will be developed in areas with the best expected return on invested capital. known as Imperial Smelting Process (ISP). The ultimate consequence is higher global CO2 emissions.9 15 54 72 480 552 13 4 0. The electrolytic process used by BKO and also known as Roast10 . at a rate of 1. 6. The effects of this is already evident in that needed investments are not made and no new primary zinc refinery has been built or major refurbishment undertaken on mainland Europe the last 5 years.Excl EUAs Cash conversion cost (USD) . Please present the main factors of relocation decisions and/or the decision to shift production to locations outside the EU in order of importance and explain which position the impact of CO2 prices (especially on profitability) in this respect.

as ISP refineries are more energy intensive than electrolytic ones. Nowadays. but also by consolidation. the ISP refineries were less competitive and the majority of them were closed down during those years. is a hydrometallurgical process and consists of 3 major steps: roasting. The reason for the higher cost structure of ISP refineries compared to electrolytic refineries is mainly the energy cost. Table 2: European zinc smelters closures since 2004 Year Smelter Country Capacity (tonnes) 2003 2003 2004 2005 2005 2006 2008 2008 Total Crotone Overpelt Avonmouth Noyelles Godault Portevesme Sudamin Ruhr Zink Espanola de Zinc Italy Belgium UK France Italy Germany Germany Spain 103 000 130 000 100 000 105 000 75 000 85 000 145 000 45 000 788 000 The location of the remaining various refineries is shown below: Fig 8: Remaining Zinc Refineries in the EU27 in 2011 11 . Also. leaching-purifcation and electrolysis. Because of their relatively higher operating costs.Leach-Electrowin (RLE) process. During the period when the LME price was severely constraining smelter income. the RLE process is the most widely used since it is more energy efficient. The landscape of the zinc metal industry in Europe has been marked not only by ISP and RLE closures. Total of 788.000 tons production capacity being taken out of the European market since 2004. energy costs were increasing relatively faster for ISP refineries. A period of low prices during 2001 to 2004 (see LME price evolution under Q10) put a lot of pressure on European zinc metal producers. with no capacity for cost pass through. the amount of direct CO2 emissions is insignificant compared to the pyrometallurgical plants which use coke as energy source. This is a good example of an asymmetric shock.

000 tons of imports outweighing the market deficit of 119. This situation is forecast to become even worse over the next five years. 2007 was a record year with 606. Fig 9: The market deficit resulted in an increasing flow of imports from non-EU countries 12 .The reduction in European zinc production capacity has left the EU 27 with a deficit market since 2006. a situation where local demand is not anymore satisfied with local supply. The production volume that disappeared from the EU market was more than replaced by imports from non-EU producers.000 tons. Even the 2.5% import tax which is due on zinc metal from most of the non-EU countries does not seem to have had a negative effect on import levels.

BKO however. Please substantiate your answer in concrete terms. no country has a CO2 pricing mechanism. 8. Introduction of these schemes has put some additional pressure on the EU 27 zinc companies. replaced by imports from non-EU suppliers. capacity closures in EU are also likely to be replaced by Non-EU companies in Non-EU countries.000 tons of zinc per year (see Table 2). The aim of the EU ETS Directive is to mitigate the risk of carbon leakage occurring from 2013 onwards. The impact of this has in some instances been leading to the closure of several Zn refineries. The primary drivers will be long-term availability of competitively priced power and regulatory stability. In other words. Please provide your views on the extent to which carbon leakage has already occurred as a result of the introduction of ETS 1 or ETS 2. less energy efficient. 8 companies had to close in that period resulting in an overall capacity loss of close to 800. If (some) companies in the sector concerned were to relocate or to shift production locations outside the EU. The sub-sectors identified in this questionnaire are principally at 13 . please specify to what locations this would likely be.It is therefore utmost important to keep the remaining installations within the EU. Outside of Europe. Our demand for a transitional compensation is linked to the present imbalances caused by the fact that no other competing regions will have such cost in their electricity prices in the near future. which have seen their competitiveness further reduced. so this is not a determining factor in where to site new facilities. In this context it should also be noted that not all European Industry is global enough or capital rich to 'relocate' to less carbon constrained zones outside the EU. acknowledge EU’s climate policies and have no particular preference for areas without carbon emission cost. particularly as a major part of their market is already taken over by imports. risking more dependency of other countries. throughout Europe. Would it be to countries with a low carbon factor or rather to countries with no CO2 pricing mechanism? Please substantiate your answer. 7. In fact.

b) Long-term power supply arrangements are expiring (most have already). using respectively 15. as shown previous in Table 1 and Fig. This is also show by the lack of investment in new or upgraded facilities over the last 5 years.risk of carbon leakage due to the indirect cost associated with the EU ETS. Other installations may be able to continue with operations in the short-term until the new state aid schemes are established. thus giving rise to exposure to higher prices due to CO2 costs. the lack of regulatory certainty around carbon leakage mitigation measures has probably already led to the first stages of carbon leakage as installation owners will be unwilling to take the risk of continuing to invest in improving those facilities. In the case of zinc. In any event.6. The Directive did not envisage a need to demonstrate that carbon leakage occurred during ETS 1 or ETS 2 as a result of the indirect CO2 associated with electricity purchase as precursor for providing State aid during ETS 3. Increase in indirect costs due to ETS-3 9. The zinc smelting industry competes globally on cost of production (‘conversion costs’). Please quantify the increase in costs which firms face due to electricity generation as they comply with ETS-3. Renewal of power supply contracts at prices without emission allowance cost was therefore not possible. Please indicate the sector's profit margin. Carbon leakage has already occurred as a result of ETS 1 and 2: a) Increases in electricity market prices occurred regardless that free allowances were given to the generation sector for a large proportion of their emissions. The only way to mitigate this is full compensation for the indirect costs. The increased cost for power consumers due to the imposition of emission cost on power generators is: ∆P = k * E Where. ∆P = Power price increase for the year (€/MWh) k = Marginal CO2 emission factor for the year (t/MWh) E = Average emission allowance price for the year (€/t) The fixed and variable cost elements are not relevant to cost competitiveness. Please also compare the situation today (under ETS-2) with the future situation under ETS-3. In particular. Profit margin 10. 30 and 50 €/t CO2 assumption in ETS-3. 23 and 33% of the total cash conversion costs. please differentiate between impact on fixed costs and variable costs. indirect CO2 costs make up 12. Energy is the greatest proportion (49% in 2010) of BKO and other EU zinc refineries conversion costs. In your reply. please quantify the estimated impact of the increase in CO2 costs related to electricity prices (comparing ETS-3 to 14 .

If the smelter is not able to get its costs below the LME price level in the long-term it makes a loss and goes bankrupt. respectively. In the long-term it is also said to represent the refineries costs plus a profit margin. and explain your reply. Zinc prices are cyclical due to global supply-demand balance.9 t/MWh and EUAs prices of 15. Fig 10. Even with 70 % compensation. the effect is significant and will lead to carbon leakage Fig. roughly 13.g. absolute profit margins for the sub-sectors identified in this questionnaire are not relevant as they will vary tremendously from year to year during commodity cycles. Please specify on which segments of the sector's profits these indirect CO2 costs have an impact. using 15 and 30 EUR/t CO2 assumptions in ETS-3).CO². a marginal CO2 emissions factor of 0. More relevant to fulfilling the aim of the Directive in avoiding the risk of carbon leakage is the quantification of the competitive disadvantage resulting from impact of the CO2 price in power costs. of zinc produced. Please indicate the same as regards the impact of CO2 costs related to electricity prices on the sector operating costs and margins. 108 and 180 €/t. 11: Projected electricity costs for the EU zinc Industry 15 . 30 and 50 €/t. 23 and 33 % of the total conversion cost – see table 1. the corresponding increase in production cost would be 54. The LME price is said to reflect the balance of supply and demand short and long-term.ETS-2) on your profits (e. its sales price is therefore fixed. Assuming an electricity consumption of 4 MWh/t. Evolution of the LME price over a period of 50 years A smelter sells its output at LME price. Smelter viability must be assessed looking over a longer time period and the investment cycles are long term (10 to 15 years) Therefore.

As for direct CO2 costs. Products are transported by seaway and delivered further by trucks to customers around Europe. Not relevant as the sub-sectors identified in this questionnaire will not enter into the EU ETS until 2013. please quantify the total accumulated surplus of free allowances over actual emissions in the period 2008-2009 and estimated surplus for the rest of ETS-2nd Phase. Please indicate which transport costs the sector incurs. How relevant is the physical proximity of the plants to the markets where the intermediate goods are bought from and to those where the final goods are sold? 16 . Transport costs of the zinc produced are not significant with respect to the turnover and value added of the sector (less than 1% of product price). How significant are they with respect to the turnover and value added of the sector? Is a significant share of production transported or are products sold close to the production site? How much transport costs are relevant for the use of intermediate goods? Please substantiate your answer. BKO is located at the west coast of Finland and main part of raw materials and products are transported by sea carriage.11. 13. Transport costs 12. Therefore transport costs do not represent a barrier to global competition. if relevant. BKO’s all customers are located in EU.

The price of refined zinc is set on global exchanges. 17. Please indicate the share of your sales to clients in the same Member State. in other EU Member States. Please indicate whether the products of the sector are homogeneous or differentiated based on quality. The products produced by the zinc sub-sector highlighted in this questionnaire are homogeneous commodities. All clients of BKO are located in Europe. Substitutability of final products 18. such as the LME. 14. Transportation costs for products sold are not relevant to the decision to curtail facilities in Europe or to build new facilities outside Europe. technical assistance and recovery of zinc residues for recycling. Please provide information on the substitutability between the sector's products from the point of view of the clients. Whereas services provided to the clients such as just in time deliveries. Please indicate whether services provided at local level by your company matter for your clients.Physical proximity of production is irrelevant as the zinc produced can be sold to customers or delivered to LME warehouses. the provision of these services does not enable differentiation in the price of the commodity sold. Product differentiation 15. about 15 % of production is sold for Finnish customers. such as an increase in electricity 17 . Zinc metal is a commodity wide with no price differentiation for material produced to international designation standards. do matter for the clients.or is not . it thus can easily be substituted by non-EU sources. marketing and branding or content. i. that an increase in prices of the EU producers would lead to a significant reduction of EU production. 19. Service differentiation 16. Therefore regional conversion cost increases. in non-EU States. Please explain how these transport costs impact on possibility to relocate or shift production locations outside EU. Are products from non-EU sources to be considered as close substitutes? Please substantiate your answer. which is sensitive to the worldwide production/demand ratio.e.highly price elastic. Please provide studies and reports that substantiate the claim that the level of EU production is . These form common reference points for domestic and imported deliveries. Please also illustrate your claim with concrete observations from the (recent) past. The zinc producers compete globally on cost of production and the global cost curve for zinc production is relatively flat.

UBA Research Report 3707 41 501. paper. brass and semi’s castings (12 %). As for all non-ferrous metals produced by the sub-sectors highlighted in the questionnaire and traded in global markets. ISSN 18624359 “Comparing the few estimates available for the various sectors. It will not reflect the impact of a differentiated application of EUAs on their operating costs and hence on their competitiveness. zinc die-casting alloys (12 %). the degree of agglomeration and vertical or horizontal integration. 10/08. as these additional costs will not be transferred to the market and will not affect the global demand. Please provide information on the characteristics of the market affected by the possible increase in CO2 costs. ZnO and chemicals (9 %) and others (4 %). Zinc Consumption by first and end-use 18 . the market share of the main companies in the relevant market. elasticity factors are not significant as they only reflect the sensitivity of the global demand to the commodity price. This would be countries where it is possible to get long term power contracts at affordable prices. See response Q 19 Market segmentation and industry structure 22. 20. Fig12. See also notes on the functioning of the LME question 30. See also report Impacts of the EU Emissions Trading Scheme on the industrial competitiveness in Germany. Which non-EU countries would see the largest increase in production if the price of EU production were to rise due to ETS-3? Please substantiate your answer. Please provide information on the elasticity of overall demand with respect to price increases in the sector concerned. semi-manufactured products (9 %). The main markets for the zinc industry are galvanizing (54 %).price due to the pass through of indirect CO2 costs under the EU ETS. It would be impossible to attempt to raise prices within Europe without significant loss of sales. cement”. which would ultimately result in complete displacement of European production capacity by imports. steel. a very rough sector ranking in terms of demand elasticity would be (starting with highest absolute value): aluminium. including the market size (outside and within the EU). Overall demand elasticity 21. can make a significant difference to the global competitiveness of producers from that region.

However. on a longer term. Imports from non-EU countries have filled the gap. Nevertheless. Fig 13: Forecast of the consumption/production over the next 10 years Information on the regional forecasts is not available and depends merely on the competitiveness of the each producer. The production will most probably follow closely this trend.In general terms. Fig 14: Evolution of the refined zinc production and consumption in the EU27 19 . mainly due to the important market potential in China and India. they will have access to less suppliers and will lose the direct contact and assistance from their EU relations. all these markets can buy their zinc from LME or non-EU suppliers and are thus not affected by the closure or lower capacities of EU producers. Please provide information on the expected rate of growth of demand for the product concerned over the next 10 years in total and by geographic macro-area. it can be seen from the following graphs that demand for refined zinc has always been higher than local production. The Worldwide Zn consumption is expected to grow on a steady basis. Demand Growth 23. leading to a loss of expertise and competitiveness against their non-EU counterparts.

Please indicate for the years 2005-2010. If possible. (d) the total annual level of exports out of the EU. 9 and 14 here-above shows the evolution of zinc production and consumption during the period 1997-2007 and shows that imports have always been outweighing the European market deficit The graphs here-under show more details about the current import-export statistics for 2010 into and from Europe respectively. Fig. respectively. please also provide a breakdown by Member State and for the exports and imports a breakdown by the 10 main countries of destination and origin.Import volumes & export volumes 24. (b) the total market size.16: Exports from EU27–countries representing more than 2000 tons 20 . (c) the total annual level of imports into the EU. both at (i) world level and (ii) at the level of the EU (a) the total annual level of production (in volumes and values). 15: Imports into the EU27 from countries importing over 2000 tons/year. Fig. Fig.

See answer to question 24. Please indicate any changing patterns of world trade in the sector. there are still important markets where duties remain and have even been increased again. Please indicate within which regions are the products of the sector traded. …). Third country tariffs (relevant to EU NFM exports) also vary considerably and. 9 and the graph here-under shows the evolution of the global zinc supply in the world and the Western world respectively Fig 17: Zinc metal supply 1979-2009 21 .5 %. Mediterranean countries.EU and the total market size for the EU in the period 2005-2010. in the form. of EU import duties or export tariffs? The tariff imposed on zinc imports from non-EU countries is 2.EU trade intensity 26. Does the sector in question face any import restrictions.25. as the price is fixed by the LME and can vary significantly from one moment to the other in the same year. However. Africa. Extra. While values are proportional to tonnages. Please indicate the ratio between total of value of EU exports to non-EU and value of imports from non. Fig. while tariffs generally were reduced under the WTO. several countries exporting zinc to the EU have gained import duty reductions or exemptions through EU trade agreements (S. for example. Changing patterns of world trade 27. it is not relevant to discuss values in the case of commodities.

and the impact of closures and lower investments in Europe.Important changes in the pattern have occurred in the zinc industry in the last decade. the share of the European producers has been significantly reduced. highlighting the progress made in Asian countries. Fig. Indeed.18: Distribution of zinc metal supply 22 . While European producers used to have a leading position in the zinc market. pushing the EU in the second position. China is clearly taking the lead.

N I. so that the larger the value of Q the larger m will be Currently the current efficiency for zinc electrolysis is at the level of 92-94 %. the mass of a substance released on an electrode is directly proportional to the amount of electricity that was circulated by the electrolyte. Please indicate the adaptability of a sector to new lower-carbon technologies and production processes. where conversion efficiency is governed by physical laws. further significant reduction targets for indirect CO2 emissions are nearly impossible to achieve via zinc producer actions.Therefore. the maturity of the new technology (and costs) and the nature of the new technology (incremental or step-change). Please substantiate your answer based on the existing capital infrastructure of the sector. Market penetration rate for new technologies 29.n = F.M m is the mass of the substance (Zn metal) liberated at an electrode Q is the total electric charge passed through the substance I is the electric current intensity t is the time during which current is applied F = 96. that is. 23 .M m = F. Any improvement depends on gradual improvement of existing technology and the best performance here is getting close to theoretical limits. it is proportional to the intensity of the current and the time during which the current was circulated. F.Substitutability of inputs 28.t. What is the market penetration rate for such technologies? Please substantiate your answer. The remaining 6 to 8 % are due to physical parameters. Please indicate whether the sector can reduce the energy intensity of the production processes by inputting other factors of production. Q . and z are constants. The intensive use of electricity in the processes employed by the sub-sectors highlighted in this questionnaire cannot be reduced by inputting other factors of production. According to Faradays law. Further reduction of the total energy consumption by European RLE plants has become rather marginal. M. Indeed. (such as the resistivity factor induced by the presence of the electrolyte between electrodes during electrolysis) and cannot be reduced further. most (over 80%) of the electricity consumption is used in the zinc electrolysis stage.485 C mol-1 is the Faraday constant M is the molar mass of the substance For Faraday's law. There are currently no new technologies on the market or close to market application.

Trading takes place across three trading platforms: through open-outcry trading in the ‘Ring’. Such is the liquidity at the Exchange that the prices ‘discovered’ at the LME are recognized and relied upon by industry throughout the world. The Roast-LeachElectrolysis (RLE) production process is the most used (88%) in the zinc industry. the Exchange’s electronic trading platform. which enabled the transition from ETS-2 to ETS-3. hedging. contract negotiations and margining and are indicators of where the market is at any point in time.3 million lots. through an inter-office telephone market and through LME select. One lot is equal to 20 tonnes. Are the products of the sector commodities.RLE Technology is the most energy efficient and dominant process. equivalent to $11. The LME publishes a set of daily reference prices that are based on the most liquid trading sessions of the day..6 trillion annually and $46 billion on an average business day The LME trading volumes are multiples of the physical production of the commodities. Please substantiate your answer. The Directive stipulates that financial support should maintain an incentive to reduce electricity consumption and stimulate a shift in demand from "grey" to "green" electricity. For Aluminium the volume of futures contracts traded on the exchange were 46. This is subtly different to statement above: “financial support 24 . They are used the world over by industrial and financial participants for purposes of referencing.EU ETS incentives to save energy and to stimulate a shift in demand from ‘grey’ to ‘green’ electricity are maintained. physical settlement. There are no other technologies currently to produce industrially zinc metal at lower energy consumption Global price setting mechanism 30. How such an incentive could be maintained? Please substantiate your answer. Please specify to what extent EU producers in the sector should be viewed as price takers. SECTION B: LEVEL OF SUPPORT The ETS Directive. The LME provides a transparent forum for all trading activity and as a result helps to ‘discover’ what the price of material will be months and years ahead. The primary exchange where these commodities are traded is the London Metal Exchange (LME).5 million lots in 2010. We highly appreciate the realistic view of DG COMP to focus on global price setting mechanisms as criteria for eligibility. sold in global exchanges? What percentage of the sector (in volume and value) is sold in global exchanges? How does this global price mechanism function? Please specify the premiums on top of potential prices at global exchanges. The sub-sectors highlighted in this questionnaire produce commodities that are subject to their selling price being determined by global exchanges. The LME is a highly liquid market and in 2010 achieved volumes of 120. 31. allows for compensation of costs due to indirect emissions for the increase that results from the implementation of ETS-3 (due to tightening of the cap leading to expected increased CO2 prices). Recitals 24 and 27 of the Directive states that the aid should be granted such that “.. This helps the physical industry to plan forward in a world subject to often severe and rapid price movements.

Do you consider that requiring an own contribution would give an extra incentive to energy users to be even more energy efficient (in addition to the efficiency benchmarks) and that it would ensure the continued existence of incentives when benchmarks become relatively less ambitious over time? Please substantiate your answer. On the contrary. Compensation for indirect costs would. As a consumer of power we cannot change the mix provided in the grid by the producers. 34. Reducing the level of aid will not give an extra incentive to reduce electricity consumption.should maintain an incentive to reduce electricity consumption and stimulate a shift in demand from ‘grey’ to ‘green’ electricity”. Do you consider that requiring an own contribution would give an indirect incentive to electricity producers to invest in less environmentally damaging generating technologies? Please substantiate your answer. Providing aid will not lead to aid dependency. Electricity is supplied to consumers at the same price regardless of its source of production. that of mitigating carbon leakage. What level of aid reduction would help preserving an adequate incentive to reduce electricity consumption? Please substantiate your answer. 32. As electricity costs as already highlighted represent a large percentage of the total operating costs for the sub-sectors identified in this questionnaire there continues to be an incentive to improve energy efficiency and to go beyond the benchmark. Reduced profitability will reduce investment and slow down the introduction of new technologies. maintain the incentive to reduce electricity consumption and lead to an overall reduction in direct emissions. 33. How would you ensure that the support does not lead to aid dependency? Would degressiveness in the level of support help preparing for a gradual phasing-out of the support over time in line with the temporary character of the support? Please substantiate your answer. assuming it were to be based on an electro-efficiency benchmark. The primary incentive to switch from ‘grey’ to ‘green’ electricity generation is already embedded in the ETS by placing a carbon cost on fossil fuelled generation and the various subsidies for renewable power generation. There is no need to reduce the level of aid as the “own contribution” is already embedded in the very high prices paid for electricity in Europe (even with full compensation for the CO2 element). Financial support provided to eligible consumers for CO2 costs embedded in electricity prices can neither strengthen nor weaken the incentive. See response to question 31. Reducing the aid will thus increase the risk of carbon leakage. and ‘grey’ electricity cannot be distinguished from ‘green’ electricity. temporary. Reducing the aid will not enhance the bargaining power in the European electricity markets of the sub-sectors identified in this questionnaire. Reducing the aid simply puts one of the primary intensions of the Directive at risk. See response to question 32. full compensation could provide the basis for investment and stronger competitive position 25 . 35.

in order to calculate the maximum aid amount. BKO’s tankhouse power consumption in year 2010 was 3 325 kwh/t Zn. it is up to the companies to provide this information if needed and useful. They could be developed in the same way that product benchmarks were developed for direct emissions. Please specify the electricity consumption per unit of production that should correspond to the most efficient available technologies for a certain sector. benchmarks would be introduced linked to best performing technique. The ex-ante benchmarks shall be calculated for a given sector or subsector as the product of the electricity consumption per unit of production corresponding to the most efficient available technologies and of the CO2 emissions of the relevant European electricity production mix. In the nonpaper addressed to the European Parliament and the Council. SECTION D: CO2 EMISSION FACTOR 2 Article 10a(6) of the ETS Directive. which is one of the lowest in comparison between European Zn-smelters. A gradual reduction in the level of support over time simply puts one of the primary intensions of the Directive at risk. The Commission will undertake a study to determine the efficiency benchmarks for the relevant sectors. the Commission stated that. What factors are in your view relevant to define a benchmark for your sector in order to incentivise energy efficiency investments by beneficiaries? Electricity efficiency benchmarks should be based on electricity use per ton of production. 37. please compare it with other companies from your sector. SECTION C: BENCHMARKS The ETS Directive2 foresees that aid for indirect emissions shall be based on ex-ante benchmarks of the indirect emissions of CO2 per unit of production. Aid should only be provided whilst the absence of a binding international agreement (whereby industry would be subject to comparable carbon costs. 36. that of mitigating the risk of carbon leakage. 26 . also for indirect emissions) puts certain energy-intensive sectors and sub-sectors in Europe at an economic disadvantage.for the situation when a level global playing field is restored at a later stage. What is the level of your company’s electricity efficiency? In your reply. Please substantiate your answer with data and sources. The information at company level being confidential. 38. notably with countries outside of the EU? When it comes to total energy consumption so BKO is according to Brook Hunt report one of the most energy efficient Zn-refiner in the world.

∆Pi = Power price increase of hour i (€/MWh) Ei = Emission allowance price for hour i (€/t) ki = Marginal CO2 emission factor for hour i (t/MWh) The corresponding annual formula for base load would be: ∆P = k * E k = ∑i (ki * c i * Ei ) / ∑i (c i * Ei ) Where. 3 The average CO2 intensity in the EU's total electricity production is also referred in the formula in the nonpaper for the maximum amount of aid that a Member State could provide for an installation. The question is what CO2 factor to use as a basis for calculating the compensation. No. the CO2 factor of the marginal plant setting the electricity price for the installation concerned is used Do you consider that using the annual weighted average of the CO2 factor of the marginal power production in the relevant electricity market. as they all could lead to under or over compensation. 27 . the Commission stated that the actual CO2 factor can in principle be identified from self-generation and electricity supply contracts that explicitly specify the level of pass through of the EUA price per MWh. i. The aim of the calculation must be to establish the level of full compensation. Where electricity is purchased on the grid.The CO2 emission factor corresponds to the CO2 emissions per MWh of electricity generated. Method 1: 40. In the non-paper to the EP and the Council. Where electricity is purchased on the grid (on the exchange or forward market). 39. e. therefore the increase in power prices is proportionate to the allowance price. Provided that emission factors are calculated in the correct way. including in case of self-generation and in case of electricity supply contract that explicitly specifies the level of pass through? Please substantiate your answer. It is generally accepted that in a competitive power market where prices are related to marginal generation costs. a method that would compensate the consumers for the actual price increases due to emission allowance cost in power purchased. The four proposed methods should not be considered in case of self-generation and in case of electricity supply contracts that explicitly specifies the level of pass through. the following would be the best method (see also the response to questions 41 and 42). Do you consider that one of the methods presented below should be used in all cases. which supplies the beneficiary is the appropriate method? Please substantiate your answer. Four methods are conceived hereinafter. Under compensation will not mitigate the carbon leakage risk. Yes. The first three methods propose to use the actual CO2 factor from self-generation and electricity supply contracts and present different possibilities for the case where electricity is purchased on the grid. The fourth proposes to use a uniform CO2 factor in all cases. The formula below describes this relationship: ∆Pi = ki * Ei Where. the average CO2 intensity in the EU's total electricity production could be used3.

and/or power exchanges will be able to identify the marginal plant technology responsible for setting the price in national and sub-national markets. and • In markets with portfolio bids. 41. some being supranational and sub-national? How would national regulators address the need to revise the price setting areas periodically. extensive exchange of data and/or co-operation on analysis is required. Regulators should have the right to access to this data. National regulators. however. Would national regulators be able to identify the marginal plant when the price setting areas do not correspond to the borders of each Member State. 28 . the price setting technology may only be inferred indirectly. anyone (including the national regulator) will be able to estimate the correct marginal cost increase due to emission allowance cost. identifying the relevant marginal CO2 pass through factor is not trivial as it will depend on the opportunity value of selling the power in interconnected markets where CO2 emitting plant sets the market price. in most countries such data will be made publicly available. Identifying the plant technology responsible for setting the price and applying standard emissions factors for that technology should not lead to any confidentiality issues. • Implicitly assuming that the same technology will be price setting with and without emission cost. without specifically having to identify marginal (price setting) technology hour by hour. system operators. as the interconnection and generation infrastructure evolve? National regulators. By applying Method 1 through the use of a market model. Average emission allowance price for the year (€/t) k = Marginal CO2 emission factor for the year (t/MWh) ci = The consumption in hour i (t/MWh) If we assume that emission allowance cost is constant through the year. markets operators. Are national regulators always able to identify the marginal plant in the relevant price setting area? Do you consider that due to confidentiality issues or to lack of transparency of the market or of data. In some instances Method 1 applied in this manner may not be the most effective way of setting the CO2 factor for a particular hour as: • Identifying the price setting technology may not always be possible across borders. the marginal CO2 emission factor for base load consumers would simply be a flat average of hourly emission factors. Regulators should have the right to access to this data. For supra-national price setting. they may not be able to define it? Please substantiate your answer. system operators. and/or power exchanges will be able to identify the marginal plant technology responsible for setting the price in the majority of hours of the year.∆P = ∑i ∆Pi / 8760. • If the price setting technology is hydropower. Average power price increase for the year (€/MWh) E = ∑i Ei/ 8760. 42. markets operators.

Do you consider that this method may result in over-compensation or in undercompensation? If so. Please substantiate your answer. Do you think that this method would have the effect of incentivising grey electricity? In particular. as referred to in the response to question 41. in price setting areas that do not correspond to the borders of a Member State. Such models will also be able to give separate emission factors for any area (sub or supra national) that is specified. but a coal plant becomes the marginal plant once CO2 costs are considered. The compensation does thus not provide any incentive to influence the merit order in any way. Commercial models are continuously updated to reflect available grid capacities and hence the actual degree of price influence between areas. No under. without making any particular adaptations of the method. 29 .Once the guidelines are in place for determining the base methodology for the granting of aid. this method may give incentives to electricity producers to influence the choice of marginal plant for the one that has the highest CO2 factor (the dirtiest) and therefore justify compensation on the basis of artificially higher CO2 costs. and c. for instance. it is clear that any aid provided would need to take into account the evolution of the CO2 cost embedded in power prices in the relevant market. under which circumstances? In your reply. The introduction of a compensation scheme will not strengthen any incentive or opportunity to exercise market power. companies in one price setting area may face conditions leading to over-compensation. 44. c. Method 1 supplemented with analysis derived from models will correctly estimate marginal costs taking into account the issues under a. Back-up plants set the price when they are used. if the CO2 factor is based on the marginal plant in another Member State instead of the installation's price setting area within the country. and the estimates will be correct.or overcompensation will occur. b. using the modified Method 1. The relevant pricing area split is model output. Electricity generators are neither paying nor receiving any compensation for CO2 costs embedded in power prices to/from eligible sectors. The percentage of overall European electricity consumption that would be eligible to receive compensation for the indirect costs under the new state aid guidelines is very small. when a gas plant is the marginal plant without CO2 pricing. the introduction of CO2 pricing will in some cases result in reversals of the merit order. in the absence of perfectly competitive markets. and generators would not have any incentive to change the way their businesses are operated. b. please take into account of the following scenarios: a. No. Challenges caused by dynamic geographical diversity of price setting area can be solved by supplementing the analysis using a model based on Method 1. when a coal/gas fired power plant is used as an alternative back up for renewable energy production. 43. whereas companies in other price setting area may not get enough compensation. including any effects due to developments in grid interconnections and generation assets.

see response to question 46. using a model based approach. 48. Please indicate whether you consider that another EU-wide factor should be used. The average CO2 emission factor in the EU is much lower than the actual marginal CO2 emission factor. Do you consider that this method may involve over-compensation in some Member States with greener electricity and under-compensation in Member States with grey electricity? Please substantiate your answer. irrespective of the actual terms of supply of electricity for the installation concerned. Only a methodology based on the marginal pass through factor in the relevant market will address the issue correctly. irrespective of the actual terms of supply of electricity for the installation concerned. Applying Method 2 will lead to significant undercompensation in all cases. Do you consider that this method involves an excessive administrative burden. compared to Method 1? It is certainly simpler but does not correctly address the nature of the issue.45. the average CO2 emission factor for the EU is used Do you consider that using the average CO2 emission factor at EU level is the appropriate method? Please substantiate your answer. since national regulatory authorities will have to provide the necessary data? If so. Where electricity is purchased on the grid. Method 3: 49. the CO2 emission factor for the average plant in a geographical pricing area concerned is used Do you agree that a method based on average CO2 intensity of a plant in the geographical pricing area of the companies receiving aid. Method 3 would be even less appropriate than Method 2. reflecting if possible consumption patterns of those companies (share of base-load and peak consumption) would be appropriate? Would such method more closely reflect needs of the companies than method 2? Please substantiate your answer. Do you consider that this method has the advantage of simplicity. what alternative would you consider more appropriate? No. The greenness of a country’s electricity sector turns out to have little influence on the actual emission cost pass-through at the margin. 47. No. and will not mitigate the carbon leakage risk. Please respond to the view that an average CO2 emission factor for the EU. and substantiate why you believe it would be more appropriate. This would in most cases lead to under-compensation. Where electricity is purchased on the grid. If the proposed application of Method 1 proves too complicated for any market it can easily be supplemented. Method 2: 46. would best 30 Method 4: . The average CO2 emission factor for the EU is used. Only a methodology based on the marginal pass through factor in the relevant market will address the issue correctly. Using Method 2 would lead to under-compensation in all cases. 50. and be grossly unfair for geographical pricing areas with a green production mix.

See response to question 31 regarding maintaining incentives to switch to ‘green’ electricity. while retaining all weaknesses of Methods 2 and 3 in not mitigating the risk of carbon leakage. Financial support to consumers can neither strengthen nor weaken the incentive for ‘green’ electricity.preserve the incentives for purchasers of electricity to switch to green electricity and to make use of the opportunities granted by the single EU market for electricity. Method 4 could therefore not have any advantages in this respect. SECTION E: OTHER ISSUES Do you have any additional comments on the above issues? Please provide copies of any documents or studies which may be relevant to support your submissions. THANK YOU FOR RESPONDING TO THIS QUESTIONNAIRE. 31 . Please indicate whether the Commission services may contact you for further details on the information submitted. Method 1 does not have any negative side effects related to this type of incentive. if required.

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