Auctioning of Emission

Allowances in EU ETS Phase III

Guidance FOR BiddeRS

New in 2012

1

1. EEX Auction Model

Phase III of the EU ETS will see a significant increase in the importance of auctioning, with over half of the total volume of allowances to be auctioned, totalling almost 1 billion EUAs per year. Thus, auctioning will support and strengthen the EU carbon price signal as a simple, transparent, and economically efficient method of distributing EU emission allowances.

In 2012, the European Commission appointed EEX as the transitional common auction platform to auction Phase III EU Allowances on behalf of 24 Member States. Also Germany selected EEX as its transitional opt-out auction platform for Phase III allowances.

In addition, EEX has been nominated as a cooperation exchange of the European Investment Bank’s NER300 initiative. In this context, EEX also carries out auctions of Phase III EU Allowances.

EEX is the only exchange in Europe that has experience in EUA auctions on a regular basis. Throughout Phase II of the EU ETS, it has successfully conducted weekly EUA primary market auctions for Germany and, amongst others, for the Netherlands (in 2011/12) and Lithuania (in 2011/2012). As the chosen Phase III EU transitional common platform and the Phase III transitional opt-out auction platform for Germany, EEX will become the first exchange in the world to conduct regular and large-scale auctions within the scope of an emissions trading scheme. With its auction model EEX offers a safe, cost-effective, and accessible chan-nel for auctioning volumes of emission allowances.

2. Rules and Regulations

For all Phase III auctions – including the auctioning of EU aviation allowances (EUAA) – a common set of rules will apply. These are set out in the so-called EU Auctioning Regulation (No. 1031/2010).

The design of Phase III auctions will be largely similar to Phase II EUA auctions on EEX (e.g. for Germany, the Netherlands, Lithuania). However, some changes do apply. This concerns, for instance, the eligibility of bidders in the auctions and admission requirements of the exchange (Article 18 and 19 of the Auctioning Regulation).

Eligibility to Bid

a) Entities must be eligible to bid according to EU rules 1. These are:

• Compliancebuyers(operatorsofstationaryinstallations,aircraftoperators)thathaveanoperatorholdingaccount, bidding on own account” 2.

• Investmentfirmsandcreditinstitutions,biddingonownaccountoronbehalfofclients.3

1 Article 18(1) and (2) Auctioning Regulation.2 This includes any parent undertaking, subsidiary undertaking or affiliating undertaking forming part of the same group of under-

takings as the operator or the aircraft operator. Also compliance buyers that are public bodies or state-owned entities of the Member States are covered.

3 These firms must be authorized under MiFID (Directive 2004/39/EC) or under the Credit Institutions Directive (Directive 2006/48/EC) respectively.

eeX will become the first exchange in the world to conduct regular and large-scale auctions within the scope of an emissions trading scheme.

2

• Businessgroupingsofcompliancebuyers,biddingonownaccountandactingasanagentonbehalfoftheir members.

• OtherintermediariesspecificallyauthorisedbythehomeMemberState,biddingonownaccountoronbehalf of clients

b) Potential bidders must also fulfill the admission requirements set out in the EU Auctioning Regula-tion 4 and the exchange rules of EEX. These are:

4 Article 19 Auctioning Regulation5 Article 19(2) Auctioning Regulation6 Article 18(3) Auctioning Regulation

Potential bidders must fulfill the admission requirements set out in the eu auctioning Regulation and the exchange rules of eeX.

• AdmissionrequirementsaccordingtoEUrules5 · Establishment in the EU (except for compliance buyers)· Nominated holding account· Nominated bank account· Appointment of at least one bidder’s representative· Technical arrangements to give effect to a maximum bidsize (if necessary) · Compliance with respective exchange requirements

• EEXrequirementsforadmission· Liable equity of at least EUR 50,000 *· Evidence of personal reliability and professional qualification· Admission of at least one trader, incl. EEX trader examination **· Technical arrangements for trading ** and settlement· Recognition as a trading participant by ECC (clearing house)· Conclusion of an agreement with a clearing member of ECC

* Not required for “Auction-only” membership on EEX** Not required for “Auction-only” membership on EEX, if bidding via EEX Market Supervision

c) Specific requirements for investment firms and credit institutions when bidding on behalf of clients

• MustbeauthorisedtobidonbehalfofclientsinEUAspotauctionsbytheirrelevantcompetentnationalauthority (e.g. FSA, BaFIN) 6

• Areresponsibleforensuringthattheirclientsarethemselveseligibletobid(alsoappliestoallfurtherclients down the chain bidding indirectly) 7

• Musthaveinplaceadequateinternalprocesses,proceduresandcontractualagreementstoensure,interalia, that their clients comply with the admission requirements as to the EU rules 8

Note: Pursuant to EU rules, EEX reserves the right to request direct evidence of the fulfilment of the requirements mentioned above. This applies all the way down the chain of clients.

EU ETS Regulation

Full EU ETS regulation documentation is available on the website of the European Commission. http://ec.europa.eu/clima/policies/ets/index_en.htm

7 Article 19(3)a Auctioning Regulation8 Article 19(3)b (i)–(iii)

3

3. Volumes and Timing

In Phase III of the EU ETS, the auctioning of allowances becomes the basic principle for allocation. This constitutes a substantial increase in auctioning in Phase III compared to previous years.

• More than half of the total volume of allowances will beauctioned in Phase III (i.e. some 1 billion EUAs per year), compared to around 4 per cent in Phase II.

What does that mean for participants?

• PowerSector:Nomorefreeallocationforelectricitygenerators(withexceptionsinsomeMemberStateswhich provide for the allocation of limited volumes on a transitional basis).

• Industrialsectors:Sectorswithnosignificantriskofcarbonleakagewillreceive80%oftheirbench-markedallocationforfreein2013,withadeclineofthisshareto30%in2020and0%in2027.

• Aviationsector:15percentoftheEUAviationAllowances(EUAAs),i.e.some30millionperyear,willbeauctioned from 2012 through 2020.

In 2012, a total of 120,000,000 Phase III EUAs will be auctioned as “Early Auctions” through a common transitional auction platform as well as through national auction platforms in the UK (permanent platform) and Germany (transitional platform).

In 2013, EUAs and EUAAs will be auctioned-off through the common transitional platforms until the permanent platforms (for the EU, Poland and Germany) are in place.

Further details on planned auctions are provided in the EEX Auction Calendar, available online: http://www.eex.com/en/Auction

4. Access to the Auctions

Access to the auctions will be available via the ComXerv EUA Primary Auc-tion Service. The auction platform is a web-based system easily accessible via the internet, with a dedicated log-in and password provided to admitted Spot members by the EEX Market Supervision department. Existing EEX EUA Spot Market members who satisfy the requirements for eligibility to bid under the EU rules may access the auctions via their Spot log-in and password.

eeX auction calendar: http://www.eex.com/en/auction

access via comXerv eua Primary auction Service

4

Becoming a Member

Companies which would like to become a member of the EEX EUA Spot Market in order to access the auctions must first determine whether they are eligible to bid as per the EU rules and the EEX admission requirements. If so, the applicant can choose between three forms of EEX membership:

1. contact eeX customer Relations

The EEX Customer Relations team will guide you through the admissions process and provide detailed information on the EEX Emission markets.

Leipzig: +49 341 2156 555 | Paris: +33 1 73 03 6243 | London: +44 207 865 7555E-mail: sales@eex.com

2. complete eeX and ecc admission documents

For EEX:· Download forms on the EEX Website. · Fill in EEX Admission forms and supply supporting documents.· Appoint authorised trader(s) who have/has passed the EEX Trader Exam *.· Establish a technical connection to the trading systems of the exchange *.

* not necessary for Auction-only members

For ECC:· Download forms on the ECC Website.· Choose and conclude an agreement with a clearing bank who is a member of the ECC.· Fill in ECC admission forms and supply supporting documents (KYC).

3. Submit eeX and ecc admission documents to:

• EEX,AdmissionServices,Augustusplatz9,04109Leipzig,Germany• EEXandECCadmissionchecksandprocessesthedocuments,providingsupportifneeded

4. admission as a trading participant on eeX Markets

• EEXMarketSupervisionsetsupthetechnicalconnectionsordered,includingITsupportforanysoftware required

• EEXMarketSupervisionsendstheauthorisedtradertheirlog-inandpasswordandthelinktotheEEXSpot Auction Platform

5. Start Trading!

If the company would prefer to bid indirectly, they may contact a trading member of EEX or a clearing member of the ECC who provides client services. This may depend on satisfying their requirements for acceptance.

Full EEX membership Access to all EEX Markets (Spot, Derivatives) and products (power, natural gas, emissions, coal).

Emissions-only EEX membership

Access to both the Spot and Derivatives Markets for emission products only (EUA, EUAA, CER, ERU).The member can bid in the Primary Auctions and trade in continuous trading.

Auction-only EEX membership

Free access: EEX Market Supervision enters bids on behalf of the member, via the Primary Auction Bidding form (no technical or membership fee).

Trader access: Direct access to the EEX Spot Auction Platform; the member can enter, modify and cancel bids (small technical fee is payable).

5

5. Auction Design

The Phase III EEX auction design has been crafted in accordance with the EU Auctioning Regulation.

6. Step-by-Step Guide to Bidding in an Auction

Prior to the auction, participants inform themselves on the timings of the bidding window and volume to be auctioned via the EEX Auction Calendar, which is available online at www.eex.com

Participants place their bids during the 2-hour bidding window for the auction via two ways:

– I – Via the ComXerv EUA Primary Auction Service A video demo of the platform is available online at: http://streaming.eex.com/pws-june/EUA_Auction_v1.htm

– II – Via the Bidding Form EUA Primary AuctionThis form must be completed, and signed by a Member’s Authorised Trader or Auction Coordinator (in the caseofAuction-OnlyMembership).

Auctioned product EU Allowances for the 3rd trading period of the EU ETS (2013 to 2020)

Auction delivery Next-day delivery (T+1)

Auction format Single round: Bids will be submitted during one given bidding window

Sealed bid:Bids will be submitted without seeing other participant’s bids

uniform price: All successful bidders will pay the same auction clearing price

Minimum lot size 500 allowances

Submission and withdrawal of bids

Submission of bids:· Bids may be submitted,

modified and with-drawn during the bidding window

· Onlyauthorisedpersons are entitled to place bids (bidder’s representatives)

each bid shall state:· Bid volume as integral

multiples of lots of 500 allowances

· Price in Euro for each allowance (in two decimal points)

· Identity of the client when bidding on behalf

each bid may only be withdrawn:· During the bidding

window· Genuinely mistaken bids

can be unwound only under restrictive conditions by EEX upon request of the bidder’s representative

Determination of auction clearing price

All successful bids will be allocated at the auction clearing price, which is deter-mined as follows:· Bids are sorted in descending order of the price bid· Bid volumes are added, starting with the highest bid; the price at which the sum

of volumes bid matches or exceeds the volume of allowances auctioned shall be the auction clearing price

· Tied bids will be sorted through random selection according to an algorithm· All bids with a price higher than the auction clearing price are successful;

Execution of bids made at the auction clearing price depends on their ranking in the random selection

· Partial execution of orders may be possible for the last successful bid matching the auction clearing price, depending on the remaining quantity of allowances

6

– I – Via the ComXerv EUA Primary Auction Service

2. The auction Home Screen displays the auctioneer, auctioned product, auction volume, bidding window times and the auction configuration. The Messages box communicates the auction status.

3. Members click on ‘Submit new Bid’ and place their bids as integral multiples of lots of 500 allowances and state their price per allowance in euros to two decimal points, then click ‘OK’.

In this example, the member bids for 150,000 EUAs at a price of EUR 7.80 each.

1. eeX Spot eua Members log-in to the auction platform via their log-in and password provided by eeX Market Supervision.

7

4. When bidding on behalf of a client, Members additionally check the box ‘Bid as Broker’ and enter their client’s name in the ‘Broker Reference’ field.

5. entered bids are visible in the ‘Bids’ window. Members can only see their own bids.

In this example, the Member bids for 50,000 EUA at a price of 7.75 EUR each, on behalf of their client ‘German Power co.’

8

7. Once the auction is closed, the auction status changes to ‘closed’ then ‘accepted’ in the right hand Messages box. auction results are displayed, and the Member can view whether their bids have been totally (green) or partially executed (yellow).

6. Bids can be modified or cancelled in the ‘bidding’ window by clicking on ‘M’ or ‘c’.

9

8. Post-auction, Members can download Order Reports and Trade Reports.

This form must be completed, and signed by a Member’s authorised Trader or auction coordinator (in the case of auction-Only Membership).

Order Report: summarise the bid input, cancellation, modification and execution per auction.

Trade Report: provides an overview of the Member’s executed trades.

– II – Via the Bidding Form EUA Primary Auction

Please note that EEX Market Supervision will use our best diligence when entering your bid and that the bid entry will be checked by a second member of staff.However, EEX Market Supervision cannot take liability for the correctness and for the chronological order of the bid entry.

Such orders must be placed at least 10 minutes prior to the closing of the bidding window to ensure that bids are entered in the auction.

10

7. Delivery and Payment

Members who are successful in the auction will have the delivery of the EU emission allowances won in the auction executed via their ECC delivery account and the respective payments processed via their Clearing Member.

Note: ECC will use designated internal accounts for EUA, EUAA, CERs and ERUs. There will be no separate accounts at the registry level.

Deliveries of EU emission allowances are effected by booking within ECC’s internal accounts.

ECC Internal Accounts:1.OnceECChasreceivedtheEUemissionallowancesinitsauctiondeliveryaccount,theholdingsofthe

auctioneers internal account will be updated (+).2.Onthedeliveryday,afterpaymentont+1,ECCwilltransfertheholdingsfromtheinternalaccountsofthe

auctioneers (–) to the internal accounts of the buyers (+) = fulfilment of the transaction.3. Buyers could keep the holdings in their account (e.g. to fulfil an upcoming delivery obligation for deriva-

tives contracts), sell them on the secondary spot market or request a delivery to a registry account at the registry level.

Physical Delivery:1.Oncepaymenthasbeenmadetotheauctioneers,ECCisallowedtotransfertheEUemissionallowances

to its primary market registry (trading) account (26 h delay/Trusted Account List if available).2. ECC will deliver the EU emission allowances to the buyer’s registry accounts on their request (26 h delay

or via the Trusted Account List).

Registry

ecc system

Registry AccountSeller

EU Auction Account

ECCAuction Delivery

Account

Registry AccountECC

(primary market)

Registry AccountECC

(secondary market)Registry Account

Buyer

Internal AccountSeller

(secondary market)

Internal AccountAuctioneer

Internal AccountBuyer

(primary market)

Internal AccountBuyer

(secondary market)

11

8. FAQ

Who is eligible to bid?Any ETS operator or aviation operator is eligible to apply for admission to bid in the auctions, and so aretheirparent,subsidiaryoraffiliateundertakings.Operatorscanalsoformbusinessgroupingstobid as an agent on their behalf.In addition to operators, investment firms and credit institutions, which are authorised and regulated under EU law, may apply for admission to bid.

Furthermore, EU rules provide for an additional category, namely intermediaries that benefit from an exemption from the authorisation requirements under EU law, but that have been authorised under rules laid down in the Auctioning Regulation. This is, for instance, relevant for intermediaries such as fuel traders, so these can easily add allowances to the products they offer to ETS operators.

Which “other intermediaries” can apply for bidding in the auctions, in addition to investment firms and credit institutions, and how can they get authorisation?

The scope of other intermediaries eligible to bid in the auctions covers persons that are not MiFID- licensed but benefit from the MiFID-exemption for “ancillary activity” [MiFID Art. 2 (1) (i)]. Those persons would have to get a special authorisation from their competent national au tho rity (e.g. from FSAorBaFIN)inordertobeeligibletobid.Oncesuchanauthorisationingranted,theycanpartici-pate in phase III auctions on all auction platforms provided that they have been admitted to the re-spective exchange.

The relevant competent national authority can grant such authorisation only if corresponding na tio nal legislation has been enacted by the Member State in the first place:

For example: In the UK, HM Treasury has made “bidding for emissions auctions” a new regulated ac-tivity within the Financial Services & Markets Act 2000 (FSMA) as part of its implementation of the EU Auc tioning Regulation. This enables the UK financial regulator (FSA) to authorise and supervise intermediaries exempt from MiFID under Article 2 (1) (i) for bidding in the auctions.

Those intermediaries (when based in the UK) will have to apply for such authorisation by submitting a “Variation of Permission (VoP) Application” form to the FSA. This can be found at the following link: http://www.fsa. gov.uk/static/pubs/forms/emissionsbiddingvopform.doc. For more information on the application process you can also refer to the FSA Handbook http://www.fsa.gov .uk / handbook).

For Germany, a similar provision is set out in the German Emissions Trading Act (“Treibhausgas emis-sionshandelsgesetz”, TEHG), namely in Article 8 (4) TEHG. Based on this provision, intermediaries exempt from MiFID under Art. 2 (1) (i) will have to apply for authorisation by con tacting the German financial regulator (BaFin).

I am already an EEX member and admitted to the EUA Spot Market. Am I automatically eligible to bid in the auctions?

EEX’s members already admitted to the EUA Spot Market are eligible to bid under the requirements of Art. 18 Commission Regulation (EU) No. 1031/2010. Therefore, members have to submit an appropri-ate declaration to EEX together with the respective proof of categorization.

12

I am already an EEX member but have not been admitted to the EUA Spot Market so far. What do I have to do in order to participate in the auctions?

EEX members may contact the Customer Relations team in Leipzig, London, or Paris, to be guided through the admission process for the EUA Spot Market. This will include the completion of some basic forms for identifying two persons responsible for registry transaction requests, ordering a tech-nical connection to the spot market, and identifying an authorised trader for the Spot Market. Support is provided by the EEX Admissions department. Once the setup has been completed, EEX Market Supervision will send the member their log-in details for the EUA spot auction platform. There is no extra cost for existing members to join the spot market.

I would like to become an EEX member in order to participate in the auctions. What do I have to do?Interested companies must first check that they fulfil the EEX and EU Auction participation require-ments. If so, the first step is to contact the Customer Relations team in Leipzig, London, or Paris, to be guided through the admission process for the EEX markets and get information on the different types of membership options. In parallel, they must sign an agreement with a clearing bank which is a member of the ECC. Additionally, an exchange trader must be appointed who has passed an EEX trader exam.Once the company has picked their preferred access option, theymaydownload andcomplete the EEX and ECC admission forms and supply all necessary supporting documents. EEX Market Supervision then sets up the technical and trader access and provides the member with all the information necessary for trading.

EEX also provides an Auction-only membership option, whereby the company applying may choose to have its bids entered by EEX Market Supervision. Applicants for this membership need not furnish proofofliableequityofEUR50,000,andthereisnoannualmembershipfee.Onlyasmalltechnicalaccess fee is charged if the member wishes to access the electronic auction platform.

I would like to participate in the auctions without becoming an EEX member. How can I do that?Companies wishing to participate in the auctions indirectly can contact a Clearing Member of European Commodity Clearing, or a trading member of EEX, and request to enter into an agreement. This may requireprovidingthememberselectedwithadditionalinformationaccordingtotheirprocedures.Oncethe agreement has been concluded, the member is informed of its client’s bid preferences, and receives any necessary upfront payments in time for the auction. During the auction, the member bids on its client’s behalf and has to reveal its client’s name per bid, as per the EU Auction Regulation. Settlement of successful bids is completed according to the terms of the agreement. For a full list of ECC and EEX members, please see www.ecc.de and www.eex.com.

I’m an Eurex member. Can I also participate in the auction?

In the context of the cooperation between EEX and Eurex, Eurex participants can trade in the EEX Phase III auctions via their Eurex membership. Please contact you Eurex customer relations repre-sentative for more information on how to gain access.

European Energy Exchange AG

Leipzig office: Augustusplatz 904109 Leipzig GermanyPhone: +49 341 2156-555

London office: OneCanadaSquare|CanaryWharfLondon E14 5DRUnited KingdomPhone: +44 207 862 7559

Paris office: EEX Power Derivatives 5, Boulevard Montmartre 75002 Paris | France Phone: +33 1 73 03 6243

sales@eex.comwww.eex.com

Eurex Exchange

Frankfurt office:Mergenthalerallee 6165760 EschbornGermanyPhone: +49 69 2111 5956

London office: OneCanadaSquare|CanaryWharfLondon E14 5DRUnited KingdomPhone: +44 207 862 7276 andreas.seifert@eurexchange.com www.eurexchange.com

As o

f Sep

tem

ber 2

012

about us

Eurex Exchange and EEX have been cooperating in emissions trading for four years. Within this cooperation Eurex participants can trade emission allowances that are listed on EEX.

The European Energy Exchange (EEX) is the leading energy exchange in Europe. It develops, operates and connects secure, liquid and transparent markets for energy and related products on which power, natural gas, emission allowances and coal are traded. Clearing and settlement of all transactions are provided by the clearing house European Commodity Clearing AG (ECC).

Eurex Exchange is one of the largest global derivatives exchanges. Ourmembers benefit from diverse trading opportunities in more than 1,500 products covering 11 asset classes, including futures and options on national and international benchmark indexes, highly liquid fixed income derivatives and a growing range of commodity products. The Eurex global distribution network connects more than 400 members from 30 countries, providing them with cost-efficient access to our global liquidity pool.

More information: http://www.eex.com/en/auction