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The magnitude of the impact of a shift from coal to gas under a Carbon Price

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  • Wagner, Liam
  • Molyneaux, Lynette
  • Foster, John

Abstract

We seek to evaluate the extent of the pass through of increased fuel and carbon costs to wholesale prices with a shift of generation from coal-fired to gas-fired plants. Modelling of Australia's National Electricity Market in 2035 is undertaken using Australian Energy Market Operator assumptions for fuel costs, capital costs and demand forecasts. An electricity market simulation package (PLEXOS), which uses deterministic linear programming techniques and transmission and generating plant data, is used to optimize the power system and determine the least cost dispatch of generating resources to meet a given demand. We find that wholesale market prices increase due to the full pass through of the increased costs of gas over coal as an input fuel and the Carbon Price. In addition, we find that wholesale prices increase by more than the pass through of fuel and carbon costs because of the fact that generators can charge infra-marginal rents and engage in strategic behaviour to maximize their profits.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 66 (2014)
Issue (Month): C ()
Pages: 280-291

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Handle: RePEc:eee:enepol:v:66:y:2014:i:c:p:280-291

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Web page: http://www.elsevier.com/locate/enpol

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Keywords: Electricity; Markets; Infra-marginal rent;

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References

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  1. Robert S. Pindyck, 1999. "The Long-Run Evolutions of Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-27.
  2. Molyneaux, Lynette & Froome, Craig & Wagner, Liam & Foster, John, 2013. "Australian power: Can renewable technologies change the dominant industry view?," Renewable Energy, Elsevier, vol. 60(C), pages 215-221.
  3. Cruciani, Michel & Keppler, Jan Horst, 2010. "Rents in the European Power Sector due to Carbon Trading," Economics Papers from University Paris Dauphine 123456789/2570, Paris Dauphine University.
  4. William E., Lilley & Luke J., Reedman & Liam D., Wagner & Colin F., Alie & Anthony R., Szatow, 2012. "An economic evaluation of the potential for distributed energy in Australia," Energy Policy, Elsevier, vol. 51(C), pages 277-289.
  5. Denny, Eleanor & O'Malley, Mark, 2009. "The impact of carbon prices on generation-cycling costs," Energy Policy, Elsevier, vol. 37(4), pages 1204-1212, April.
  6. Nanduri, Vishnu & Kazemzadeh, Narges, 2012. "Economic impact assessment and operational decision making in emission and transmission constrained electricity markets," Applied Energy, Elsevier, vol. 96(C), pages 212-221.
  7. AfDB AfDB, . "AfDB Group Annual Report 2010 (Arabic)," Annual Report, African Development Bank, number 311, 9.
  8. Foley, Aoife & Tyther, Barry & Calnan, Patrick & Ó Gallachóir, Brian, 2013. "Impacts of Electric Vehicle charging under electricity market operations," Applied Energy, Elsevier, vol. 101(C), pages 93-102.
  9. Liam Wagner & Luke Reedman, 2010. "Modeling the deployment of plug-in hybrid and electric vehicles and their effects on the Australian National Electricity Market," Energy Economics and Management Group Working Papers 06, School of Economics, University of Queensland, Australia.
  10. Lynette Molyneaux & Craig Froome & Liam Wagner, 2012. "Where is Australian Power headed in 2035?," Energy Economics and Management Group Working Papers 10-2012, School of Economics, University of Queensland, Australia.
  11. AfDB AfDB, . "Annual Report in Brief 2010," Annual Report, African Development Bank, number 304, 9.
  12. AfDB AfDB, . "AfDB Group Annual Report 2010," Annual Report, African Development Bank, number 310, 9.
  13. García-Martos, Carolina & Rodríguez, Julio & Sánchez, María Jesús, 2013. "Modelling and forecasting fossil fuels, CO2 and electricity prices and their volatilities," Applied Energy, Elsevier, vol. 101(C), pages 363-375.
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Cited by:
  1. John Foster & Liam Wagner, 2014. "International experience with transformations in electricity markets: A Short Literature Review," Energy Economics and Management Group Working Papers 2-2014, School of Economics, University of Queensland, Australia.

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