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Carbon and energy prices under uncertainty: A theoretical analysis of fuel switching with non-equally efficient power plants

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  • Vincent Bertrand

Abstract

European power producers have a major influence on the EU ETS, given that both their CO2 emissions and their EUA (European Union Allowance) allocations account for more than half of the total volumes of the scheme. Fuel switching is often considered as the main short-term abatement measure under the EU ETS. It consists in substituting combined cycle gas turbines (CCGTs) for hard-coal plants in power generation. Thereby coal plants run for shorter periods, and CO2 emissions are reduced. This paper provides a theoretical analysis of fuel switching, in a context where power plants involved are not equally efficient. We begin with some analyses which enable us to observe how differences in the efficiency of power plants impact the cost of fuel switching, and how this is related to the level of switching effort. Based on these preliminary analyses, we build the first partial equilibrium model taking into account the effect of differences in the efficiency of power plants involved in fuel switching. We also investigate the effect of the timing of fuel switching abatements, within the temporally defined environment of our dynamic partial equilibrium model. Results show that the gas price, uncontrolled CO2 emissions and the timing of abatement (through the time of occurrence of random shocks on uncontrolled emissions) act together on the carbon price, and on its relationship with fuel prices..

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Bibliographic Info

Paper provided by Chaire Economie du Climat in its series Working Papers with number 1309.

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Length: 28 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:cec:wpaper:1309

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Keywords: Tradable Emission Allowances; Fuel Switching; EU ETS; Efficiency of power plants; Partial Equilibrium Modeling;

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References

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  1. Delarue, Erik & Lamberts, Hans & D’haeseleer, William, 2007. "Simulating greenhouse gas (GHG) allowance cost and GHG emission reduction in Western Europe," Energy, Elsevier, Elsevier, vol. 32(8), pages 1299-1309.
  2. Bertrand, Vincent, 2013. "Switching to biomass co-firing in European coal power plants: Estimating the biomass and CO 2 breakeven prices," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/12952, Paris Dauphine University.
  3. Beat Hintermann, 2009. "Allowance Price Drivers in the First Phase of the EU ETS," CEPE Working paper series, CEPE Center for Energy Policy and Economics, ETH Zurich 09-63, CEPE Center for Energy Policy and Economics, ETH Zurich.
  4. Vincent Bertrand, 2013. "Switching to biomass co-firing in European coal power plants: Estimating the biomass and CO2 breakeven prices," Economics Bulletin, AccessEcon, vol. 33(2), pages 1535-1546.
  5. Schennach, Susanne M., 2000. "The Economics of Pollution Permit Banking in the Context of Title IV of the 1990 Clean Air Act Amendments," Journal of Environmental Economics and Management, Elsevier, vol. 40(3), pages 189-210, November.
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  7. Creti, Anna & Jouvet, Pierre-André & Mignon, Valérie, 2012. "Carbon price drivers: Phase I versus Phase II equilibrium?," Energy Economics, Elsevier, Elsevier, vol. 34(1), pages 327-334.
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  9. Bertrand, Vincent, 2012. "Understanding fuel switching under the EU ETS," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/12955, Paris Dauphine University.
  10. Ellerman Denny & Delarue Erik & Hannes Weigt, 2012. "CO2 Abatement from RES Injections in the German Electricity Sector: Does a CO2 Price Help?," Working papers, Faculty of Business and Economics - University of Basel 2012/14, Faculty of Business and Economics - University of Basel.
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  14. Maria Mansanet-Bataller & Angel Pardo & Enric Valor, 2007. "CO2 Prices, Energy and Weather," The Energy Journal, International Association for Energy Economics, International Association for Energy Economics, vol. 0(Number 3), pages 73-92.
  15. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, Elsevier, vol. 5(3), pages 395-418, December.
  16. Trotignon, Raphaël, 2012. "In search of the carbon price: The european CO2 emission trading scheme : from ex ante and ex post analysis to the protection in 2020," Economics Thesis from University Paris Dauphine, Paris Dauphine University, Paris Dauphine University, number 123456789/11212 edited by De Perthuis, Christian.
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