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Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules

Author

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  • Etienne Billette de Villemeur

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Pierre-Olivier Pineau

Abstract

The electricity sector is the largest source of greenhouse gases (GHG) emissions in the world, and reducing these emissions can often be costly. However, because electricity markets remain integrated at a shallow level (with different pricing regulations), many gains from deeper integration (adoption of marginal cost pricing everywhere) are yet to be realized. This paper assesses the benefits of deep integration between a "hydro" jurisdiction and a "thermal" one. It also underscores the inefficiency of trade when pricing rules differ. Our detailed hourly model, calibrated with real data from the provinces of Ontario and Quebec, Canada, estimates price, consumption, emissions and welfare changes associated with fully integrating electricity markets, under transmission constraints. A negative abatement cost of $37/tonne of CO2 was found (for more than 1 million tonnes), clearly illustrating the untapped potential of wealth creation in carbon reduction initiatives. Furthermore, given the inefficiency of shallow integration between markets, we found that removing interconnections between markets offers a relatively affordable CO2-reduction opportunity, at $21.5/tonne.

Suggested Citation

  • Etienne Billette de Villemeur & Pierre-Olivier Pineau, 2016. "Integrating Thermal and Hydro Electricity Markets: Economic and Environmental Costs of not Harmonizing Pricing Rules," Post-Print hal-01533544, HAL.
    • Handle: RePEc:hal:journl:hal-01533544
    DOI: 10.5547/01956574.37.1.edev
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    References listed on IDEAS

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    Cited by:

    1. Muhumuza Ezra Rubanda & Livingstone Senyonga & Mohammed Ngoma & Muyiwa S. Adaramola, 2022. "Electricity Trading in Energy Market Integration: A Theoretical Review," Energies, MDPI, vol. 16(1), pages 1-31, December.
    2. Walter Cont & Diego Barril & Agustín Carbó, 2021. "Electricity trade in South America: An analysis based on the gravity equation," Asociación Argentina de Economía Política: Working Papers 4456, Asociación Argentina de Economía Política.
    3. Chenavaz, Régis Y. & Dimitrov, Stanko & Figge, Frank, 2021. "When does eco-efficiency rebound or backfire? An analytical model," European Journal of Operational Research, Elsevier, vol. 290(2), pages 687-700.
    4. Genc, Talat S. & Thille, Henry & ElMawazini, Khaled, 2020. "Dynamic competition in electricity markets under uncertainty," Energy Economics, Elsevier, vol. 90(C).

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