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The Impact of Modified EU ETS Allocation Principles on the Economics of CHP-based District Heating Networks

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Author Info

  • Westner, Günther

    ()
    (E.ON Energy Projects GmbH)

  • Madlener, Reinhard

    ()
    (E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University)

Abstract

The economics of large-scale combined heat and power (CHP) generation for district heating (DH) applications are strongly affected by the costs and allocation mechanism of CO2 emission allowances. In the next period of the European emission trading system (EU ETS), from 2013 onwards, the allocation rules for CHP generation will be modified according to the principles announced in EU Directive 2009/29/EC. By means of a discounted cash-flow model we first show that the implementation of the modified allocation mechanism significantly reduces the expected net present value of large-scale CHP plants for DH. In a next step, by applying a spread-based real options model we analyze the decision-making problem of an investor who intends to invest in CHP generation. Our results provide some evidence that the modified EU ETS principles contribute to reducing the attractiveness of investments in energy-efficient large-scale CHP plants that feed into DH networks. In contrast, decentralized small-scale CHP, which is not subject to the EU ETS, may benefit from this development and could, therefore increasingly replace large-scale CHP assets. In other words, European legislation is indirectly promoting the further diffusion of decentralized CHP generation units.

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Bibliographic Info

Paper provided by E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN) in its series FCN Working Papers with number 4/2011.

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Length: 33 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:ris:fcnwpa:2011_004

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Related research

Keywords: Combined heat & power; Emission trading system; Investment under uncertainty; Spread; Real options;

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Cited by:
  1. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "An Evaluation of Attribute Anchoring Bias in a Choice Experimental Setting," FCN Working Papers 6/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  2. Bruns, Stephan B. & Gross, Christian, 2013. "What if energy time series are not independent? Implications for energy-GDP causality analysis," Energy Economics, Elsevier, vol. 40(C), pages 753-759.
  3. Hackbarth, André & Madlener, Reinhard, 2011. "Consumer Preferences for Alternative Fuel Vehicles: A Discrete Choice Analysis," FCN Working Papers 20/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  4. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Optimal Power Generation Investment: Impact of Technology Choices and Existing Portfolios for Deploying Low-Carbon Coal Technologies," FCN Working Papers 12/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  5. Kraas, Birk & Schroedter-Homscheidt, Marion & Pulvermüller, Benedikt & Madlener, Reinhard, 2011. "Economic Assessment of a Concentrating Solar Power Forecasting System for Participation in the Spanish Electricity Market," FCN Working Papers 12/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  6. Rohlfs, Wilko & Madlener, Reinhard, 2013. "Challenges in the Evaluation of Ultra-Long-Lived Projects: Risk Premia for Projects with Eternal Returns or Costs," FCN Working Papers 13/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  7. Palmer, Johannes & Sorda, Giovanni & Madlener, Reinhard, 2013. "Modeling the Diffusion of Residential Photovoltaic Systems in Italy: An Agent-based Simulation," FCN Working Papers 9/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  8. Harmsen - van Hout, Marjolein & Ghosh, Gaurav & Madlener, Reinhard, 2013. "The Impact of Green Framing on Consumers’ Valuations of Energy-Saving Measures," FCN Working Papers 7/2013, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  9. Rohlfs, Wilko & Madlener, Reinhard, 2012. "Assessment of Clean-Coal Strategies: The Questionable Merits of Carbon Capture-Readiness," FCN Working Papers 18/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  10. Dergiades, Theologos & Madlener, Reinhard & Christofidou, Georgia, 2012. "The Nexus between Natural Gas Spot and Futures Prices at NYMEX: Do Weather Shocks and Non-Linear Causality in Low Frequencies Matter?," FCN Working Papers 17/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2013.
  11. Michelsen, Carl Christian & Madlener, Reinhard, 2011. "Homeowners' Preferences for Adopting Residential Heating Systems: A Discrete Choice Analysis for Germany," FCN Working Papers 9/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
  12. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

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