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How marginal is lignite? Two simple approaches to determine price-setting technologies in power markets

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  • Germeshausen, Robert
  • Wölfing, Nikolas

Abstract

How much carbon is in the price of power? The answer to this question determines many economic consequences of climate policies, i.e. in terms of costs for downstream industries. It requires, however, to first identify the cost impact of carbon pricing on the price-setting entity on the power market. Economic theory tells us that power prices are determined by the cost of the marginal plant. We propose two simple approaches to conclude on marginal technologies in electricity wholesale from public data. Both approaches are complementary, easy to implement, and based upon assumptions which are commonly used in more complex energy system models. We exemplify their use with a policy example on the compensation for indirect emission costs from the EU Emissions Trading Scheme. We find that the current policy design severely overweighs CO2 emissions from lignite power plants in the Central Western European power market, which may lead to overcompensation of industrial power users and therefore to a distortion with regard to the policy’s stated goal.

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  • Germeshausen, Robert & Wölfing, Nikolas, 2020. "How marginal is lignite? Two simple approaches to determine price-setting technologies in power markets," Energy Policy, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:enepol:v:142:y:2020:i:c:s0301421520302305
    DOI: 10.1016/j.enpol.2020.111482
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    Cited by:

    1. Gugler, Klaus & Haxhimusa, Adhurim & Liebensteiner, Mario, 2021. "Effectiveness of climate policies: Carbon pricing vs. subsidizing renewables," Journal of Environmental Economics and Management, Elsevier, vol. 106(C).
    2. Rövekamp, Patrick & Schöpf, Michael & Wagon, Felix & Weibelzahl, Martin, 2023. "For better or for worse? On the economic and ecologic value of industrial demand side management in constrained electricity grids," Energy Policy, Elsevier, vol. 183(C).

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    More about this item

    Keywords

    Marginal technology; Price formation; Power market; EU ETS; Indirect cost compensation;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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