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Impacts of the European Emission Trade System on Finnish Wholesale Electricity Prices

Author Info

  • Juha Honkatukia
  • Ville Mälkönen
  • Adriaan Perrels

Abstract

This study deals with the matter to what extent the costs of the EU Emission Trade System (EU ETS) end up in the electricity prices. The study encompasses both a theoretical and an empirical review of electricity price formation. It includes an econometric analysis of electricity price formation and the impact of EU ETS on power prices. On the basis of the econometric analysis is concluded that cost compensation due to EU ETS is indeed occurring. On average, about 75% to 95% of a price change in EU ETS is passed on to the Finnish NordPool spot price. The analysis also shows that the degree of utilisation of generation capacity (and hence the network loads) have an effect on electricity prices. This hints at possible market imperfections and can aggravate the price effects of EU ETS.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 405.

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Date of creation: 08 Nov 2006
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Handle: RePEc:fer:dpaper:405
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Keywords: Electricity markets; emission trading; competitiveness;

This paper has been announced in the following NEP Reports:

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  1. Nils-Henrik M. von der Fehr, Eirik S. Amundsen and Lars Bergman, 2005. "The Nordic Market: Signs of Stress?," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 71-98.
  2. Niels Haldrup & Morten O. Nielsen, 2004. "A Regime Switching Long Memory Model for Electricity Prices," Economics Working Papers 2004-2, School of Economics and Management, University of Aarhus.
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  7. Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
  8. Vives, Xavier, 1986. "Commitment, flexibility and market outcomes," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 217-229, June.
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  10. Neuhoff, K. & Keats, K. & Sato, M., 2006. "Allocation, incentives and distortions: the impact of EU ETS emissions allowance allocations to the electricity sector," Cambridge Working Papers in Economics 0642, Faculty of Economics, University of Cambridge.
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Cited by:

  1. Ibrahim Ahamada & Djamel Kirat, 2012. "Evidence of a nonlinear effect of the EU ETS on the electricity-generation sector," Documents de travail du Centre d'Economie de la Sorbonne 12047, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Wietze Lise & Jos Sijm & Benjamin Hobbs, 2010. "The Impact of the EU ETS on Prices, Profits and Emissions in the Power Sector: Simulation Results with the COMPETES EU20 Model," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(1), pages 23-44, September.
  3. Beat Hintermann, 2014. "Pass-through of CO2 Emission Costs to Hourly Electricity Prices in Germany," CESifo Working Paper Series 4964, CESifo Group Munich.
  4. Yihsu Chen & Jos Sijm & Benjamin Hobbs & Wietze Lise, 2008. "Implications of CO 2 emissions trading for short-run electricity market outcomes in northwest Europe," Journal of Regulatory Economics, Springer, vol. 34(3), pages 251-281, December.
  5. Jouvet, Pierre-André & Solier, Boris, 2013. "An overview of CO2 cost pass-through to electricity prices in Europe," Energy Policy, Elsevier, vol. 61(C), pages 1370-1376.
  6. Cotton, Deborah & De Mello, Lurion, 2014. "Econometric analysis of Australian emissions markets and electricity prices," Energy Policy, Elsevier, vol. 74(C), pages 475-485.
  7. Ibrahim Ahamada & Djamel Kirat, 2012. "The impact of phase II of the EU ETS on the electricity-generation sector," Documents de travail du Centre d'Economie de la Sorbonne 12007, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  8. repec:hal:journl:halshs-00717629 is not listed on IDEAS
  9. Adriaan Perrels, 2007. "Economic Implications of Differences in Member State Regulations for the European Union Emission Trade System," Discussion Papers 412, Government Institute for Economic Research Finland (VATT).
  10. Carlos Pinho & Mara Madaleno, 2011. "CO 2 emission allowances and other fuel markets interaction," Environmental Economics and Policy Studies, Society for Environmental Economics and Policy Studies - SEEPS, vol. 13(3), pages 259-281, September.
  11. Chernyavs’ka, Liliya & Gullì, Francesco, 2007. "Interaction of carbon and electricity prices under imperfect competition," MPRA Paper 5866, University Library of Munich, Germany.
  12. Ibrahim Ahamada & Djamel Kirat, 2012. "The impact of phase II of the EU ETS on the electricity-generation sector," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00673918, HAL.
  13. Kangas, Hanna-Liisa & Lintunen, Jussi & Uusivuori, Jussi, 2009. "The cofiring problem of a power plant under policy regulations," Energy Policy, Elsevier, vol. 37(5), pages 1898-1904, May.
  14. Ibrahim Ahamada & Djamel Kirat, 2012. "Evidence of a nonlinear effect of the EU ETS on the electricity-generation sector," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00717629, HAL.
  15. Francesco Gulli & Liliya Chernyav´ska, . "Modelling CO2 Price Pass-Through in Imperfectly Competitive Power Markets," Energy and Environmental Modeling 2007 24000016, EcoMod.
  16. Tim Laing & Misato Sato & Michael Grubb & Claudia Comberti, 2013. "Assessing the effectiveness of the EU Emissions Trading System," GRI Working Papers 106, Grantham Research Institute on Climate Change and the Environment.
  17. Blanco, Mari­a Isabel & Rodrigues, Glória, 2008. "Can the future EU ETS support wind energy investments?," Energy Policy, Elsevier, vol. 36(4), pages 1509-1520, April.
  18. repec:hal:journl:halshs-00673918 is not listed on IDEAS

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