a b s t r a c tIf CO 2 capture and storage (CCS) is to become a viable option for low-carbon power generation, its deployment will require the construction of dedicated CO 2 transport infrastructure. This paper describes the InfraCCS model, which can determine the likely extent and cost of the optimal least-cost CO 2 transport network at European scale for the period 2015-2050, with 2015 the earliest foreseeable starting date of the CCS projects co-funded by the European Energy Programme for Recovery (EEPR), and 2050 the EU's target date for 80-95% reduction of greenhouse gas emissions. The computation is made possible by a number of methodological innovations compared to previous research, in particular: the use of k-means clustering to reduce the number of nodes in the network; the application of the Delaunay triangulation algorithm for pipeline pre-selection; and the introduction of a mathematically convenient yet realistic new pipeline costing model. The InfraCCS tool is applied to determine the optimal network corresponding to a CCS scenario that ensures near-complete decarbonisation of the European power sector. It is shown that the size of the CO 2 network could range from 11,000 to 17,000 km by 2050, requiring 16-36 billion euros investment, with the higher numbers corresponding to the case when onshore aquifers are excluded as potential CO 2 storage sites. Since the model shows that by 2030 more than half of the EU Member States could be involved in cross-border CO 2 transport, international coordination seems crucial for the development of an optimised trans-European CO 2 transport network.

The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when an increasing number of derivatives are introduced. It develops an equilibrium model of the electricity market with risk averse firms and a set of traded financial products, more specifically: a forward contract and an increasing number of options. We first show that aggregate welfare (the sum of individual firms' utility) increases with the number of derivatives offered, although most of the benefits are captured with one to three options. Secondly, power plant investments typically increase because additional derivatives enable better hedging of investments. However, the availability of derivatives sometimes leads to 'crowding-out' of physical investments because capital is being used more profitably to speculate on financial markets. Finally, we illustrate that players basing their investment decisions on risk-free probabilities inferred from market prices, may significantly overinvest when markets are not sufficiently complete. 1 The authors would like to thank the participants of the workshop on "Policymaking Benefits and Limitations from Using Financial Methods and Modelling in Electricity Markets" in Oxford (July 2008) and of the seminar at Tilburg University for the insightful discussion. Special thanks to the discussant Thomas Tangerås, as well as to two anonymous reviewers. Furthermore, the authors would like to thank the three anonymous referees of Energy Economics, who provided helpful and constructive feedback. Joris Morbee gratefully acknowledges financial support from the KULeuven Energy Institute.

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The high volatility of electricity markets gives producers and retailers an incentive to hedge their exposure to electricity prices by buying and selling derivatives. This paper studies how welfare and investment incentives are affected when markets for derivatives are introduced, and to what extent this depends on market completeness. We develop an equilibrium model of the electricity market with riskaverse firms and a set of traded financial products, more specifically: forwards and an increasing number of options. Using this model, we first show that aggregate welfare in the market increases with the number of derivatives offered. If firms are concerned with large negative shocks to their profitability due to liquidity constraints, option markets are particularly attractive from a welfare point of view. Secondly, we demonstrate that increasing the number of derivatives improves investment decisions of small firms (especially when firms are risk-averse), because the additional financial markets signal to firms how they can reduce the overall sector risk. Also the information content of prices increases: the quality of investment decisions based on risk-free probabilities, inferred from market prices, improves as markets become more complete Finally, we show that government intervention may be needed, because private investors may not have the right incentives to create the optimal number of markets.1 The authors would like to thank the participants of the workshop on "Policymaking Benefits and Limitations from Using Financial Methods and Modelling in Electricity Markets" in Oxford (July 2008) for the insightful discussion. Special thanks to the discussant Thomas Tangerås, as well as to two anonymous reviewers.