Price determination of ETS allowances through the switching level of coal and gas in the power sector

Abstract

SUMMARYThis paper discusses the opportunities that exist for reducing greenhouse gases (GHG) emissions by switching from coal to gas-fired units in electricity generation, 'forced' by the European Union Greenhouse Gas Emission Trading Scheme (EU ETS) price level of CO 2 . It attempts to find efficient GHG cost profiles leading to a reasonable GHG emission reduction.In a methodological demonstration case (an electricity generation system consisting of two coal and two gas-fired power plants), we demonstrate how a GHG emission cost can lead to a certain switch of power plants with an accompanying GHG emission reduction. This GHG emission cost is dependent on the load level.The switching point method is applied to an electricity generation system similar to the Belgian one. It is found that the greatest opportunities for GHG emission reductions are situated in the summer season. By switching only the coal-fired units with the combined cycle (CC) gas-fired units, a significant GHG emission reduction is possible at a modest cost.With the simulation tool E-Simulate, the effect of a GHG emission cost in the summer season is investigated. A potential GHG emission reduction of 9.5% in relation to the case where there is no cost linked to GHG emission is possible at a relative low cost. When implementing a GHG cost in winter season, a smaller GHG reduction occurs while costs are higher.

Allowance price drivers in the first phase of the EU ETS

“…Probably the best-known result in permit market theory is that each firm chooses a level of abatement such that its MAC is equal to the permit price in every period, which implicitly defines the optimal amount of abatement: hard coal towards gas, because the former is more than twice as emissions-intensive per unit of output than the latter. Fuel switching is generally considered to be abatement method of choice in the EU ETS [4,22,23,25], given that there was not enough time between market setup and the end of the first phase for firms to alter production technology significantly. Because load factors for power generation are around 50%, a production shift from coal to gas is more likely in this than in other sectors covered by the market.…”

Abatement and Allocation in the Pilot Phase of the EU ETS

“…Fossil fuel prices play an important role in determining CO 2 emissions in both the short run -due to the substitution effect of fuel switching from emissions intensive fuels to less intensive alternatives (Delarue, Voorspools, and D'haeseleer, 2008;Delarue and D'haeseleer, 2007) -and the long run, through the income effect and the process of directed technical change. Ideally, prices for various fossil fuels used for energy production would be included as explanatory variables in our analysis.…”

Impacts on CO2 Emission Allowance Prices in China: A Quantile Regression Analysis of the Shanghai Emission Trading Scheme

“…Bredin and Muckley [14] investigated additional fundamentals such as equity prices, temperature deviations, and CDS and CSS by using the Johansen cointegration test. Wang and Bai [15] found that CDS and CSS had a positive and negative effect on allowance prices in EU-ETS, respectively and other studies took account of the switching behavior between gas and coal [16,17]. Relying on the cointegration method, Creti et al [17] investigated the relationships between carbon price and its drivers (oil price, the switching price between gas and coal, equity price index) during Phases I-II of the EU-ETS and showed that the equilibrium relationships existed in both phases, especially in Phase II.…”