CO2 cost pass-through and windfall profits in the power sector

TLDR: In this article, the authors analyzed the implications of the EU ETS for the power sector, notably the impact of free allocation of CO2 emission allowances on the price of electricity and the profitability of power generation.

About: This article is published in Climate Policy.The article was published on 2006-01-01 and is currently open access. It has received 642 citations till now. The article focuses on the topics: Windfall gain & Marginal product.

Figures

Figure 4. Peak power prices versus fuel/CO 2 costs in The Netherlands (year-ahead, 2004–2005).

Figure 3. Off-peak power prices versus fuel/CO 2 costs in Germany (year-ahead, 2004–2005).

Figure 7. Work-on rate of CO 2 costs on the German spot power market for different time periods, assuming coal generators are at the margin.

Figure 1. Pass-through of CO 2 opportunity costs for different load periods (at a price of d20/tCO 2 ).

Figure 5. Trends in dark spreads and CO 2 costs per coal-generated MWh in Germany during peak and off-peak hours (year-ahead, 2004–2005).

Figure 6. Trends in spark/dark spreads and CO 2 costs per gas/coal-generated MWh in The Netherlands during peak and off-peak hours (year-ahead, 2004–2005).

Frequently asked questions

Q1. What have the authors contributed in "Cp_61_47_sijm.pmd" ?

This article analyses the implications of the EU ETS for the power sector, notably the impact of free allocation of CO 2 emission allowances on the price of electricity and the profitability of power generation. As well as some theoretical reflections, the article presents empirical and model estimates of CO 2 cost pass-through for Germany and The Netherlands, indicating that pass-through rates vary between 60 and 100 % of CO 2 costs, depending on the carbon intensity of the marginal production unit and various other marketor technology-specific factors. 

Q2. What is the main purpose of the free allocation of emissions allowances?

A main purpose of the free allocation of emissions allowances under the US capand-trade programmes for SO2 and NO x , as well as under the EU ETS for CO 2 , is to obtain thepolitical support of large emitters. 

Q3. What is the effect of emissions trading on the infra-marginal unit?

if the infra-marginal unit is more carbon-intensive than the marginal unit, it suffers from a loss, as the increase in power price is lower than the increase in its carbon costs per MWh; notably if allowances have to be bought on the market. 

Q4. What is the effect of emissions trading on the price of electricity?

The extent to which carbon costs are passed through to power prices also depends on changes in the merit order of the supply curve due to emissions trading. 

Q5. What is the reason for the increase in the price of gas-generated power?

CO2costs of gas-generated power have also increased over this period, but less dramatically, i.e. from d4 to d11/MWh (partly due to the relatively low – but constant – emission factor of gas-generated electricity). 

Q6. What is the effect of the increase in gas prices on the pass-through rate of coal-?

As coal generators benefit from this gas cost-induced increase in power prices, this leads to an overestimation of the pass-through rate of CO2 costs for coal-generated power. 

Q7. What is the cost of CO2 emissions per MWh?

Earthscanshows the costs of CO 2 allowances required to cover the emissions per MWh generated by a coalfired power plant (with an emission factor of 0.85 tCO 2 /MWh). 

Q8. What is the reason for some grandfathering to this infra-marginal unit?

in the latter case, some grandfathering to this inframarginal unit may be justified to break even, depending on the relative carbon intensity of this unit. 

Q9. What is the effect of a smaller market on the profits of power generators?

While all generators profit from the higher prices, the effect of a smaller market dominates this effect and therefore slightly reduces their revenues.