Electricity pricing under “carbon emissions trading”: A dominant firm with competitive fringe model

The aim of this paper is to analyze the impact of trading of CO₂ emissions allowances on electricity pricing in the short run. We mainly refer to the European Emissions Trading Scheme (ETS) and are interested in understanding the role of electricity market structures. We carry out a simple analytical model useful to verify whether (and under which conditions) the impact of the ETS under market power could be lower (or higher) than that under perfect competition. We analyze a context where generators compete in a uniform, first price auction. Market power in the form of a dominant firm facing a competitive fringe model is assumed. The paper highlights that the marginal CO₂ opportunity costs are fully included in energy prices when the electricity market is perfectly competitive. Under market power the impact of the ETS equals or exceeds that under the competitive scenario only when there is excess capacity and the share of most polluting plants in the market is low enough. Otherwise, the impact under market power is less than under perfect competition and significantly decreases in the degree of market concentration. This especially occurs when there is not high excess capacity and regardless of either the plant mix or the allowance price. In this case, moreover, the marginal pass-through rate is lower in the peak than in the off-peak hours and can be even nil if the degree of market concentration is high enough.     

A theoretical analysis of procurement auctions for tertiary control in Germany

As far as energy policy is concerned, the design of the regulatory framework for energy transmission and distribution is a key issue. Consequently, also the embodiment of balancing power markets drives mainly the effectiveness of political implications for the energy sector. Initially, tertiary control in Germany was solely offered by transmission system operators of the respective power control areas and their associated power plant. The recast of the Energy Industry Act of 2005 led in last consequence to a common procurement auction for the supply of tertiary control, which starts on December 1, 2006. Admittedly, the reform has fallen short of expectations so far, first concerning the intensification of market entry of tertiary control providers as well as the desired decline of the price level. Hence, this article examines the effects of the changeover on observable demand charges. In order to identify attributes of the common procurement auction for tertiary control hampering market entry of providers, giving stimuli to collusion and strategic behavior, reducing intensity of competition and encouraging an upswing of prices, we analyze the design under an auction theoretical approach and deduce empirically whether structural components of the auction design have to be touched up again.     

Influence of allowance allocation events on prices in China’s carbon market pilots– an AR-GARCH-based analysis

ABSTRACT

China has established seven pilot carbon markets and has made efforts to establish a national carbon market. This paper constructs an AR-GARCH model and adopts bilaterally modified dummy variables to investigate the impacts of regulatory update events (allowance allocation plans and allowance auctions) on the pilot carbon markets in China. The pilots of Guangdong, Shanghai, and Hubei are chosen as case studies. We find that each pilot reacted differently to the same events due to mechanism design diversity. The allowance allocation plan in the Shanghai and Guangdong pilot markets generated relatively distinct influences on the carbon price. Furthermore, to a certain extent, allowance auctions played a role in carbon price discovery in Guangdong and Hubei. However, such an impact was not remarkable in the Shanghai pilot market. Based on the empirical results, policy recommendations are presented for the establishment of a national carbon market.     

基于碳交易市场下的电力企业碳减排决策研究

中国CO2排放量巨大,其中电力企业的CO2排放量占全国总排放量的50%以上。在碳交易市场背景下,电力企业需要在拍卖购买碳配额进行减排与自主更新进行减排中作出抉择。基于成本效益法对发电企业的低碳成本进行了综合分析,将通过优化后所减少的CO2排放量作为收益,在碳排放交易市场的背景下将碳减排的经济效益进行量化,并通过与碳排放权交易市场的碳价格进行比较,从而得出火电企业所应作出的最佳决策。如结果所示,在一定条件下,如果企业进行技术更新后可以减排10%、20%、30%的电力生产CO2排放量,则火电企业所作出的碳减排决策分界点的拍卖比例分别为54%、27%与18%。     

煤种对燃煤电厂碳排放经济性的影响研究

为了减少温室气体排放,同时保证电厂运行的经济性,本文采用VB6. 0编程实现对一台600 MW锅炉热力计算,对比分析了4种不同煤种对锅炉效率、燃煤成本的影响;基于物料平衡法重点分析煤质成分对碳排放及脱硫成本影响。结果表明:同一负荷下,低位发热量越低、收到基碳含量越高的煤种燃煤量、碳排放量越大;煤质特性和碳价共同决定燃煤成本、排碳及脱硫成本,燃用贫煤时整体经济性最差;碳价变化时,不同的煤种对应的燃煤和排碳总成本也不同。根据当前燃煤价格及碳价提前预测电厂运行经济性,对燃煤电厂合理选择煤种提供有益的参考。     

Market design for renewable energy auctions: An analysis of alternative auction formats

Auctions are widely used to determine the remuneration for renewable energies. They typically induce a high concentration of renewable energy plants at very productive sites far-off the main load centres, leading to an inefficient allocation as transmission line capacities are restricted but not considered in the allocation, resulting in an inefficient system configuration in the long run. To counteract these tendencies effectively, we propose a combinatorial auction design that allows to implement regional target capacities, provides a simple pricing rule and maintains a high level of competition between bidders by permitting package bids. By means of extensive numerical experiments we evaluate the combinatorial auction as compared to three further RES auction designs, the current German nationwide auction design, a simple nationwide auction, and regional auctions. We find that if bidders benefit from high enough economies of scale, the combinatorial auction design implements system-optimal target capacities without increasing the average remuneration per kWh as compared to the current German auction design. The prices resulting from the combinatorial auction are linear and anonymous for each region whenever possible, while minimal personalised markups on the linear prices are applied only when necessary. We show that realistic problem sizes can be solved in seconds, even though the problem is computationally hard.     

Design of yardstick competition and consumer prices: Experimental evidence

In this paper we analyze the effect of the design of yardstick competition on consumer prices, by means of a theoretical analysis as well as an economic experiment. We compare four different designs: the uniform yardstick, the unweighted uniform yardstick, the discriminatory yardstick, and the best-practice yardstick. The effect of a specific design on prices depends on two separate mechanisms, one which affects the incentive power to increase productive efficiency and another which affects the risk of collusion. We show theoretically that for the best-practice yardstick, which is widely applied in several industries in a number of countries, these two mechanisms point in the same direction (high prices), which is confirmed by the experiment. Both the theoretical analysis as well as the economic experiment show that the discriminatory yardstick results in lower prices than the unweighted uniform yardstick. The theory, however, does not give a clear answer on the relative performance of the discriminatory versus the weighted uniform yardstick. In the experimental analysis, we find that the advantage of the discriminatory yardstick in terms of giving incentives to improve productive efficiency exceeds the disadvantage of a relatively higher risk of collusion. This conclusion appears to be robust for different degrees of heterogeneity of the industry. Hence the discriminatory yardstick yields the lowest prices for consumers.     

The potential impacts of climate-change policy on freshwater use in thermoelectric power generation

Climate change policy involving a price on carbon would change the mix of power plants and the amount of water they withdraw and consume to generate electricity. We analyze what these changes could entail for electricity generation in the United States under four climate policy scenarios that involve different costs for emitting CO₂ and different technology options for reducing emissions out to the year 2030. The potential impacts of the scenarios on the U.S. electric system are modeled using a modified version of the U.S. National Energy Modeling System and water-use factors for thermoelectric power plants derived from electric utility data compiled by the U.S. Energy Information Administration. Under all the climate-policy scenarios, freshwater withdrawals decline 2–14% relative to a business-as-usual (BAU) scenario of no U.S. climate policy. Furthermore, water use decreases as the price on CO₂ under the climate policies increases. At relatively high carbon prices (>$50/tonne CO₂), however, retrofitting coal plants to capture CO₂ increases freshwater consumption compared to BAU in 2030. Our analysis suggests that climate policies and a carbon price will reduce both electricity generation and freshwater withdrawals compared to BAU unless a substantial number of coal plants are retrofitted to capture CO₂.     

Carbon emissions trading scheme exploration in China: A multi-agent-based model

To develop a low-carbon economy, China launched seven pilot programs for carbon emissions trading (CET) in 2011 and plans to establish a nationwide CET mechanism in 2015. This paper formulated a multi-agent-based model to investigate the impacts of different CET designs in order to find the most appropriate one for China. The proposed bottom-up model includes all main economic agents in a general equilibrium framework. The simulation results indicate that (1) CET would effectively reduce carbon emissions, with a certain negative impact on the economy, (2) as for allowance allocation, the grandfathering rule is relatively moderate, while the benchmarking rule is more aggressive, (3) as for the carbon price, when the price level in the secondary CET market is regulated to be around RMB 40 per metric ton, a satisfactory emission mitigation effect can be obtained, (4) the penalty rate is suggested to be carefully designed to balance the economy development and mitigation effect, and (5) subsidy policy for energy technology improvement can effectively reduce carbon emissions without an additional negative impact on the economy. The results also indicate that the proposed novel model is a promising tool for CET policy making and analyses.     

Reserve price: Lessons learned from Brazilian electricity procurement auctions

Auctions have been used in several formats in the electric energy industry. In general, regulators may be uncomfortable initiating a reverse auction at a higher-than-expected final price, fearing that participants may sell their energy at an excess profitability. Nevertheless, evidence from electricity procurement auctions conducted in Brazil supports the findings that these types of auctions have the opposite effect. By attracting a larger number of agents, these auctions can trigger stronger competition and lead to lower settlement pricing. Accordingly, the Brazilian cases examined in this article present significant evidence to support this directional theory. In fact, there are some cases of electricity procurement auctions that show that inadequate auction reserve pricing leads to inefficient outcomes and may also cause the auction to fail. On the other hand, auctions with adequate price caps have led to lower final clearing prices, thus contributing to reasonable final energy pricing.     

Valuation of marginal CO2 abatement options for electric power plants in Korea

The electricity generation sector in Korea is under pressure to mitigate greenhouse gases as directed by the Kyoto Protocol. The principal compliance options for power companies under the cap-and-trade include the application of direct CO₂ emission abatement and the procurement of emission allowances. The objective of this paper is to provide an analytical framework for assessing the cost-effectiveness of these options. We attempt to derive the marginal abatement cost for CO₂ using the output distance function and analyze the relative advantages of emission allowance procurement option as compared to direct abatement option. Real-option approach is adopted to incorporate emission allowance price uncertainty. Empirical result shows the marginal abatement cost with an average of €14.04/ton CO₂ for fossil-fueled power plants and confirms the existence of substantial cost heterogeneity among plants which is sufficient to achieve trading gains in allowance market. The comparison of two options enables us to identify the optimal position of the compliance for each plant. Sensitivity analyses are also presented with regard to several key parameters including the initial allowance prices and interest rate. The result of this paper may help Korean power plants to prepare for upcoming regulations targeted toward the reduction of domestic greenhouse gases.     

Income risk of EU coal-fired power plants after Kyoto

Coal-fired power plants enjoy a significant advantage relative to gas plants in terms of cheaper fuel cost. This advantage may erode (or turn into disadvantage) depending on CO₂ emission allowance price. Financial risks are further reinforced when the price of electricity is determined by natural gas-fired plants’ marginal costs. We aim to empirically assess the risks in EU coal plants’ margins up to the year 2020. Parameter values are derived from actual market data. Monte Carlo simulation allows compute the expected value and risk profile of coal plants’ earnings. Future allowance prices may spell significant risks on utilities’ balance sheets.     

拍卖法对京津冀碳市场一体化的影响

依据国家原定计划,2020全国统一的碳市场将进入运行阶段。受新冠疫情及相关因素影响,现阶段全国碳市场的全面建成与充分使用仍然难以一蹴而就。京津冀碳市场一体化建设是全国统一碳市场建设的关键。研究主题为京津冀碳市场一体化:一是以超越对数生产函数为理论工具,运用岭回归数据分析方法,分析测算2001-2015年京、津、冀地区的碳配额影子价格,并预测2025年不同拍卖比例下三地区的碳配额影子价格;二是依据冰川模型思想,以碳配额不同拍卖比例下的影子价格为基础数据,分析测算出京津冀碳市场一体化指数。研究结论显示,随着碳配额拍卖比例由1%到10%,2025年京津地区的碳配额市场一体化程度有逐步降低趋势,京冀和津冀区域有逐步上升趋向。     

Designing an emissions trading scheme for China with a dynamic computable general equilibrium model

To fulfill its Copenhagen pledges to control carbon emissions and mitigate climate change, China plans to establish a nationwide emissions trading scheme (ETS) in 2016. This paper develops a multi-sector dynamic computable general equilibrium model with an ETS module to study the appropriate ETS policy design, including a carbon cap, permit allocation and supplementary policies (e.g., penalty policies and subsidy policies). The main results are as follows. (1) To achieve China's Copenhagen pledge, the equilibrium nationwide carbon price is observed to be between 36 and 40 RMB yuan per metric ton. (2) The ETS policy has a cost-effective mitigation effect by improving China's production and energy structures with relatively little economic harm. (3) Various ETS sub-policies should be carefully designed to balance economic growth and carbon mitigation. In particular, the carbon cap should be set according to China's Copenhagen pledge. A relatively large distribution ratio of free permits, the output-based grandfathering rule for free permits, a penalty price (on illegitimate emissions) slightly above the carbon price, and a sufficient subsidy (from ETS revenue) are strongly recommended in the early stages to avoid significant economic loss. These designs can be adjusted in later stages to enhance the mitigation effect.     

European CO2 prices and carbon capture investments

We assess the option to install a carbon capture and storage (CCS) unit in a coal-fired power plant operating in a carbon-constrained environment. We consider two sources of risk, namely the price of emission allowance and the price of the electricity output. First we analyse the performance of the EU market for CO₂ emission allowances. Specifically, we focus on the contracts maturing in the Kyoto Protocol's first commitment period (2008 to 2012) and calibrate the underlying parameters of the allowance price process. Then we refer to the Spanish wholesale electricity market and calibrate the parameters of the electricity price process.We use a two-dimensional binomial lattice to derive the optimal investment rule. In particular, we obtain the trigger allowance prices above which it is optimal to install the capture unit immediately. We further analyse the effect of changes in several variables on these critical prices, among them allowance price volatility and a hypothetical government subsidy.We conclude that, at current permit prices, immediate installation does not seem justified from a financial point of view. This need not be the case, though, if carbon market parameters change dramatically, carbon capture technology undergoes significant improvements, and/or a specific governmental policy to promote these units is adopted.     

不同拍卖分配比例下电力系统碳排放交易最优经济性研究

在分析电力系统碳排放分配方式及分配机制基础上,得到了不同拍卖分配比例下的火电机组的初始碳排放配额,从机组角度分析了机组的碳排放权交易经济性。为实现系统因碳排放交易而带来的额外发电成本最小化,提出了基于碳排放分配的系统碳排放交易最优经济性评估模型,实现了不同拍卖分配比例下的系统碳排放交易经济性最优,对于未来电力系统开展碳排放权交易及实施碳排放管理提供了有益的参考。通过算例对提出的最优经济性模型进行了验证。     

A tripartite equilibrium for carbon emission allowance allocation in the power-supply industry

In the past decades, there has been a worldwide multilateral efforts to reduce carbon emissions. In particular, the “cap-and-trade” mechanism has been regarded as an effective way to control emissions. This is a market-based approach focused on the efficient allocation of initial emissions allowances. Based on the “grandfather” allocation method, this paper develops an alternative method derived from Boltzmann distribution to calculate the allowances. Further, with fully considering the relationship between the regional authority, power plants and grid company, a three-level multi-objective model for carbon emission allowance allocations in the power-supply industry is presented. To achieve tripartite equilibrium, the impacts on electricity output, carbon emissions and carbon intensity of the allocation method, allocation cap, and emission limits are assessed. The results showed that the greatest impact was seen in the emission limits rather than the allocation cap or allocation method. It also indicated that to effectively achieve reduction targets, it is necessary to allocate greater allowances to lower carbon intensity power plants. These results demonstrated the practicality and efficiency of the proposed model in seeking optimal allocation policies.     

Oxygen efficiency with regard to carbon capture

Carbon capture is often discussed in the literature with the sole focus on power processes, despite the fact that carbon dioxide emissions from other sources are just as relevant for the impact on the atmosphere. Furthermore, some carbon capture methods are relatively inefficient when applied to power production processes. Carbon capture should preferably be performed where the cost is as low as possible, i.e. not necessarily from power production processes. As an example, carbon capture using combustion with pure oxygen is far more energy efficient if it is used together with lime kilns or cement kilns than together with power production processes. A new concept termed “oxygen efficiency” is introduced in this paper. It describes the amount of carbon dioxide that can potentially be captured per unit of oxygen. As such, the oxygen efficiency quantifies the value of a certain unit of oxygen for carbon capture reasons. The base concept is that the energy penalty for the production of one part of oxygen is the same no matter where it is produced; hence, if this unit of oxygen can be used to capture more carbon dioxide, it is more efficient. Typically, the oxygen efficiency would be five times greater for carbon capture when utilising pure oxygen together with cement kilns rather than together with methane-fired power plants. Furthermore, the concept of oxygen efficiency illustrates the importance of considering how carbon capture methods can be utilised in the most efficient way, in addition to evaluating which carbon capture method is the most suitable for a particular technology.     

Stylized agent-based modeling on linking emission trading systems and its implications for China's practice

China established a national emission trading system (ETS) to peak its carbon emission around 2030, building on the experience of pilot ETSs that are planned to be linked. Firms are the main entities that conduct carbon reduction and allowance trading. Due to the heterogeneity in the initial stock of technologies, firms' abatement costs differ, resulting in different abatement activities and the dynamics of the carbon price. Most of the studies on linking ETSs pay little attention to firms' behaviors, especially the interactions among firms' technology adoption strategies and their allowance trading strategies. In addition, whether linking ETSs can reduce carbon emission with lower system costs remains insufficiently explored. This study develops a stylized agent-based model (ABM) to explore the impact of linking two ETSs considering firms' heterogeneities and the interactions between their technology adoption strategies and allowance trading strategies. The model considers two ETSs, each of which includes energy-service-providing agents who are heterogeneous in the production scale and initial stock of technologies (and thus with different abatement costs), and attempts to minimize the total cost for a given output by adopting different technologies and trading emission allowances. The carbon price is dynamically affected by agents' willingness to pay, and a Walrasian auction is introduced to obtain the equilibrium. The results show that linking ETSs could be cost-effective to achieve carbon reduction commitment and creates a larger and more liquid carbon market; however, it also provides agents the opportunity to purchase more allowances rather than adopt low-emission technologies, which may result in more carbon emission. Adding restrictions on the linkage could somehow mediate this negative effect. Imposing strict exchange rate restrictions to the system with more balanced market shares of agents or quantitative restrictions would result in desirable results at the expense of increasing system costs. Moreover, restricted linkages could help alleviate the difficulties in initialing a linkage. The stylized ABM is mainly used for exploratory modeling purposes as a heuristic research device to examine in depth the effectiveness of unrestricted linkages and restricted linkages on adopting low-emission technologies at firms' level and the resulting carbon reduction. On the basis of the main findings of the ABM, we discuss the case if the Hubei pilot ETS links with the Guangdong pilot ETS, which could improve the understanding of the potential impact of linking ETSs on technology adoption and carbon reduction and provide policy implications for linking different ETSs.     

A coal-fired power plant integrated with biomass co-firing and CO2 capture for zero carbon emission

A promising scheme for coal-fired power plants in which biomass co-firing and carbon dioxide capture technologies are adopted and the low-temperature waste heat from the CO₂ capture process is recycled to heat the condensed water to achieve zero carbon emission is proposed in this paper. Based on a 660 MW supercritical coal-fired power plant, the thermal performance, emission performance, and economic performance of the proposed scheme are evaluated. In addition, a sensitivity analysis is conducted to show the effects of several key parameters on the performance of the proposed system. The results show that when the biomass mass mixing ratio is 15.40% and the CO₂ capture rate is 90%, the CO₂ emission of the coal-fired power plant can reach zero, indicating that the technical route proposed in this paper can indeed achieve zero carbon emission in coal-fired power plants. The net thermal efficiency decreases by 10.31%, due to the huge energy consumption of the CO₂ capture unit. Besides, the cost of electricity (COE) and the cost of CO₂ avoided (COA) of the proposed system are 80.37 $/MWh and 41.63 $/tCO₂, respectively. The sensitivity analysis demonstrates that with the energy consumption of the reboiler decreasing from 3.22 GJ/tCO₂ to 2.40 GJ/ tCO₂, the efficiency penalty is reduced to 8.67%. This paper may provide reference for promoting the early realization of carbon neutrality in the power generation industry.