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

This 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 CO₂. 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. Copyright © 2006 John Wiley & Sons, Ltd.