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MSR Under Exogenous Shock
The EU implemented the Market Stability Reserve (MSR) in response to the 2008 financial crisis to deal with short-term impacts of future shocks, such as the COVID-19 pandemic. We link a model that intertemporally optimizes the handling of banked allowances every five years with one that simulates the annual working of the EU ETS including the MSR with its potential cancelling. Neglecting the pandemic, 2.16 billion allowances are cancelled. Accounting for the pandemic, 0.28 billion additional allowances are cancelled if the European economy fully recovers by 2021, which even overcompensates the 2020 drop in CO2 emissions. Additional cancelling increases when the pandemics lasts longer, meaning that the MSR even outperforms its initial purpose.
European Electricity Prices in Times of Multiple Crises
European energy crisis has three elements: skyrocketing prices for energy carriers such as natural gas, coal, as well as electricity, reduced nuclear power plant availability in France, and lower hydro power generation in Europe. This paper decomposes the effects of those elements on power markets and the EU ETS. Permanently higher natural gas prices reduce the canceling volume in the MSR by 425 million and prevent gas-CCS from being competitive in the long-run. Electricity prices are almost unaffected because gas-CCS is substituted by similarly competitive nuclear. Half of the 2022 European electricity price increase can be traced back to higher energy prices (from 36 to 143 e/MWh), whereas the other half (from 143 to 247 e/MWh) comes from French nuclear and European hydro problems. The decision to stretch the operation of three German nuclear power plants to counteract against those crises brings down European (German) electricity prices by 0.89% (2.47%) in 2023. Extending them for seven years after stretching, starting from September 2023, brings down electricity prices by 1.88% (4.8%) in 2024.
Endogenous Technological Change in Power Markets
Decarbonization requires the transformation of power markets towards renewable energies and investment costs are decisive for the deployed technologies. Exogenous cost assumptions cannot fully reflect the underlying dynamics of technological change. We implement divergent learning-by-doing specifications in a multi-region power market model by means of mixed-integer programming to approximate non-linear investment costs. We consider European learning, regional learning, and three different ways to depreciate experience stocks within the European learning metric: perfect recall, continuous forgetting, and lifetime forgetting. Learning generally yields earlier investments. European learning fo...
Steering the Energy Transition in a World of Intermittent Electricity Supply
We consider an economy in which competitive firms use three technologies for electricity production: pollutive fossils, intermittent renewables whose availability varies continuously over time, and storage. A Pigouvian tax implements the first-best solution. This is also the case for an electricity consumption tax that is supplemented by subsidies for renewables and a tax on storage, but not for high shares of renewables in the energy mix. We then analyze second-best subsidies for renewables and storage capacities when carbon pricing is imperfect. The subsidy rate for renewables decreases as electricity production becomes less reliant on fossils. The storage subsidy is usually negative as lo...
Subsidising Renewables But Taxing Storage?
We consider an economy in which competitive firms use three technologies for electricity production: pollutive fossils, intermittent renewables like wind or solar, and storage. We determine optimal subsidies for renewables and storage capacities when carbon pricing is imperfect. This policy is efficient for low market shares of intermittent renewables in the energy system, but it turns inefficient once there are sufficient renewables to partly displace fossil electricity production at times of high availability. Moreover, the subsidy scheme is substantially more complex than a first-best Pigouvian tax. The optimal renewable subsidy is always positive but tends to decrease as electricity prod...
Policy Implications of a World with Renewables, Limited Dispatchability, and Fixed Load
Most electricity systems face contractual fixed consumer prices in the short term, that is, load and price are fixed before the random supply of renewables like wind or solar realizes. Steam power plants also make production decisions before such a random supply realizes. These capacities cannot react instantly, which creates a demand for gas turbines to balance renewables. We approach these dynamics by considering different types of dispatchability in a more general framework of peak-load pricing and contribute to the debate on market design and capacity payments. Steam power always recovers costs, gas turbines never do so, and renewables might. We describe possible transfer schemes to overcome this problem and provide a more market-oriented solution. However, consumers must always be compensated for lost load.
Taxation of Carbon Emissions with Social and Private Discount Rates
Energy system and power market models refrain from distinguishing between private and social discount rates. We devise a strategy to account for diverging private and social discount rates in intertemporal optimization frameworks, resulting in an optimal carbon tax above the marginal damage when private discount rates exceed the social one. We quantify results for the European power market until 2050. Not distinguishing between private and social discount rates yields carbon emissions of 0.83 Gt in 2050 with rising trend from 2020 onwards. Distinguishing between private and social discount rates achieves full decarbonization (-0.15 Gt in 2050) and avoids damages of 1,386 billion € until 2050. Results explain missing investments of firms and suggest that policymakers should announce high future carbon prices to incentivize sufficient investments into clean technologies.
Efficient Diffusion of Renewable Energies
When the supply of intermittent renewable energies like wind and solar is high, the electricity price is low. Conversely, prices are high when their supply is low. This reduces the pro t potential in renewable energies and, therefore, incentives to invest in renewable capacities. Nevertheless, we show that perfect competition and dynamic pricing lead to efficient choices of renewable and fossil capacities, provided that external costs of fossils are internalized by an appropriate tax. We also investigate some properties of electricity markets with intermittent renewables and examine the market diffusion of renewables as their capacity costs fall. We show that the intermittency of renewables ...
Collaboration, Decarbonization, and Distributional Effects
We conduct a hybrid scenario exercise to analyze decarbonization pathways of the European power market and related distributional effects across countries as well as between consumers and producers. Our CIB analysis reveals qualitative scenarios that differ in the level of political (stringency of climate policy) and physical collaboration (transmission grid expansion). We use a CGE model to quantify those scenarios for further usage in a power market model. Consumers generally experience considerably higher electricity prices, whereas producers observe higher rents. Electricity prices are lowest in the least collaborative future. Producer rents in turn are highest in the most collaborative one. Patterns hugely differ by country, making 13 countries to profiteers of the least collaborative future and 12 countries to profiteers of the most collaborative one. Only 3 countries profit from medium collaboration. Countries that profit from the most collaborative future experience substantially higher producer rents. Countries that profit from the least collaborative one in turn experience lowest electricity prices.
