Do support systems for RES-E reduce EU-ETS-driven electricity prices?

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Energy Policy](]]]])]]]–]]]

Do support systems for RES-E reduce EU-ETS-driven electricity prices?

M. Rathmann

University of Flensburg, International Institute for Management, Energy and Environmental Management, Munketoft 3b, 24943 Flensburg, Germany

Abstract

Support systems for ELECTRICITY FROM RENEWABLE ENERGY SOURCES (RES-E) can reduce electricity prices which have also been

inﬂuenced by a CO2EMISSION TRADING SCHEME(ETS): Additional RES-E substitutes electricity from fossil fuels, and thus CO2-emissions

are reduced. The demand for emission reductions is lowered, as a result the CO2-price is also reduced. Consequently the wholesale price

for electricity decreases. However, most RES-E support systems are financed via the electricity market, which increases the retail electricity price. An assessment for Germany shows that retail electricity prices in the first trading period of the EU-ETS 2005–2007 are lowered by 2:6 Euro=MWh due to additional RES-E. Considering the complete EU, the effect is substantially higher. This paper describes the effect and the influence of different policy designs. It develops an approach for assessing the effect and applies it for the case of Germany and roughly estimates the effect for the EU.

Keywords:Emissions trading; Renewables; Electricity prices

1. Introduction

Support systems for ELECTRICITY FROM RENEWABLE ENERGY SOURCES (RES-E) interact in several ways with

the EU EMISSION TRADING SCHEME (EU-ETS). During the

planning and implementation of the EU-ETS there has been some research into this question (e.g. Sorrel et al., 2003; Boots et al., 2001; Azuma-Dicke et al., 2004;

Morthorst, 2001, 2003; Jensen and Skytte, 2003; Hinds-berger et al., 2003), with most of this research being limited to the interaction of a tradable green certificate system and an emission trading scheme. The effect that RES-E support systems have on electricity prices due to the interaction with the EU-ETS has not yet been mentioned explicitly, although Unger and Ahlgren (2005) have touched on the topic for the case of quota systems. This paper describes this price effect (Section 2), discusses the influence of different policy designs (Section 3), and presents the data requirements and an approach for quantifying the effect (Section 4). The approach is applied in a case study of Germany (Section 5) and a first estimate is made for the EU (Section 6). Section 7 concludes.

2. Inﬂuence of EU-ETS and RES-E support systems on electricity prices

This paper concentrates on the effect of RES-E support systems on the electricity price via the price of carbondi-oxide (CO2). This should not be confused with the two

independent effects that the EU-ETS and RES-E support systems have on the electricity price:

The EU-ETS allocates a limited amount of rights to emit CO2 (EU-Allowances) to electricity producers

using fossil fuels in their power generation. Member States administered the allocation for the 2005–2007 trading period. Most Member States allocated the EU-Allowances for free to the participants, based on their historic emissions (Grandfathering). Due to the fact that EU-Allowances can be traded a price for CO2-emissions

can now be established as market forces come into play. Thus electricity producers have to face costs when emitting CO2: Firstly they have to face the cost of

purchasing EU-Allowances where their CO2-emissions

exceed their allocation, and secondly opportunity cost occur as EU-Allowances can be sold in case of non-production. According to cost theory electricity

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producers will take both kinds of cost into account when calculating prices. Thus electricity prices on the whole-sale market rise (compare e.g. Bode, 2004; Sijm et al., 2005).

RES-E support systems—if working properly—increase the amount of RES-E produced. If this increase in production is higher than the increase in electricity consumption, electricity production from other sources is then substituted by RES-E. In a competitive power generation market the marginal power plants in the merit order will be replaced ﬁrst, leading to a reduction in the wholesale price of electricity. The effect on the consumer price level depends on the way in which the RES-E support system is ﬁnanced.

The effect this paper wants to discuss is in addition to the direct effect of RES-E on the merit order mentioned above.

Additional RES-E affects electricity prices through its influence on theCO2-price:

By substituting electricity from fossil fuels, RES-E reduces the electricity sector’s CO2-emissions.

Thus the demand for EU-Allowances and accordingly the CO2-price declines.

Electricity producers’ (opportunity) costs decrease and this affects the marginal cost curve (merit order).

The wholesale electricity price is lowered.

Which order of magnitude does this price-reducing effect have compared to the additional cost for the electricity supply caused by the RES-E support system? Does RES-E support in the context of the EU-ETS thus lead to lower consumer electricity prices compared to a situation without additional RES-E? This paper tries to give a theoretical approach to answer these questions and applies this approach empirically by analysing the effect for the case of Germany, with a rough estimate for the EU as a whole.

3. Inﬂuence of different policy designs on the effect

First, there will be a discussion about the types of policy designs the effect occurs under. This refers to the different allowance allocation schemes on the one hand and the different support systems for RES-E on the other.

3.1. Influence of different allowance allocation schemes

Allowances can be allocated for free on the basis of historic emissions or according to a benchmark, or they can be auctioned. The inﬂuence of the different allocation schemes is discussed below.

Regardless of the kind of allocation scheme, the interaction between additional RES-E and the CO2-price

would not exist if emission reductions by RES-E were taken into account ex ante in the National Allocation Plans. Reducing allowance allocations accordingly would prevent emission reductions achieved by RES-E impacting

upon the CO2-market. Instead, the pressure to reduce CO2

-emissions, and thus compliance costs, in those sectors not encompassed by the EU-ETS (e.g. transport/commercial/ private sector) would be lowered. The EU Commission advised Member States to take additional RES-E into account when preparing National Allocation Plans (Point 16 inEuropean Commission, 2004).

3.1.1. Allocation based on historic emissions

In the ﬁrst trading period of the EU-ETS, 2005–2007, 95% of the EU-Allowances have to be allocated for free. This allocation can be done on the basis of historic emissions (grandfathering). In that case the actual emis-sions of producers in a certain period in the past are used as a basis for the allocation of allowances. One method of deriving the allocations is to apply a reduction factor to the historic emissions. In the case of grandfathering, electricity producers have the choice to use the allowances for production or to not produce and sell the allowances. Thus the value of the allowances represent opportunity cost, which, at least theoretically, will be taken into account.

3.1.2. Ex ante and ex post benchmarks

Allowances can also be allocated for free based on a benchmark. A useful benchmark is the CO2-intensity of the

electricity production (e.g. 350 g CO2/kWh). Benchmarks

can be speciﬁc for different techniques and/or fuels. In order to determine the amount of allocated allowances, the benchmark can be multiplied by the expected electricity production before the related period commences (ex ante) or by the realised electricity production after the period has ended (ex post).

An ex ante allocation based on benchmarks makes no difference compared to a grandfathering as long as the amount of allocated allowances is not altered. In case of non-production the allocated allowances can be sold and thus the value of all allowances needed for electricity production materialises as (opportunity) cost.

An ex post allocation based on benchmarks reduces the opportunity cost to electricity producers substantially. This is due to the fact, that in case of non-production no allowances can be sold as allocation is based on the actual production. Only the difference between the benchmark and actual emissions—that is the amount of allowances that can be sold or needs to be bought—materialises as (opportunity) cost.

Lower (opportunity) costs in the case of an ex post allocation based on benchmarks lead to a lower increase in electricity prices due to the EU-ETS. Thus the ratio between the electricity-price reducing effect of RES-E and the additional cost for RES-E changes, leaving only a smaller net beneﬁt, or no net beneﬁt at all.

3.1.3. Auctioning

Allowances can also be allocated by means of an auction. This means that electricity producers buy

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allowances from the auctioneer, which is usually the state. The price and the amount of allocated allowances are then determined through an auction.

In this case the value of all allowances needed for electricity production materialises as cost to the producer. Opportunity costs for allowances do not exist anymore. The effect of the EU-ETS on electricity prices remains the same as in the case of a grandfathering as long as the CO2

-price is not changed. This applies regardless of whether the auction proceedings remain with the state or are redis-tributed to, say, electricity producers.

Thus the electricity-price reducing effect of the interac-tion of RES-E and CO2-prices remains the same under an

auctioning scheme.

3.2. Influence of different RES-E support systems on the effect

The majority of EU 25 Member States use feed-in tariffs or its variant feed-in premium, while some use quota systems in order to support RES-E. Both systems show the electricity-price reducing effect in a comparable way as long as the growth in RES-E and the corresponding costs to electricity consumers are the same. Other support systems, like e.g. tendering, have not been examined in this paper because they are only rarely used in the EU.

3.2.1. Feed-in tariff and feed-in premium

A feed-in tariff is a fixed tariff paid for all RES-E fed into the grid. A more market-oriented variant of the feed-in tariff is the so-called feed-in premium, where a fixed amount is paid in addition to fluctuating wholesale electricity price.

3.2.2. Quota system

As an alternative to a feed-in tariff or a feed-in premium, RES-E can be supported by a quota system (also called renewable portfolio standard) with TRADABLE GREEN CERTIFICATES (TGC). Producers of RES-E receive

certiﬁ-cates in proportion to their production, while e.g. utilities are obliged to hold enough TGCs compared to the amount of electricity sold, in order to fulﬁl the given quota. RES-E is traded at the wholesale electricity price while the producer receives additional revenue by selling the TGCs.

Unger and Ahlgren (2005)analysed the combined effect of an (EU-)ETS and a quota system with TGC for the power market in the four Nordic countries Sweden, Denmark, Norway and Finland, and come to comparable results as this paper has for Germany: They ﬁnd ‘‘that the introduction of TGC quotas reduces wholesale electricity and . . . [CO2] prices. The impact on the latter is very

pronounced.’’ Assuming a linear reduction of CO2

-emis-sions by 30% until 2023 they conclude that ‘‘for a TGC quota of 25% the retail price is roughly 3.5 Euro/MWh lower than if TGC-quota obligations were absent.’’

4. Data requirements and the approach for estimating the effect

4.1. Data requirements

Several data are required for an estimation of the price effect. They are described below and listed inTable 1.

4.1.1. CO2-abatement cost curve

The effect of emission reductions due to increased RES-E on the CO2-price depends on the marginal CO2

-abatement cost curveðfÞwithin the EU-ETS. The relevant parameter for the effect of additional emission reductions on the CO2-price is the slope of this curveðf0Þ.

As f cannot be known exactly, an approximation is needed. For a ﬁrst approximation,f can be assumed to be linear and pass through the origin. Knowing the short position of the EU-ETS (i.e., the amount of necessary emission reductionsðQ_CÞ) and its CO2-priceðPCÞ, the slope

f0is

f0¼PC

Q_C.

4.1.2. RES-E production and CO2-abatement

The RES-E production before the period under con-siderationðQ_RÞneeds to be known as well as the additional RES-E production in the period under consideration

ðDQ_RÞ.DQ_R is the difference betweenQ_Rand the average RES-E production in the considered EU-ETS trading period. But to which point in time QR refers, depends on

the allowance allocation mechanism: In case of a grand-fatheringQ_Ris the average RES-E production in the base period, while in case of an ex ante benchmark Q_R is the RES-E production before the start of the trading period.

The value of substituted electricity is assumed to bePEW.

This paper treats the ﬁnancial support given to RES-E

Table 1

Overview of data requirements and symbols used Symbol Data

Q_E Electricity consumption (TWh/a)

PEW Wholesale price for electricity (Euro/MWh)

PER Retail price for electricity (Euro/MWh)

QR RES-E production before the period under consideration

(TWh/a)

DQR Additional RES-E production in the period under

consideration (TWh/a)

PR Support for RES-E (additional toPW) (Euro/MWh)

FR RES-fee (the part ofPEWused forPR) (Euro/MWh)

Em Emission factor of marginal power plant (gCO2=kWhel)

Es Emission factor of substituted electricity (gCO2=kWhel)

f0 _{Slope of the marginal CO}

2-abatement cost curve

For an approximation off0_Q

CandPCare needed

QC Short position of the EU-ETS (Mt CO2/a)

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equally, regardless of the support system used. The speciﬁc ﬁnancial support given to RES-E ðPRÞ is assumed to be

equal to the spread (i.e., the difference) between feed-in tariff and wholesale electricity price, the feed-in premium, or the value of a TGC respectively. It assumes that these costs are not paid by the state, the grid operator or the utilities, but evenly distributed among the total amount of electricity sold, thus increasing the retail price of electricity. The amount by which the retail electricity price is increased is called the RES-feeðFRÞ.

In order to determine the emission reductions of RES-E, the emission factor of the substituted electricity ðEsÞmust

be known.

4.1.3. Electricity market and the effect of CO2-prices

The average annual electricity consumption during the considered trading periodðQ_EÞneeds to be known as well as the average wholesale electricity priceðPEWÞ.

In a liberalised market the wholesale electricity price is determined by the marginal power plant in the merit order. Depending on PC the EU-ETS can alter the merit

order quite substantially (e.g. electricity generation from natural gas becoming cheaper than from hard coal). Thus in order to estimate the effect of the EU-ETS on the wholesale electricity price it is not sufﬁcient to consider the marginal power plant’s (opportunity) cost changes, be-cause this does not reﬂect these shifts in the merit order. Still, as long as no reliable data on the effect of CO2-prices

on wholesale electricity prices are available, the effect can be approximated by multiplying PC by the average

emission factor of the power plants at the upper end of the merit order (Em).

4.2. Calculations

Here, the effect on the retail price for electricity will be calculated:

DPER¼?

Two different cases can be distinguished:

(A) What would today’sPERbe without additional RES-E

production in the past?

(B) What will PER be assuming additional future RES-E

production?

Case A is described below, as the case study for Germany in Section 5 also refers to the RES-E development in the past. If formulae differ between both cases, the ones for case B are also given.

As mentioned above, the additional amount of RES-E substitutes electricity produced from fossil fuels and thus reduces CO2-emissions:

DQ_C¼ DQ_REs. (1)

Due to reduced CO2-emissions the CO2-price is lower than

it would be without additional RES-E:

DPC¼f0DQC. (2)

Due to a lower CO2-price (opportunity) costs are lower,

and—assuming that opportunity costs have been taken into account completely in PEW—then the wholesale

electricity price is also lower compared to a situation without additional RES-E:

DPEW¼DPCEm. (3)

Inserting Eqs. (1) and (2) in Eq. (3) yields as a ﬁrst result the effect of additional RES-E on the wholesale electricity price

DPEW¼f

0_ð_D_Q

RÞEsEm. (4)

In order to assess the effect of additional RES-E on the retail electricity price, the rising RES-fee has to be considered. The RES-fee is increased by two factors: Firstly the additional amount of supported RES-E increases the RES-fee (ﬁrst part of Eq. (5):

ðDQ_R=Q_EÞPR). Secondly the decreasing wholesale price

for electricity (compare Eq. (4)) increases the support needed for RES-E, asPR—the spread between the cost of

RES-E and the value of substituted electricity—rises. This rising spread also increases that part of the RES-fee, that is caused by RES-E installed before the period under consideration but still gaining support (second part of Eq. (5):ðQ_R=Q_EÞDPEW). DFR¼ DQ_R Q_E PR Q_R Q_EDPEW. (5)

If Eq. (5) is to be used for case B, the future wholesale electricity price needs to be known. If no estimate for the futurePEW is available, Eq. (6) can be used instead with PEW at the beginning of the period under consideration.

For Eqs. (6) and (10) below, all factors inﬂuencing PEW

except the increase of RES-E are assumed to stay constant

DFR¼

DQ_R

Q_E ðPRDPEWÞ Q_R

Q_EDPEW. (6)

Thus, RES-E affects the retail electricity price in two ways. On the one hand it is increased through a rising RES-fee, and on the other hand it is decreased through a falling wholesale price due to the effect the additional RES-E had on the CO2-price:

DPER¼DFRþDPEW. (7)

Inserting Eq. (5) in Eq. (7) shows that the changing wholesale price affects the retail price in two ways: Firstly a lower wholesale price leads to a lower retail price, secondly the RES-fee is increased.

DPER¼ DQR Q_E PR QR Q_EDPEW þDPEW. (8)

Inserting Eq. (4) in Eq. (8) yields the result

DPER¼DQR PR Q_Eþ Q_REsEmf0 Q_E EsEmf 0 . (9)

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For case B Eq. (10) applies instead of (9) DPER¼DQR PR Q_Eþ Q_REsEmf0 Q_E EsEmf 0 þDQ2_R EsEmf 0 Q_E . ð10Þ

Note the squared term in Eq. (10). In case B the price- reducing effect of additional RES-E is linear, while part of the price-increasing effect is quadratic. Thus the price-reducing effect weakens with growing amounts of RES-E, but this is substantial only with very high amounts of RES-E.

5. Quantitative analysis of the effect in Germany

Germany allocated its EU-Allowances for the ﬁrst trading period 2005–2007 completely for free to electricity producers, based on their average historic emissions in the years 2000–2002. New power plants without historic emissions are allocated through a technology-speciﬁc benchmark, which existing installations can also opt for.

Germany uses a feed-in tariff to support RES-E. The Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG) consists of differentiated tariffs for severable renewable energy technologies, which decrease over time in order to stimulate innovation. The tariffs are paid by those utilities where the RES-E is fed into the grid. The physical amount of RES-E and the corresponding costs are equalised nationwide among all utilities. Thus every utility receives the same share of RES-E at the same price.PR is

evenly distributed among the total amount of electricity. Companies consuming more than 10 GWh/a, with elec-tricity costs amounting to more than 15% of the value added, are eligible for an exemption/reduction of the RES-fee. For the remaining consumers the increase in RES-fee due to these exemptions is limited to 10%. This threshold is usually fully utilised.

Due to this pecularity the calculation approach has to be amended. Eq. (5) is replaced by Eq. (11).FRonly applies to

electricity consumers without a reduced RES-fee.

DFR¼ DQ_R Q_E PR Q_R Q_EDPEW 1:1. (11)

Eq. (8) is changed accordingly (not shown), and the result will be calculated on the basis of Eq. (12) instead of Eq. (9):

DPER¼DQR PR Q_E1:1þ Q_REsEmf0 Q_E 1:1EsEmf 0 : ð12Þ 5.1. Assumptions

Below the assumptions made for the German case study are presented. For those assumptions, that are arguable or ﬂuctuant—especially those regarding the CO2-market—a

brief sensitivity analysis is made in the section presenting the results.

5.1.1. CO2-abatement cost curve

As described in Section 4.1.1PC=QCwill be used instead

off0.

Thus an assumption for the average CO2-market

situation during the ﬁrst trading period 2005–2007 is needed. The EU-ETS analyst Point Carbon (2005)

estimates a short position:

Q_C¼70 Mt=a.

Note that this short position already includes the emission reductions due to currently foreseeable additional RES-E within the ﬁrst EU-ETS trading period. The same applies to the current CO2-price within the EU-ETS

(EEX, 2005b). It is arguable whether this price level is backed by fundamental data, and may at least be partly due to strategic behaviour and speculation (see e.g.Sinner, 2005).

PC¼20 Euro=t.

Thus the slope of the assumed simpliﬁed marginal abatement cost curve is

PC Q_C¼ 20 Euro=t 70 Mt=a ¼0:29 Euro=t Mt=a .

5.1.2. RES-E production and CO2-abatement

Allocation of EU-Allowances for the trading period 2005–2007 is based on the emissions in the years 2000–2002. Between 2000–2002 and 2005–2007 the produc-tion of RES-E due to the EEG increases from 19.0 TWh/a to an estimated 48.4 TWh/a by 155% (VDN, 2005):

Q_R¼19:0 TWh=a,

DQ_R¼29:4 TWh=a.

The average feed-in tariff for RES-E within the EEG in the years 2005–2007 is 91.3 Euro/MWh (VDN, 2005). The RES-fee can only be estimated, as it depends on the value of the substituted electricity, which is arguable. Here the value of the substituted electricity is assumed to equal the wholesale electricity price:

PR¼91:3 Euro=MWhPEW.

The rise in RES-E and the corresponding emission reductions are not anticipated in Germany’s National Allocation Plan (NAP Germany, 2004). A recent analysis of several studies regarding the emission factor for the substituted electricity (Klobasa and Ragwitz, 2005) esti-mates the value as

Es¼875 g=kWhel.

5.1.3. Electricity market and the effect of CO2-prices

The average annual electricity consumption in the years 2005–2007 in Germany is assumed to be (VDN, 2005):

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The average wholesale electricity price is difﬁcult to estimate, here the baseload price for 2006 at the European Energy Exchange (EEX, 2005a) is utilised. Note that this price theoretically already includes (opportunity) cost due to the EU-ETS, as market participants have taken them into account. But it includes a (opportunity) cost based on a CO2-price that is lower than it would be without

additional RES-E in the past:

PEW¼40 Euro=MWh.

The emission factor of the marginal power plant is assumed to be the same asEs:

Em¼Es¼875 g=kWhel.

5.2. Results

The increase in RES-E supported by the EEG of 29.4 TWh/a in the period from 2000–2002 to 2005–2007 reduced CO2-emissions by 25.7 Mt/a assuming an emission

factor of the substituted electricity production of 875 g=kWhel. Related to the energy sector’s annual

emis-sions of 368 Mt (Matthes et al., 2003) and Germany’s overall EU-ETS budget of 499 Mt/a, the reduction of CO2

-emissions caused by RES-E amounts to 7.0% and 5.2%, respectively. Assuming a short position of the EU-ETS of 70 Mt/a and a linear CO2-abatement cost curve, the current

CO2-price is 27% lower than it would be without

additional RES-E. With a current CO2-price of 20 Euro/t

and an emission factor of 875 g=kWhel in the marginal

power plant (merit order), this reduces the (opportunity) cost of electricity production from fossil fuels by 6.4 Euro/ MWh.

Assuming a wholesale electricity price of 40 Euro/MWh, a total electricity consumption of 477 TWh/a, and the aforementioned wholesale price reduction of 6.4 Euro/ MWh, the additional amount of RES-E supported by the EEG of 29.4 TWh/a at an average feed-in tariff of 91.3 Euro/MWh led to an increase of the RES-fee of 3.8 Euro/MWh.

Altogether the additional amount of RES-E supported by the EEG reduced the wholesale price of electricity by 6.4 Euro/MWh while increasing the RES-fee by 3.8 Euro/ MWh. Thus, without support of RES-E by the EEG the retail price of electricity in the years 2005–2007 would be 2.6 Euro/MWh higher than it actually is (PER has a

negative value). The net price reducing effect of 2.6 Euro/ MWh applies for the currently assumed slope of the marginal CO2-abatement cost curve of 0:29 Euro=t=Mt=a

(compare Section 5.1.1). If one solves Eq. (12) for the quotient of PC and QC, then ceteris paribus a net

price-reducing effect occurs as long as the quotient lies above the threshold of 0:16ðEuro=tÞ=ðMt=aÞ.

Table 2shows the results of a sensitivity analysis for the assumed values that are most arguable and subject to ﬂuctuation.

5.3. Who gains, who loses?

ELECTRICITY CONSUMERS obviously gain from lower

electricity prices. Consumers without exemption from the RES-fee gain from the electricity price reduction of 2.6 Euro/MWh, while the price reduction for those consumers that are exempt from the RES-fee (e.g. energy-intensive industry) is 6.4 Euro/MWh.

ELECTRICITY PRODUCERSlose a part of potential additional

revenue due to opportunity cost of CO2, because the value

of their grandfathered EU-Allowances and accordingly the electricity prices are lower than in the case where no additional RES-E would have been produced. On the other hand, electricity producers can sell excess EU-Allowances or can at least reduce their purchases by 25.7 Mt/a due to CO2-intensive electricity substituted by RES-E. As the

market clearing price including these excess EU-Allowan-ces is assumed to be 20 Euro/t, this represents a value of about 500 million Euro/a.

NON-ELECTRICITY PRODUCING EU-ETS PARTICIPANTS gain

from lower electricity prices as all customers do. Whether they can also proﬁt from a lower CO2-price depends on the

question of whether they were able to take opportunity cost into account or not. Those companies that were able to take opportunity cost into account lose some of their additional revenue due to the reduction in the price of CO2.

Other companies—e.g. those exposed to strong (global) competition—that were not able to take opportunity cost into account, gain through the lower CO2-price and can

improve their competitiveness.

6. Estimation of the effect in the EU

The analysis of single EU Member States is necessary, but not sufﬁcient to assess the effect of additional RES-E on the electricity price. While the analysed feed-in tariff within the German Renewable Energy Sources Act affects only the German RES-E production, the CO2-price within

the complete EU-ETS is altered by it. Thus, electricity prices in all countries with liberalised markets and comparable allocation schemes for EU-allowances are reduced, while it seems as if only German consumers take the burden of higher RES-fees. This is not realistic, as other EU Member States also support RES-E with similar consequences for the CO2 and electricity prices. The

question arises as to which order of magnitude the

Table 2

Sensitivity analysis

Assumption D DPERT

PC 20 Euro/t + () 1 Euro/t + () 0.31 Euro/MWh

Q_C 70 Mt/a + () 1 Mt/a (+) 0.09 Euro/MWh PEW 40 Euro/MWh + () 1 Euro/MWh + () 0.07 Euro/MWh

Em 875 g=kWhel + () 100 g=kWhel + () 0.70 Euro/MWh

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described interaction between RES-E and CO2-prices has,

if one considers the EU-wide growth in RES-E.

This paper can only deliver a very rough estimate of the EU-wide effect, because a more precise assessment would require a detailed analysis of each single EU Member State as was conducted here for Germany. For this estimate a comparable situation in all Member States concerning RES-E support systems, allowance allocation, emission factors, RES-E and electricity prices is assumed. Further-more an RES-E growth in line with the EU RES-E Directive 2001/77/EG is expected. The Directive’s objective is to have a 21% RES-E compared to gross energy consumption in 2010. In 2000–2002 the share was on average 13.5%, thus for 2005–2007 on average 17.7% are assumed (own calculations afterEUROSTAT, 2004). The gross energy consumption is expected to increase to 3207 TWh/a on average in 2005–2007 (own calculations after European Commission, 2003). Thus, we see in 2005–2007 an additional 134.7 TWh/a RES-E compared to 2000–2002. This reduces CO2-emissions by about

118 Mt/a, which equals about 5% of the EU allowances. Compared to a current short position of the EU-ETS of 70 Mt/a and a CO2-price of 20 Euro/t (Point Carbon, 2005; EEX, 2005b) the short position would almost triple to 188 Mt/a without RES-E. Assuming a linear marginal CO2-abatement cost curve this would increase the CO2

-price to almost 54 Euro/t. If opportunity cost were taken into account completely, electricity prices without addi-tional RES-E would be almost 30 Euro/MWh higher than with the assumed growth.

Under these assumptions, a net electricity-price-reducing effect of RES-E growth occurs EU-wide as long as the CO2

-abatement cost curves’s slope is higher than 0:04ðEuro=tÞ=

ðMt=aÞ (compare Sections 4.1.1 and 5.2). With Q_C¼

70 Mt=a this applies already at CO2-prices of 3 Euro/t.

7. Conclusion and outlook

The aim of this paper was to show that in the presence of CO2-emission trading schemes additional RES-E can

reduce electricity prices. An estimation of the effect’s order of magnitude was also given.

The effect occurs with a feed-in tariff as well as with a quota system for RES-E, and regardless of whether emission allowances are allocated through auction, grand-fathering, or ex ante based on a benchmark. The effect is weakened if allocation is done ex post based on a benchmark, and it would cease to exist when emission reductions due to RES-E are correctly anticipated in National Allocation Plans.

For a more exact assessment of this effect a detailed analysis of the situation in all 25 Member States of the EU is needed. Two major aspects remain critical and require better understanding for an exact assessment:

How is the CO2-price affected by emission reductions

due to additional RES-E?

More precisely: What does the marginal CO2-abatement

cost curve look like in detail? How does additional RES-E production affect potential speculation and strategic behaviour by CO2-market participants?

How is the electrictiy price affected by a certain CO2

-price reduction?

More precisely: To what extent is opportunity cost taken into account by electricity producers? How does this then change the merit order, especially if some power plants are allocated according to a benchmark?

What does the existence of a electricity price reducing effect of additional RES-E in the presence of the EU-ETS mean for the future of both instruments? According to the political aim both instruments have in common—climate protection—the emission reductions due to additional RES-E should be anticipated in the NAPs, maintaining the climate protection effect of RES-E support systems in addition to those of the EU-ETS, and keeping both instruments independent of each other. The idea, to use additional RES-E in order to maintain EU-ETS driven electricity prices at a lower level, could seem clever at ﬁrst sight, but leads to a perverse outcome at closer inspection: On the one hand one tries to reduce CO2-emissions

through the EU-ETS, on the other hand, the emerging and necessary price signal is weakened by another instrument. In order to reduce the effect the EU-ETS has on electricity prices, an ex post allocation based on benchmarks seems more promising, as it reduces electricity producers’ opportunity costs substantially. The support of RES-E on the other hand, does not need to be justiﬁed by this effect, as for its rationale more and better well-known reasons exist.

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