Arbejdsrapport fra Miljøstyrelsen Nr. 23 2007 – Impact of CO2 quota allocation to new entrants in the electricity market

Impact of CO2 quota allocation to new entrants in the electricity market

7 Conclusion

In the spot market the EU ETS is an efficient tool to reduce CO₂ emissions. Gas, nuclear and renewable energy power plants become more competitive compared to coal power, incentives are provided to run plants with high fuel efficiency and electricity prices increase – thereby stimulating energy efficiency/saving measures among consumers. Allocation to new fossil fuel plants will not have any direct impacts on the spot market. In the longer term allocation to new entrants may however change investments patterns and thereby the composition of power plants in the spot market.

The EU ETS provides incentives to invest in technologies with low or no carbon emissions. Because of the allocation to new entrants these incentives are reduced in some countries – thus eroding the incentives of the CO₂-scheme.

The present study shows that allocation to new entrants will have the following long term consequences if the allocation principles from the 2005-7 National Allocation Plans are continued:

Investments in new capacity will shift from gas power and renewables to coal power increasing CO₂-emissions by 40 million tonnes/year in the long term (6per cent increase)
Investments primarily take place in Germany, because allocation here is more generous than in the Nordic countries
Electricity price will decrease– particularly in Germany – because allocation to new entrant will stimulate investments in new power capacity with low short run marginal costs. Consumers will benefit from this whereas existing electricity producers will loose
Distortions in the market will lead to a welfare-economic loss of almost €4.1 bn (net present value) at a CO₂-price of 20 euro/tonne. This is approximately 25per cent of investments in the electricity sector in the period 2006-2022. Scaled up to the EU-25 level this corresponds to a welfare-economic loss of €20 bn if we assume that the loss is directly proportional to CO₂-emissions. The welfare-economic loss increases with increasing quota prices.
Carbon prices will increase, and hence enforce the welfare-economic loss mentioned above. If carbon prices reach 40 euro/tonne this may even endanger the functioning of the EU ETS as the subsidy for fossil fuel plants will exceed the investment costs of new power plants.
The costs of achieving a renewable energy target may be increased significantly due to new entrant allocation. According to the simulations by almost 60 per cent from app. 14 euro/MWh in a situation without new entrant allocation to 22.5 euro/MWh.

The European Commission has recently decided to set down a multi-stakeholder working group reviewing the EU emissions trading scheme submitting a report by June 2007. We hope that the conclusions from this study will be taken into account in this work.