Emissions trading and support schemes : effects on renewable electricity generation

Abstract

The Energy and Climate Package of the European Commission sets ambitious targets for the EU Member States. These comprise a reduction of greenhouse gas emissions of 20% in 2020 compared to 1990 levels, a higher share of renewable energy sources, i.e. 20% renewables in total gross final energy consumption in 2020 and 10% renewables in transport final energy consumption, and a significant improvement of energy efficiency. The targets require a fundamental restructuring of existing energy systems, i.e. of current patterns of energy use and supply. With respect to the targets for renewable energy sources and greenhouse gas emissions the following policy instruments are particularly relevant in the EU: renewable support schemes and the EU Emission Trading System (EU ETS). While often considered isolated, inter- linkages between the EU ETS and renewable support schemes prevail: On the one hand, the carbon price generated by the EU ETS might increase the competitiveness of low carbon fuels such as renewables. On the other hand, an increasing share of - carbon neutral - renewables that is not taken into account in the definition of the emission cap might undermine incentives for implementing other emission reductions options. However, in general the coexistence of both policies is advocated for as emissions trading allows exploiting a broader range of abatement potentials and especially immature renewable technologies require additional support. This thesis analyses the impacts of the EU ETS on selected renewable electricity generation technologies (biomass and biogas, photovoltaics, wind and hydro power) focussing on three case study countries in Central and Eastern Europe: Austria, the Czech Republic and Hungary. Using two carbon price scenarios (EUR 36 and EUR 60 per ton CO2) and two renewable policy scenarios (default scenario and optimistic scenario), the competitiveness of the renewable electricity generation technologies compared to non-renewable reference technologies in 2030 is analysed. Without carbon pricing the short run marginal costs of hydro and wind power are generally lower than the short run marginal costs of coal and gas power plants. At a CO2 price of EUR 36, also PV exhibits lower short run marginal costs than coal and gas power plants in the case study countries. Biomass and biogas do only exhibit lower short run marginal costs than coal and gas in the optimistic scenario assuming a CO2 price of EUR 60. With respect to long run marginal costs, hydro power does also exhibit lower costs than the reference technologies even without carbon pricing. At a carbon price of EUR 36, the long run marginal costs of all reference technologies do also exceed those of wind power. Comparing the long run marginal costs of the renewable electricity generation technologies with the short run marginal costs of the reference technologies shows that at a carbon price of EUR 36 per ton CO2 wind power and hydro power become competitive against the incumbent reference technologies in the optimistic scenario, i.e. the long run marginal costs of the renewable technologies is below the short run marginal costs of the reference technologies. The same is true for a carbon price of EUR 60 independent of the scenario. Whether investments in renewable electricity generation technologies will occur, depends, however, on the expected electricity price and non- monetary factors. At a stable electricity price that is determined by the short run marginal costs of coal or gas power plants, some renewable electricity generation technologies (wind power as well as small and large hydro power) will not require a feed-in tariff or other support measures due to the higher market price resulting from pricing CO2 emissions of fossil electricity generation. When renewable electricity generation technologies do gain in importance, spot market prices will, however, tend to decline as renewable electricity generation technologies exhibit lower short run marginal costs than fossil electricity generation. Furthermore, variable renewable electricity generation technologies in times of (full) in-feed might deteriorate the prices on electricity markets, and hence receive a lower income than suggested by average market figures. In such a situation, the market price will not be sufficient for the expansion of renewable electricity generation.