Spatial carbon and price spillovers among EU countries on their pathway toward net-zero electricity supply

Abstract

This paper introduces a methodology to assess and compare the carbon and price marginal impacts (also known as spillovers) of a country's generation mix on other countries. The methodology is applied for possible decarbonization pathways from 2018 to 2030 and 2040 for EU countries, considering the foreseen expansion of generation and transmission capacities, as well as nuclear and fossil fuel phase-out. Firstly, the optimal hourly dispatch of power plants is computed. Secondly, the impact of each country on the overall European electricity system is analyzed by removing that respective country from the simulation. Thirdly, each country's spillovers on prices and CO₂ emissions are assessed. On the pathway to a net-zero CO₂-emission energy system, the uncoordinated penetration of low-cost renewables among countries enables export opportunities to carbon-intensive electricity generation despite rising prices of EU CO₂ allowances. The spillovers, resulting from those exports, cause in the importing country (i) the substitution of clean electricity with electricity stemming out of carbon-intensive plants and (ii) a market price decrease. While the former lessens CO₂-mitigation strategies, the latter results in a lack of investment in renewable generation due to market prices being insufficient to recover capital costs for new renewables. Redistributing CO₂ revenues among countries could be a way to overcome the drawbacks due to spillovers.