Future merit order dynamics: A model-based impact analysis of ambitious carbon prices on the electricity spot market in Germany

Abstract

In the context of the recently observed and also projected upward sloping trend in EU carbon prices as well as rising global awareness regarding climate change impacts, it is highly vital to understand the response of the future electricity generation sector to higher carbon prices. Therefore, this research paper investigates the effect of carbon prices adequate to the estimated social costs of carbon emissions on European electricity spot markets by applying the unit commitment model MICOES-Europe for the year 2030. The results show that adequate carbon pricing is an effective measure to reach significant emission reductions with in the power sector through fuel switching from coal to gas. Moreover, the impact of the fuel-switch on emission reductions is highly dependent on the initial relationship of fuel prices for gas and coal given low carbon prices. Conversely the dependency decreases with higher carbon prices. Overall, the marginal benefit of ambitious carbon prices is capped by the capacity utilization of gas-fired power plants. The rate of additional emission mitigation is highest at carbon prices in the range between 50-100€/tCO2, an increase beyond 150 €/tCO2 results in minor further emission reductions.