The worldwide reduction of greenhouse gas emissions is the prerequisite for achieving the climate goals agreed in course of the UN Climate Conference in Paris. The pricing of those greenhouse gases would be an effective market mechanism to realize emission savings.

The worldwide reduction of greenhouse gas emissions is the prerequisite for achieving the climate goals agreed in course of the UN Climate Conference in Paris. The pricing of those greenhouse gases would be an effective market mechanism to realize emission savings.

The Merit-Order is a way of ranking the available sources of electrical generation and is based on the short-run marginal costs of production. Thus, it’s possible to determine the most cost-effective fleet of power plants to meet the current demand. The short-run marginal costs of fossil based power generation, in turn, are affected by the CO2 prices. Based on the values in table 1, the course of the short-run marginal costs for different CO2 prices can be ascertained.  As a consequence, the minimum CO2 price to achieve short-term emission savings can be determined.

Assumptions for the calculation of marginal costs, Source: Energy Brainpool

Table 1: Table 1: Assumptions for the calculation of marginal costs, Source: Energy Brainpool

As described in Figure 1, the course of marginal costs can be divided into three areas:

  • CO2 prices from 0 to 10 EUR/tCO2: This price range only shows very little impact on the Merit Order. Thus, the current level of 6.80 EUR/tCO2 is far form having an influence on the order of the used power plants[1].
  • CO2 prices from 10 to 32 EUR/tCO2: After the first fuel switch at 10 EUR/tCO2, the average marginal costs of combined cycle power plants fall below the avergage marginal costs of coal-fired power plants. As a result, inefficient coal-fired power plants are replaced by efficient combined cycle power plants (CCPP) in the Merit-Order.
  • CO2 prices from 32 EUR/tCO2: The average marginal costs of CCPPs fall below the average marginal costs of lignite-fired power plants. In addition, inefficient CCPPs are replacing efficient coal-fired power plants. Coal-fired power plants only replace lignite-fired power plants at a CO2 price of 160 EUR/tCO2
Marginal costs of CCPPs, coal-fired and lignite-fired power plants at different CO2 prices

Figure 1: Marginal costs of CCPPs, coal-fired and lignite-fired power plants at different CO2 prices

Considering the current fuel prices, the CO2 price must be above 10 EUR/tCO2 in order to ensure a short-term emission reduction in the electricity sector. The current price level of 6.80 EUR/tCO2 neither ensures a short-term emission reduction nor does it lead to an increased investment in emission-reducing technologies.

[1] EEX Primary Auction 11/09/2017