Public Power - January/February 2009 - (Page 38)

■ Carbon Trading Across the Pond generator would receive the market price for electricity, which will reflect the marginal cost of generation for that time and location, which in turn would be expected to include the market value of CO2 allowances. Consequently, in member states with fully liberalized electricity markets, the market value of allowances was included in wholesale prices regardless of whether these allowances were received for free or purchased.” As Ellerman and Joskow explained, the major consideration of a generator, regardless of whether the allocation is free, “is the opportunity cost of using the allowance to cover emissions. Since every allowance used to cover emissions means the loss of the opportunity to sell that allowance, an opportunity cost is incurred and that cost is the foregone market price for allowances.” Therefore, in a liberalized electricity market, installations pass on the opportunity costs of their allowances to their customers. In a regulated market, a utility would need regulatory approval to pass opportunity costs on to its customers. Another paper released in September 2005 reveals how certain firms think about pass-through costs. Utility representatives from the Netherlands said firms view free CO2 allowances as opportunity costs and include them in their production and trading decisions. But they also acknowledged that power producers cannot simply set power prices as they wish. Complex wholesale market forces set the price of electricity, and these include fuel prices, the exchange rate, and available production capacity, to name only a few. It is difficult to determine how CO2 allowance costs affect the price of electricity. The ability to pass through CO 2 allowance costs also differs by country, as the degree of market liberalization and other factors affect the amount of pass-through. Increases in electricity prices since the implementation of the ETS have fueled discussion of windfall profits and pass-through costs, and most analysis confirms that at least some firms did accumulate windfall profits, although the exact amount of windfall profits is difficult to determine. A study by Dutch economist Jos Sijm attempted to measure the amount of windfall profits, but reached no definitive conclusion on the linkage between CO 2 allowance prices and electricity prices. In Germany, for example, fuel prices held constant in 2004 and 2005, but CO2 costs nearly tripled by mid-2005, suggesting that increasing offpeak prices were influenced by CO2 costs, and not fuel prices. But in the second half of 2005, off-peak prices continued to rise even as CO2 prices began to decline, implying that factors besides fuel and CO2 prices must have influenced power prices. Sijm and his co-authors estimated passthrough rates for forward power prices in 2005 for delivery in 2006, and found rates ranging from 60 to 117 percent in Germany, and from 65 to 81 percent in the Netherlands. They explained the greater than 100 percent pass-through rate by noting that gas prices rose in 2005, and gas generators set the marginal price in Germany during some peak hours. Coal generators benefit when natural gas sets the marginal price, and as a 38 January-February 2009 Public Power http://www.milsoft.com

Table of Contents Feed for the Digital Edition of Public Power - January/February 2009

Public Power - December 2008 Contents Perspective 10 Questions Heat or Eat? Achieving Excellence in Nuclear Operations Training Grand Ambitions for Wind Power Visions of Green Carbon Trading Across The Pond Reliability Green Energy Customer Service DEED Hometown Connections Parting Shot

Public Power - January/February 2009

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