Eyes on the Price: Which Power Generation Technologies Set the Market Price? Price Setting in European Electricity Markets: An Application to the Proposed Dutch Carbon Price Floor

26 Pages Posted: 10 Jan 2019

See all articles by Eike Blume-Werry

Eike Blume-Werry

Energy Economics Group (EEG), Institute of Energy Systems and Electric Drives TU Wien

Thomas Faber

Axpo Holding AG

Lion Hirth

Neon Neue Energieökonomik GmbH; Hertie School of Governance

Claus Huber

WU Wien

Martin Everts

Axpo Holding AG

Date Written: January 10, 2019

Abstract

Upon discussion of price setting on electricity wholesale markets, many refer to the so-called merit order model. Conventional wisdom holds that during most hours of the year, coal- or natural gas-fired power plants set the price on European markets. In this context, this paper analyses price setting on European power markets. We use a fundamental electricity market model of interconnected bidding zones to determine hourly price-setting technologies for the year 2020. We find a price-setting pattern that is more complex and nuanced than the conventional wisdom suggests: across all researched countries, coal- and natural gas-fired power plants set the price for only 40 per cent of all hours. Other power generation technologies such as wind, biomass, hydro and nuclear power plants as well as lignite-fired plants set the price during the rest of the year. On some markets, the price setting is characterised by a high level of interconnectivity and thus foreign influence – as illustrated by the example of the Netherlands. During some 75 per cent of hours, foreign power plants set the price on the Dutch market, whilst price setting in other more isolated markets is barely affected by foreign markets. Hence, applying the price setting analysis to the proposed Dutch carbon price floor, we show that different carbon prices have little effect on the technological structure of the price-setting units. In this respect, the impacts of the unilateral initiative are limited. There are, however, considerable changes to be observed in wholesale power prices, import/export balances as well as production volumes and subsequent CO2 outputs of lignite-, coal- and gas-fired power plants.

Keywords: Price Setting, Electricity Markets, Merit Order, Generation Technologies, Carbon

JEL Classification: O13, Q41

Suggested Citation

Blume-Werry, Eike and Faber, Thomas and Hirth, Lion and Huber, Claus and Everts, Martin, Eyes on the Price: Which Power Generation Technologies Set the Market Price? Price Setting in European Electricity Markets: An Application to the Proposed Dutch Carbon Price Floor (January 10, 2019). FEEM Working Paper No. 34.2018. Available at SSRN: https://ssrn.com/abstract=3313338 or http://dx.doi.org/10.2139/ssrn.3313338

Eike Blume-Werry (Contact Author)

Energy Economics Group (EEG), Institute of Energy Systems and Electric Drives TU Wien ( email )

Thomas Faber

Axpo Holding AG ( email )

Parkstrasse 23
Baden, CH-5401
Switzerland

Lion Hirth

Neon Neue Energieökonomik GmbH ( email )

Karl-Marx-Platz 12
12043
Berlin, 12043
Germany

HOME PAGE: http://www.neon-energie.de

Hertie School of Governance ( email )

Friedrichstraße 180
Berlin, 10117
Germany

Claus Huber

WU Wien ( email )

Austria

Martin Everts

Axpo Holding AG

Parkstrasse 23
Baden, CH-5401
Switzerland

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