The impact of carbon prices on renewable energy support

This paper examines how optimal renewable energy (RE) support (RES) policies need to be adjusted to account for carbon prices. We show theoretically and empirically that changing carbon prices requires adjusting RE production subsidies due to two different motives: First, RE premiums need to be reduced to reflect the carbon value embedded in the market price. Second, RE premiums and feed-in tariffs need to be adjusted once a fuel switch away from coal towards gas power occurs. This adjustment is necessary to account for changes in the marginal external benefit of RE. For the case of the UK, we estimate the optimal RE subsidies and their adjustments due to a fuel switch. Furthermore, we use numerical simulations to analyze the impact of varying carbon prices on optimal RES. We show that the necessary adjustment due to a fuel switch is empirically rather small, whereas RE premiums must be phased out with increasing carbon prices due to the increasing reflection of the carbon cost in the electricity market price. Finally, a fuel switch increases solar-induced abatement, whereas it wind-induced abatement is rather invariant to a fuel switch. Yet, the differentiation of RE subsidies between wind and solar power is modest

How effective is carbon pricing? - A machine learning approach to policy evaluation

While carbon taxes are generally seen as a rational policy response to climate change, knowledge about their performance from an expost perspective is still limited. This paper analyzes the emissions and cost impacts of the UK CPS, a carbon tax levied on all fossil-fired power plants. To overcome the problem of a missing control group, we propose a policy evaluation approach which leverages economic theory and machine learning for counterfactual prediction. Our results indicate that in the period 2013-2016 the CPS lowered emissions by 6.2 percent at an average cost of €18 per ton. We find substantial temporal heterogeneity in tax-induced impacts which stems from variation in relative fuel prices. An important implication for climate policy is that in the short run a higher carbon tax does not necessarily lead to higher emissions reductions or higher costs

The Design of Variable Water Fees and its Impact on Swiss Hydropower Companies and Resource Owners

Water fees are a remuneration to be paid by the operators of hydropower plants to the owners of the water resource right. In Switzerland the fee is based on the gross capacity of the plant and independent from market conditions. This regulation implies that cantons and municipalities have a constant income from water fees, because the whole market risk lies with the producers. As revenues of hydropower companies have dropped after 2012 due to low electricity prices Swiss hydropower producers have been calling for a change in the water fee regime. The currently most probable policy change is a flexibilization of water fees. Within this paper we analyse the impacts of different water fee reform options - and how they depend on market conditions - from the hydropower producers (companies) and resource owners (cantons and municipalities) perspective. We find that electricity market price developments dominate the water fees in most cases, but for a range of electricity prices between 40 and 60 CHF/MWh water fees can make a difference. However, there is a larger variability between plants than between market scenarios, i.e., in every scenario, we find plants that make profits and others that make losses. We also show that a uniform water fee favors storage/pump-storage plants, whereas a differentiation of the water fee level by plant type favors run-of-river units

The future of Swiss hydropower : how to distribute the risk and the profits?

Low electricity prices put economic pressure on hydropower companies. A more flexible water fee design can counteract this pressure and support hydropower companies during times when market revenues are low. However, this comes at the cost of lower revenues for resource owners. Using a sample of cost data for 62 companies and revenue data derived from an electricity market model, we have quantified this trade-off for the case of Switzerland. We found that electricity market price developments dominate changes in water fees and that for the profitability of hydropower, electricity prices are more important than water fee levels. However, with electricity prices of around CHF 40 per MWh, water fees can make the difference between profit and loss. Therefore, while flexible water fee regimes shift the market risk from producers to resource owners to some extent, the extent of this risk shift depends on the detailed design of the flexible regime

Observatoire de la Politique Climatique - Rapport annuel 2022

The cumulative scientific evidence is unequivocal: Climate change is a threat to human well-being and planetary health. Any further delay in concerted anticipatory global action on adaptation and mitigation will miss a brief and rapidly closing window of opportunity to secure a liveable and sustainable future for all.(very high confidence

The Future of Swiss Hydropower Realities, Options and Open Questions

The NRP70 project 'The Future of Swiss Hydropower: An Integrated Economic Assessment of Chances, Threats and Solutions' (HP Future) has been initiated in 2014 with the objective to identify options for Swiss hydropower (HP) to adopt to the ongoing and expected electricity system changes. The project has been finalized in 2018 and this final report provides an overview of the obtained results and insights. Following a short summary of the main findings is provided

Cross-country spillovers of renewable energy promotion - The case of Germany

Electricity generation based on renewable energy (RE) sources such as wind and solar replace the most expensive generators that often rely on fossil fuels. In response to RE promotion, wholesale electricity prices and carbon emissions are therefore expected to decrease. In interconnected electricity systems, this so-called merit-order effect stimulates a change in electricity trade ows. Therefore, conventional generation and prices in neighboring countries are also likely to decrease. The impact of these trade reactions on carbon offsets is ambiguous and depends on installed generation and interconnector capacities. Moreover, the cross-border merit-order effect causes opposing effects on consumers and producers: Generators' profits decline, while consumers benefit from lower electricity costs and an increase in the consumer surplus. Using a rich data set of hourly technology-specific generation and wholesale market price data for ten central European countries, we estimate the domestic and cross-border impacts of German RE for the years 2015 to 2020. We find that German RE generation offset 79 to 113 MtCO2 per year. The major emission effect took place in Germany (64 - 99 MtCO2). The average cost of emission offset of 212 to 321e/t were almost entirely borne by German market participants. Neighboring countries do not bear costs, but a significant shift from producer to consumer rents is observed

The economic cost of carbon abatement with renewable energy policies

This paper exploits the randomness and exogeneity of weather conditions to identify the economic cost of decarbonization through renewable energy (RE) support policies. We find that both the aggregate cost and the distribution of cost between energy producers and consumers vary significantly depending on which type of RE technology is promoted—reflecting substantial heterogeneity in production cost, temporal availability of natural resources, and market conditions (i.e., time-varying demand, carbon intensity of installed production capacities, and opportunities for cross-border trade). We estimate that the cost for reducing one ton of CO2 emissions through subsidies for solar are e500–1870. Subsidizing wind entails significantly lower cost, which can even be slightly negative, ranging from e-5– 230. While the economic rents for energy producers always decrease, consumers incur three to five times larger costs when solar is promoted but gain under RE policies promoting wind. (JEL Q28, Q48, Q54, L94, C01)