LOW-CARBON POWER POLICY AND ITS IMPLICATION ON ELECTRICITY PRICES AND DEMAND

Isaac Dyner, CIIEN, CeiBA, Universidad Jorge Tadeo Lozano,

Laura M. Cárdenas, CIIEN, CeiBA, Universidad Nacional de Colombia,

Carlos Jaime Franco, CIIEN, CeiBA, Universidad Nacional de Colombia,

Oscar Fernández, Empresas Públicas de Medellín,

Overview

The effects of greenhouse gases on climate alteration set policy challenges in the energy industry, the largest contributor of emissions worldwide. In this context, a number of countries, mostly developed, are undertaking reforms focusing on the environment, internalizing emission costs and promoting cleaner technologies. One outstanding example of this is the proposed electricity reform in Great Britain (GB) that aims at reducing emissions while preserving security of supply, and, at the same time, maintaining a competitive power sector (DECC, 2012). Other countries such as Denmark, Spain, Germany and Brazil are undergoing major changes in the composition of their power industry in order to modify the trend of emissions growth (Chalvatzis & Hooper, 2009; Gan, Eskeland, & Kolshus, 2007; HAAS et al., 2008; Haas et al., 2011; IPCC, 2012; Lipp, 2007).

The Kyoto Protocol and other agreements, designed to reduce global emissions of greenhouse gases, have set targets that demand significant changes in a number of industries, but these may broadly affect the performance of economies (Ross, Fawcett, & Clapp, 2009). In this context, policies that may speed the penetration of clean technologies and emission reductions ought to observe the evolution of electricity prices, one of the concerns of this paper. These policies are either focused on financial incentives and subsidies such as tax, funds, premiums, etc., or on non-financial incentives such as regulations, standards and prohibitions (Delmas & Montes-Sancho, 2011; Dijk et al., 2003; Menz, 2005; Vachon & Menz, 2006).

The implementation of these policies on the power sector will have an effect on electricity prices and demand (Fischer & Newell, 2008; Haas et al., 2011). Though much is being researched and discussed, there are uncertainties in terms of the extent of these effects, particularly at the country level. This paper studies the impact of these policies on electricity prices and demand, through an integrated demand and supply analysis.

Method

This paper integrates supply and demand to analyze the effect of emission mitigation policies. Based on ideas from the GB reform, this paper proposes a dynamic hypothesis that describes the behavior of electricity markets in an integrated manner, and examines the relationships between demand, supply and electricity prices. It studies, with modeling support, the effect of three policies: The first one, internalizing of emission costs through carbon taxes; the second one, incentivizing renewable technologies through feed-in tariffs, and; the third one, combining both policies.

Results

The simulation model was calibrated for the Colombian case incorporating data from the Colombian Climate Strategy intent (CONPES, 2011). Simulation results confirm, on the one hand, that the internalization of carbon costs increases electricity prices, which in the mid-term decreases electricity demand – the system evolution brings insights for policy making. On the other hand, and contrary to common believes, incentives on renewables show low increases in electricity prices, as entry barriers are brought down, and more competition will be in place.

Furthermore, the combined effects of both policies show great displacement of fossil fuel based-technologies by low carbon ones and renewables. On important finding is the prospect of achieving the ultimate goal of implementing these policies: emissions reduction, securing electricity supply, at reasonable prices.

Conclusions

Results indicate that emission reduction policies, from an integrated supply and demand perspective, have a significant effect on electricity prices and, consequently, on demand. The internalization of emission costs generate increases in electricity prices and on more efficient consumption, which is perceived by the decline of electricity demand in the long run. Furthermore, this structured modeling of policy helps explaining how the ultimate intended goal might be achieved: sustainable emissions reduction.

References

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