FEEM working papers "Note di lavoro"
2018.034
Date: 20/12/2018

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


Authors:
Eike Blume-Werry (Economics Group EEG, Institute of Energy Systems and Electric Drives TU Wien, Axpo Holding AG); Thomas Faber (Axpo Holding AG); Lion Hirth (Neon Neue Energieökonomik GmbH Neon, Hertie School of Governance); Claus Huber (Axpo Holding AG); Martin Everts (Axpo Holding AG )
JEL n.: O13, Q41
Keywords: Price Setting, Electricity Markets, Merit Order, Generation Technologies, Carbon Price Floor

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.

***

Suggested citation: Blume-Werry, E., T. Faber, L. Hirth, C. Huber, M. Everts (2018), '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', Nota di Lavoro 34.2018, Milano, Italy: Fondazione Eni Enrico Mattei.

Download file
Download file

FEEM Newsletter & Update

Subscribe to stay connected.

Your data will be processed by FEEM - Eni Enrico Mattei Foundation - Data Controller - to receive the Foundation's Newsletter & Update via e-mail. To send the requested information, the Data Controller uses e-mail sending service providers established in the U.S.A .: for this, your consent to the transfer of your email address to the U.S.A. is required, without which it will not be possible to comply with your request. We invite you to consult the complete information to obtain detailed information to protect your rights.