Market reaction to economic climate change policy, the
merit order effect and the limits of marginal abatement
cost curves – Fabian Levihn
Background
Purpose
Acknowledgements
Governments around the world have introduced economic policies to
combat global warming. In the form of taxes, emissions trading schemes
and subsidies, these polices seek to influence market actors to reduce
greenhouse gas emissions. One tool used to understand market reactions to
such policy is marginal abatement cost curves (MACC). These curves
optimise the two dimensions of cost per abatement and abatement.
In this study, alternative models for understanding and
optimizing the response to climate change policy is
explored. Recommendations for future application on
analyzing policy implications are given.
This study was financed by the Swedish Energy Agency under the program “Investments in energy
efficiency and climate change abatement: revising marginal cost curves as an optimization model.”
It was executed in cooperation with the district heating utility AB Fortum Värme samägt med
Stockholms Stad.
However; in reality corporations instead optimize for cost reductions, not
the combined cost and abatement. Climate policy also affects the merit
order in energy systems, which prohibits the robustness of engineered
bottom-up MACCs.
Marginal abatement cost [SEK / t CO2]
2000
MACC Stockholm DH production
0
0
200
400
600
800
-2000
1000
ktonnes CO2
KVV6 FGC
KVV8
KVV7
KVV6 Closed
MW
-10000
Bio oil
Bio pellets
Heat Pump
Coal PFBC CHP KVV6
Bio CHP
Waste CHP
KVV7 Waste CHP
0
1
2
3
4
5
6
1000 h / year
Fossil oil
Bio oil
Peat HOB
Woodchips CHP
Waste HOB
KVV8 Bio CHP
Waste CHP
AUX
7
•
•
8
CO2 abatement [ktonnes]
Typical MACC
When each investment option is selected it affects
other options and present units within an energy
system.
Different production technologies, plants and fuels
have different CO2 intensity.
Merit order and energy balance depends on the price
on CO2 emissions from policy instruments such as the
EU ETS.
LFV/Arlanda
BRISTA
Stockholm District Heating System map
Vilunda
Sollentuna/Rotebro
Järfälla
Akalla
Sollentuna
KVV6 FGC: Abatement relatively robust for EUA beneath
€ 38. Marginal costs robust for EUA beneath € 49.
Norrenerg
i
VÄRTAN
HÄSSELBY
300
KVV6 FGC
200
KVV8
100
KVV7
KVV6 30%
0
0
100
200
300
400
500
KVV6 Closed
-100
-200
-300
KVV8: Abatement robust for EUA over€ 18. Marginal cost
not robust relative EUAs.
300
KVV6 FGC
200
KVV8
KVV7
100
KVV6 30%: : Abatement robust for EUA in the interval
€ 13 to € 40. Marginal cost not robust relative EUAs.
This study shown an example where a MACC is un-robust
relative the price of EUAs, similar to Delarue et al (2010)
For the two dimensions specifically, the abatement
potential of the options are relatively robust for the EUA
price interval of € 18 to € 40. The marginal cost in the
MACC is not robust relative the price of EUAs.
KVV6 30%
KVV6 Closed
0
100
200
300
Orminge
Årsta
KVV7: Abatement and marginal cost relatively robust.
Increase CO2 emissions though.
Conclusions
How the marginal cost depends on price on CO2 emissions
0
Lidingö
HAMMARBY
Fittja
HMC
HÖGDALEN
Farsta
Skogås
IGELSTA
KVV6 Closed: Abatement robust for the EUA interval of
€13 to €42. Cost not robust towards EUA price level.
Cost of EUA [SEK / tonne CO2]
400
400
500
-100
-200
Levihn, F., Nuur, C., 2014. “Biomass and waste incineration CHP: co-benefits of primary energy
savings, reduced emissions and costs”. WIT Transactions on Ecology and The Environment, vol. 190,
pp. 127-138.
The effect of changes in merit order and the sensitivity of
CO2 abatement and costs associated with different
options are highly dependent on the price on CO2
emissions.
400
Marginal Cost [MSEK]
Levihn F., 2014. “CO2 emissions accounting: Whether, how, and when different allocation methods
should be used”. Energy, vol. 68, pp. 811-818.
•
How the abatement depends on the price on CO2 emissions
500
1. Flue gas condensation (FGC) at the coal PFBC CHP plant
KVV6.
2. Building a 450 MW bio FBC CHP plant called KVV8.
3. Building a new waste incineration CHP plant called
KVV7.
4. Co-firing 30% biomass with the coal in KVV6.
5. Closing KVV6.
Delarue, E.D., Ellerman, A.D., D’haeseleer, W.D., 2010. “Robust MACCs? The topography of
abatement by fuel switching in the European power sector”. Energy, vol. 35, pp. 1465-1475.
Results
Energy balance and merit order
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
0
References
SEK 9 ≈ EUR 1
KVV6 30%
-8000
A sensitivity analysis of the data used in Levihn (2014) and
Levihn and Nuur (2014) was performed for 5 investment
options relating to district heating production in Stockholm.
In practice by plotting how the two dimensions in MACC
(abatement and cost) varied against the price on EUAs (EU
ETS emission allowances).
-4000
-6000
Methodology
Cost of EUA [SEK / tonne CO2]
Stockholm district heating
Annual heat production: 11 TWh
Annual power production: 2 TWh
More than 40 production units, some clustered at larger plants
The implications are that it is advised that a single MACC
should not be used as a tool for policy makers. Rather a
scenario approach is needed where a MACC for each
relevant price level of CO2 emissions is constructed. The
cost and abatement associated with a particular price on
CO2 emissions would thus be visible.
Contact information
[email protected]
+46 (0) 709 689 879
Värtaverket is one of the largest production
systems for district heating and cooling in
Europe. The plant is located close to the end
users and in the northeast of the city, and has a
seaport. To reduce the use of coal (in KVV6)
and increase the share of renewables within
production, a large scale biomass CHP unit
called KVV8 is under construction at
Värtaverket. Also various measures such as cofiring biomass with the coal is currently
adopted.
Högdalenverket is located in the southern
suburbs and is mainly based on waste
incineration CHP, although bio oil HOBs are
available for peak production. There are plans
to construct a large waste incineration CHP
plant called KVV7 to be ready by 2015, thereby,
expanding the capacity for waste management
within the region.
Fabian Levihn is a PhD candidate at the department of
Industrial Economics and Management at the Royal
Institute of Technology, KTH. He holds a MSE in
Mechanical Engineering.