Co-existence of electricity, TEP, and TGC markets in the Baltic Sea Region

This paper analyses the application of two policy instruments, tradable emission permits (TEPs) and tradable green certificates (TGCs) to the electricity sector in an international context. The paper contains an explicit modelling at two levels of abstraction, one suitable for defining and analysing basic functionalities and one suitable for numerical analysis in relation to countries in the Baltic Sea Region. Emphasis is on estimating implications in quantitative terms for countries in the Baltic Sea Region in 2010 when the TEP market in the analysis extends to four Nordic countries (Denmark, Finland, Norway, Sweden), and the TGC market extends to North European EU countries (Denmark, Finland, Sweden, Germany). The study concludes that within the range of goals stipulated in the EU draft directive (23.6% renewable energy) and the Kyoto targets for emissions, the following prices are affected significantly: from -2 to +10 Euro/MWh for electricity spot prices, TGC prices up to 50 Euro/MWh, TEP prices up to 18 Euro/t CO2 and up to +15 Euro/MWh on the consumer cost. It is shown that such price changes have important consequences for the production and investment patterns in the electricity sector, and the resulting patterns will be clearly different according to the specific numerical targets for the two goals. An immediate consequence is increased pressure on transmission lines. Further, the introduction of TEP and TGC markets will imply a restructuring of the electricity sector, e.g. (depending on the specific combination of targets) by a significant increase in wind power capacities. However, this will have to be counterbalanced by access to production technologies that have fast regulation properties and/or that may maintain voltage stability. However, the price signals of TGCs (and to some extent also TEPs) that will enhance wind power investments will simultaneously hamper investments in technologies that are a precondition for extensive use of wind power technologies