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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

Author

Listed:
  • Eike Blume-Werry

    (Energy Economics Group (EEG), Institute of Energy Systems and Electric Drives TU Wien and Axpo Holding AG)

  • Thomas Faber

    (Axpo Holding AG)

  • Lion Hirth

    (Neon Neue Energieökonomik GmbH (Neon) and Hertie School of Governance)

  • Claus Huber

    (Axpo Holding AG)

  • Martin Everts

    (Axpo Holding AG)

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

  • Eike Blume-Werry & Thomas Faber & Lion Hirth & Claus Huber & Martin 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," Working Papers 2018.34, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2018.34
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    Cited by:

    1. Newbery, David & Gissey, Giorgio Castagneto & Guo, Bowei & Dodds, Paul E., 2019. "The private and social value of British electrical interconnectors," Energy Policy, Elsevier, vol. 133(C).
    2. Ozan Korkmaz & Bihrat Önöz, 2022. "Modelling the Potential Impacts of Nuclear Energy and Renewables in the Turkish Energy System," Energies, MDPI, vol. 15(4), pages 1-25, February.
    3. Germeshausen, Robert & Wölfing, Nikolas, 2020. "How marginal is lignite? Two simple approaches to determine price-setting technologies in power markets," Energy Policy, Elsevier, vol. 142(C).
    4. Ulrich J. Frey & Martin Klein & Kristina Nienhaus & Christoph Schimeczek, 2020. "Self-Reinforcing Electricity Price Dynamics under the Variable Market Premium Scheme," Energies, MDPI, vol. 13(20), pages 1-19, October.

    More about this item

    Keywords

    Price Setting; Electricity Markets; Merit Order; Generation Technologies; Carbon Price Floor;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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