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Carbon Price instead of Support Schemes: Wind Power Investments by the Electricity Market

Abstract:
This paper studies wind power development within electricity markets with a significant carbon price as the sole incentive. Simulation of electricity market and investment decisions by System Dynamics modelling is used to trace the evolution of the electricity generation mix over a 20-year period from an initially thermal system. A range of carbon prices is tested to determine the value above which market-driven development of wind power becomes economically possible. This requires not only economic competitiveness in terms of cost-price, but also profitability versus traditional fossil-fuel technologies. Results stress that wind power is profitable for investors only if the carbon price is significantly higher than the price required for making wind power MWh's cost-price competitive on the basis of levelized costs. In this context, the market-driven development of wind power seems only possible if there is a strong commitment to climate policy, reflected in a stable and high carbon price. Moreover, market-driven development of wind power becomes more challenging if nuclear is part of investment options. Keywords: Electricity market, Renewables, Investment, Carbon price, System dynamics modelling.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Other; Renewables – Policy and Regulation; Renewables – Wind ; Electricity – Generation Technologies; Renewables – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
Q49 - Energy: Other
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
Q51 - Valuation of Environmental Effects
Q2 -

Keywords: Electricity market, Renewables, Investment, Carbon price, System dynamics modelling

DOI: 10.5547/01956574.37.4.mpet

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Published in Volume 37, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.