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Optimal Abandonment of EU Coal-fired Stations

Luis M. Abadie, José; M. Chamorro and Mikel González-Eguino

Year: 2011
Volume: Volume 32
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-7
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Abstract:
Coal-fired power plants face potential difficulties in a carbon constrained world. The traditional advantage of coal as a cheaper fuel may erode in the future if CO2 allowance prices increase. When would it be optimal to abandon a coal station and obtain its salvage value? We assess this question following the Real Options approach. We consider the case of a coal plant that operates in a deregulated electricity market where natural gas-fired plants are the marginal units. We assume specific stochastic processes for the fundamental uncertainties in our model: coal price, natural gas price, and emission allowance price. The underlying parameters are derived from actual futures markets. They are further used in a three-dimensional binomial lattice to assess the decision to abandon. We draw the optimal exercise boundary. Sensitivity analyses (regarding fuel prices, allowance price, volatilities, useful life, residual value, thermal efficiency, safety valves in carbon prices, time step) are also undertaken.



New Entrant and Closure Provisions: How do they Distort?

A. Denny Ellerman

Year: 2008
Volume: Volume 29
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol29-NoSI-5
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Abstract:
Provisions to endow new entrants with free allowances and to require closed facilities to forfeit allowance endowments are ubiquitous in the EU Emissions Trading Scheme, but a new design feature in cap-and-trade systems. This essay seeks to explore, within a comparative statics framework, the effect of these provisions on agent behavior in output and emissions markets assuming profit maximization. The main conclusion is that the principal effect is on capacity. The effect of the resulting over-capacity on output markets is to reduce output price and to increase output. The effect on emissions markets is more ambiguous in that it depends on the emission characteristics of the new capacity, existing capacity, and the capacity not retired, and the distribution of the excess capacity among these categories.



Electricity futures prices in an emissions constrained economy: Evidence from European power markets

George Daskalakis, Lazaros Symeonidis, Raphael N. Markellos

Year: 2015
Volume: Volume 36
Number: Number 3
DOI: 10.5547/01956574.36.3.gdas
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Abstract:
We investigate the economic factors that drive electricity risk premia in the European emissions constrained economy. Our analysis is undertaken for monthly baseload electricity futures for delivery in the Nordic, French and British power markets. We find that electricity risk premia are significantly related to the volatility of electricity spot prices, demand and revenues, and the price volatility of the carbon dioxide (CO2) futures traded under the EU Emissions Trading Scheme (EU ETS). This finding has significant implications for the pricing of electricity futures since it highlights for the first time the role of carbon market uncertainties as a main determinant of the relationship between spot and futures electricity prices in Europe. Our results also suggest that for the electricity markets under scrutiny futures prices are determined rationally by risk-averse economic agents.





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