Effects of Carbon Dioxide Capture and Storage in Germany on European Electricity Exchange and Welfare

Abstract

In the course of European efforts to mitigate global warming, the application of carbon dioxide capture and storage (CCS) technologies is discussed as a potential option. Some political opposition was raised – inter alia – by uncertainties about the effective cost of such technologies. Because of the cost structure of CCS power plants with high ‘flat’ investment cost and – in case of high carbon allowance prices – comparable low variable cost, the application of CCS will induce a merit-order effect causing a decline in electricity prices on the spot market. On the one hand, the reduction of electricity supply cost raises suppliers’ rents, while the decline of electricity prices augments consumers’ surpluses. These positive welfare effects tend to mitigate political opposition against CCS. On the other hand, the merit-order effect reduces electricity suppliers’ revenues as the electricity prices decline. This mitigates their scope for additional investments in CCS capacity. In this study, we focus on the influence of CCS in Germany on electricity supplier and consumer surpluses and associated impacts on the scope for investments in additional CCS capacity. By means of the applied model of electricity markets, influences on European electricity exchange and welfare levels are investigated