Climate policies in the power market The effect of start-up costs of power plants YSSP Midsummer Workshop July 21, 2005 Orvika Rosnes Dep. of Economics and Resource Management, Norwegian University of Life Sciences Supervised by Shilpa Rao and Ilkka Keppo Environmentally Compatible Energy Strategies (ECS), IIASA

Climate policies in power industry Reduce emissions by reducing use of fossil fuels CO 2 price –Higher costs for fossil fuelled power plants –Emission-intensive producers replaced by ”cleaner” producers Long term policies have short term effects! –Replacement both in long term (investments) short term (daily operation of existing plants) –What is the effect of the policy on daily operation decisions of existing producers?

Flexibility of power producers Usual assumption: producers are flexible –Smooth production and investment functions Reality: power plants are inflexible –Start-up costs and other constraints

Problem statement What are the effects of climate policies when the short term inflexibilities of a power plant are taken into account? Market effects (prices, production) Emissions

Example: 400 MW coal power plant Marginal cost: 18 eur/MWh Start-up cost: –Fuel: ~ 8000 eur/start-up (½ hour production at max capacity) –(Indirect cost: ~ eur/start-up) Intertemporal decision –The usual ’price = marginal cost’ rule is not sufficient –Starting and stopping threshold different from marginal costs

Starting and stopping thresholds

Total effects of CO 2 -price Total production (and emissions) during a certain period? –Stay online longer? Higher total production –Stay offline longer? Lower total production –Start-up itself uses more fuel and causes emissions Number of start-ups during a period important –Which producers are crowded out?  Need a market model!

Computable market model for Denmark Time frame: 1 week = 168 hours –Implications for longer term models 7 power plants with different characteristics Exogenous demand Trade with neighbouring countries –According to price differences up to capacity limit Perfect competition  cost minimization

Remaining work Refine the model –Include “all” relevant constraints Time-dependant costs (important) Min up/down times, part load efficiency drop,… –Include emissions –Effects of trade and hydropower Refine data –Representative week for winter, summer?

Thank you!