Internalisation of external costs in the Polish power generation sector: A partial equilibrium model

Abstract

This paper presents a methodical framework, which is the basis for the economic analysis of the mid-term planning of development of the Polish energy system. The description of the partial equilibrium model and its results are demonstrated for different scenarios applied. The model predicts the generation, investment and pricing of mid-term decisions that refer to the Polish electricity and heat markets. The current structure of the Polish energy sector is characterised by interactions between the supply and demand sides of the energy sector. The supply side regards possibilities to deliver fuels from domestic and import sources and their conversion through transformation processes. Public power plants, public CHP plants, industry CHP plants and municipal heat plants represent the main producers of energy in Poland. Demand is characterised by the major energy consumers, i.e. industry and construction, transport, agriculture, trade and services, individual consumers and export. The relationships between the domestic electricity and heat markets are modelled taking into account external costs estimates. The volume and structure of energy production, electricity and heat prices, emissions, external costs and social welfare of different scenarios are presented. Results of the model demonstrate that the internalisation of external costs through the increase in energy prices implies significant improvement in social welfare.