The Impact of Climate Policies on the Operation of a Thermal Power Plant

Abstract

Climate policy measures aimed at power markets influence the cost structure of producers and price patterns, and are therefore likely to influence the production decision of power plants, even in the short run. When power plants have costs related to starting and stopping, decisions on short-term production are intertemporal, and the conventional ‘price vs. marginal cost’ rule is not sufficient to predict production in thermal power plants. This paper analyzes how the optimal production decision is influenced by climate policies: namely, CO2 trading mechanisms, the expansion of renewables and the interaction between these policies.The main result is that higher power price variation (as a result of increased wind power production) makes the thermal power producer less flexible, but the effect on emissions is ambiguous. A CO2 cost (as a result of an emission trading system) increases the flexibility of the producer and the operation decision resembles the conventional ‘price vs. marginal cost’ rule more. This implies lower emissions. However, when the CO2 price is coupled with higher power price variation, the positive effects may be reversed since the two policies have opposing effects.