Abatement and evolution in the European electric power sector in reaction to the EU ETS carbon price signal

The electricity sector is the single most important EU ETS sector and will have determinant role in EU ETS emissions and emissions reductions. As such, understanding the reaction of the sector to EUA or carbon permit prices, both in the short-term (production) and in the long-term (investment) is important to analyse the potential impact of EU ETS policy and implications for achieving policy objectives. Analysis of the electricity sector for Phase II of the EU ETS confirms the general market expectation of switching from coal-based to gas-based, but also biomass-based, technologies with increasing EUA prices. Moreover, the emissions results of the model for the short-term corroborate market estimations of a long Phase II, but indicate that abatement occurs in spite of this, as actors are guided by longer term anticipations of stricter targets and hedge against uncertainty. However, the abatement potential of the power sector in the short-term is limited by the inertia of the park technology mix. Analysis of the sector over the longer term, to 2030, shows that the EUA price can play a role in changing the technology mix of the park towards less emissions-intensive one – even facilitating the emergence of CCS (carbon capture and storage) – and thus increase the potential for achievable emissions reductions compared to a situation where no consideration is given to EUA prices in investment.