How Marginal is Lignite? Two Simple Approaches to Determine Price-Setting Technologies in Power Markets

The impact of energy and climate policies often depends on how the market reacts to the policy, i.e. in terms of prices or costs for downstream industries. Economic theory tells us that in power markets, prices are determined by the cost of the marginal plant. We propose two simple approaches to determine marginal technologies in electricity wholesale from available data. Both approaches are complementary, easy to implement, and based upon assumptions which are commonly used in more complex energy system models. We exemplify their use with a policy example on the compensation for indirect emission costs from the EU Emissions Trading Scheme. We find that the current policy design severely overweighs CO2 emissions from lignite power plants in the Central Western Europe power market, which may lead to overcompensation of industrial power users.

Germeshausen, Robert and Nikolas Wölfing (2019), How Marginal is Lignite? Two Simple Approaches to Determine Price-Setting Technologies in Power Markets, ZEW Discussion Paper No. 19-031, Mannheim.