How Marginal Is Lignite?

The „marginal plant“ is an established term in the field of energy economics. It designates the plant, which is considered to be price-setting in a market at a specific time, and which therefore determines the pass-through of CO₂ and fuel costs to industrial consumers. While the concept is well-defined and widely accepted, there is no unambiguous identification of marginal technologies in real world markets. Energy and climate policies, relying on an estimate of cost pass-through – such as the EU-compensation mechanism for indirect CO₂ costs – are therefore prone to use implausible ad-hoc approximations of actual CO₂-price impacts.

The study presented in this ZEW Research Seminar proposes two simple and complementary approaches to approximate the number of hours where lignite power plants were price setting in the German market. The approaches are conceptually and computationally simple, they use publicly available data and assumptions which are in line with usual energy market modelling approaches. It is found that lignite power plants are overweighted in the current regulation for indirect CO₂ compensation compared to their actual frequency of being price-setting. The study is implemented in the open-source software Rmarkdown, which allows to make the research process transparent, by integrating the data analysis and its presentation.

The talk will cover

• the policy background which motivated the project,
• the proposed approaches for the determination of marginal technologies, and
• their implementation for the analysis and the report.

The seminar is jointly organised by the Mannheim Institute for Sustainable Energy Studies (MISES) and ZEW.