EURO 2025 Leeds
Abstract Submission

2123. Long-term contracts in incomplete electricity and carbon markets.

Invited abstract in session TD-44: Interactions between electricity, hydrogen and carbon markets, stream Energy Economics & Management.

Tuesday, 14:30-16:00
Room: Newlyn 1.01

Authors (first author is the speaker)

1. Matthieu Delacommune
Laboratoire de Génie Industriel, CentraleSupelec, EDF R&D
2. Sébastien Lepaul
EDF
3. Simon Quemin
EDF R&D, Potsdam Institute for Climate Impact Research, Climate Economics Chair
4. Yannick Perez
Laboratoire de Génie Industriel, CentraleSupelec

Abstract

Decarbonization requires massive, rapid investment in low carbon technologies, notably in the electricity sector. Yet markets for risk sharing are missing or incomplete, which impairs investment incentives and warrants the use of long-term contracts. These contracts will increasingly interact with the carbon price in the EU emissions trading system, the main decarbonization policy in the EU. We anlayze the impacts of long-term contracts in the electricity sector and various carbon pricing policies, focusing on the interactions between them and their effects on low-carbon investment. . A hybrid modeling framework combining optimization and simulation approaches is developed in which electricity and carbon prices are endogenous and co-determined. The co-determination is enabled by an analysis of the dual variables of the optimization module inside the hybrid model. We propose a new use of the dual variables of the carbon constraints inside a Generation Expansion Planning allowing carbon permits banking. This use -representing a perfect market- allow us to compare with a market with frictions (limited foresight) thanks to the simulation model. Even in the absence of market frictions and uncertainty, an ex-ante equivalent tax and cap and trade do not lead to identical market outcomes due to electricity supply inertia, path dependency and degeneracy issues. In the presence of market frictions, long-term contracts can restore optimal investment incentives.

Keywords

Status: accepted

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