ifo Working Paper No. 270, 2018 | Information | PDF Download
There is a broad perception that the level playing field of the European Union is increasingly impacted by the interests of individual member states. This observation also holds true for the long-run development of electricity markets. In this paper, the author looks into the questions whether reaching a cost-efficient decarbonization path and accounting for fairness at the same time is possible and finds a clear trade-off.
Market integration is seen as a complementary measure to decarbonize energy markets. In the context of power markets, this translates into regions that coordinate to maximize welfare in the power market with respect to a climate target. Yet, the maximization of overall welfare through cooperation leads to redistribution and can result in the reduction of a region's welfare compared to the case without cooperation. This paper assesses why cooperation in the European power market is not stable from the perspective of single regions and identifies cost allocations that increase fairness. In a first step, the EU-REGEN model is applied to find the future equilibrium outcome of the European power market under a cooperative, subadditive cost-sharing game. Secondly, resulting cost allocations are analyzed by means of cooperative game theory concepts. Results show that the value of cooperation is a € 69 billion reduction in discounted system cost and rational behavior of regions can maintain at most 16 % of this reduction. The evaluation of alternative cost allocations reveals the trade-off between accounting for robustness against cost changes and individual rationality. Moreover, the cost-efficient decarbonization path of the European power sector under the grand coalition is characterized by the interplay between wind power, gas power, and biomass with geologic storage of CO2. Last, with singleton coalitions only, the market outcome shifts to a higher contribution from nuclear power.