Power generation technology choice in the presence of climate policy

Abstract: The overall purpose of this thesis is to analyze power generation technology choices in the presence of climate policy. Special attention is paid to the diffusion of renewable power technologies following a carbon pricing policy, and this topic is analyzed in two self-contained papers. The overall objective of paper #1 is to analyze how future investments in the Swedish power sector can be affected by carbon pricing policies following the Kyoto Protocol. In the first part we focus on the price of carbon following the Kyoto commitments and to what extent this policy will affect the relative competitiveness of the available investment alternatives. The second part pays attention to the possible impacts of technology learning - and the resulting cost decreases - on the economics of power generation in the presence of climate policy. The first part considers the majority of power generation technologies available in Sweden, while the second part focuses solely on the competition between CCGT and the cheapest renewable power alternative, wind power. Methodologically, we approach the above issues from the perspective of a power generator who considers investing in new generation capacity. This implies that we first of all assess the lifetime engineering costs of different power generation technologies in Sweden, and analyze the impact of carbon pricing on the competitive cost position of these technologies under varying rate-of-return requirements. Overall the results indicate that in general it is not certain that compliance with the Kyoto commitments implies substantial increases in renewable power sources. If, therefore, renewable power sources are favored for reasons beyond climate policy additional policy instruments will be needed. The purpose of paper #2 is to analyze the costs for reducing CO2 emissions in the power-generating sectors in Croatia, the European part of Russia, Macedonia, Serbia and the Ukraine in 2020 by using a linear programming model. The model is based on the underlying assumptions of the so-called RAINS model frequently used to assess the potential and the costs for reducing air pollution in Europe. The results based on an exogenously given 15 percent reduction target for CO2 emissions show that the marginal cost for switching from a carbon intense fuel to either a low-carbon or to a renewable energy source differs significantly among the countries. The marginal costs range from 22 to 174 € per ton CO2, and are mainly due to country differences in the availability of renewables, existing technologies and costs. The results also indicate that although it is clear that the Eastern European countries are not homogenous in terms of CO2 abatement potential and costs, no single country emerges as particularly low cost. This may have important implications for future JI/CDM activities. For instance, risk factors such as policy uncertainty and institutional obstacles may become crucial in determining the future allocation of JI/CDM projects across the region.