Powering Europe - European Wind Energy Association

methodology
4.2 Modelling
Modelling tool
In order to carry out the modelling analysis, Pöyry applied
its modelling tool “The Classic Carbon Model”
(see Annex). It includes a fully fledged model of the
European power market. The Classic Carbon model
is an advanced simulation tool for analysing interaction
between the power and carbon market. It is
a general equilibrium model that assumes perfectly
competitive markets. It is a combination of a bottom-up
and top-down model, capturing the fundamental
supply and demand functions in the power
and carbon market. In mathematical terms, the model
maximises total welfare with a number of basic
constraints. Such constraints are, for example, that
power demand has to equal supply at all times, and
then there are transmission constraints, CHP generation
profiles, CO2 emission reduction targets and so
on. According to economic theory, the outcome from
welfare maximisation is equivalent to the outcome
in a perfectly competitive market in which producers
maximise profits and consumers maximise utility. 8
Although it is based on the assumption of perfectly
competitive markets, Classic Carbon is also able
to capture the effects of market power by adjusting
data parameters for market power.
The Classic Carbon model and hence the modelling
analysis cover the European power and carbon market
– that is, the EU-27 countries plus Norway and
Switzerland.
Concerning the carbon market, the model finds equilibrium
between supply and demand of allowances
in the EU Emissions Trading System (ETS) market
for the whole trading period and equilibrium between
supply and demand of power in each country simultaneously.
In the model, emissions from power generation,
heat generation and production in ETS industries
are “matched” with the cap. That is, the total
emissions from these sectors must be lower than or
142
equal to the total amount of allowances. The model
also allows for imports of non-European credits
from the Kyoto-based project mechanisms. Imports
are restricted by a volume cap in accordance with EU
regulations, and are estimated externally in regard to
price differences compared with EUA price levels.
The Classic Carbon model is designed to model
long-run market fundamentals, and captures the impact
of power demand developments, interconnector
capacities, fuel developments, energy policies,
emission levels and so on.
In addition to the power market, the model includes
the heating sector and the industrial ETS sectors.
It simultaneously finds a balance between supply
and demand in the power market and a balance in
the EU ETS market. Model results include wholesale
and end-user prices for each market area, trade
flows, generation, demand, fuel use, CO2 emissions
and the carbon (EUA) price. A more detailed description
of the model can be found in the Annex.
Modelling approach
In the following modelling analysis, Pöyry applied its
Classic Carbon model to estimate the long-term effects
of power capacities in 2020 on the merit order
curve through increased wind power capacities
which change the use and profitability in traditional
base load capacity. Hence, the Classic Carbon
model simulated how long-term market equilibrium
may be affected by the impact of large-scale wind
investments on conventional power technology investments
(based on short-run marginal costs and
fixed investment costs). These impacts have been
indicated by the model through the average market
price levels in 2020 at a national level (for all EU-
27 countries) as well as at a European level. The
relative price differences between the two scenarios
indicated the merit order effect of increased wind
power in electricity production.
8 compare, for example, Varian (1992), Microeconomic Analysis, third edition, Norton, New York. This is one of the main arguments for
competitive markets.
Powering Europe: wind energy and the electricity grid