Influence of the Emissions Trading Scheme on generation scheduling

Abstract: The paper investigates the effects of emissions constraints and Emissions Trading Scheme (ETS) on the generation scheduling outcome. ETS is a cap-and-trade market mechanism that has been introduced in European Union in order to facilitate CO2 emissions management. This scheme gives generators certain amount of CO2 allowances which they can use to cover emissions produced during energy generation. In a current setting, most of the allowances are given for free. However, under ETS generators also have an opportunity to buy and sell CO2 allowances on the market. Since generation power outputs are bounded by the amount of CO2 emissions that they are allowed to produce over time, it is becoming increasingly important for generating units to manage their allocations in the most profitable way and decide when and how much of permissions to spent to produce electricity. The method proposed here allows for modeling of this new limitation by including costs of buying and selling of CO2 allowance in the generation scheduling procedure. It also introduces additional emissions constraints in the problem formulation. Although CO2 permissions and energy are traded in separate markets, the proposed formulation permits analysis on how emission caps and emission market prices can influence market outcome. The method is illustrated on a 5-unit system. Given examples compare (i) a base-case when all generators have made a decision to use portions of their total free allocations that do not cause any shortfall during the investigated time period; (ii) two cases when the least expensive generators’ decisions on the amount of free allowances they are willing to use during the considered period are insufficient. In all cases generators also submit prices at which they expect to be able to “top-up” or sell allowances on the market, however, only in the second and third case the “buying” option becomes active and affects generation scheduling and total costs. In addition, the paper investigates how aggregation of emissions allowances of generators belonging to the same company can affect market clearing. [Copyright &y& Elsevier]