Impact of the derogation mechanism in EU ETS on the economic viability of modernization of existing coal blocks for dual-fuel gas-steam systems

Abstract

The tightening environmental policy, in particular regarding the reduction of CO2 emissions in energy companies, has an impact on the rising costs of electricity generation. The sector is covered by the CO2 emission trading scheme, which is most felt by coal-fired power plants, which use the fuel of the highest emissions factor. Companies wishing to remain competitive on the electricity generation market should make investments that would affect the level of emissions and at the same time would increase the power and efficiency of the installation. It is necessary to undertake investments that minimize the charges of operations and ensure profitability. One of the mechanisms that encourages enterprises to modernize existing generation units and at the same time to reduce emission factors is the mechanism of derogation from the obligation to purchase the entire EUA at auctions. Investor who decided to invest in the so-called derogation should had take into account many factors that were discussed in greater detail in this chapter and which proved to be decisive in terms of investment efficiency. The settlement of investment costs under the mechanism of derogation in various periods in 2013–14 and in –2019 may have an impact on the profitability of the undertaken investment. The high volatility market prices of EUAs may, at certain price levels, cause investment to be unprofitable for the investor. In addition, the price influence on the profitability of the investment, of used fuel in the modernized installation was examined. To get a better comparison of investment profitability, all calculations have been made for the case of investment implementation as part of the derogation mechanism and without its use. A detailed case of modernization of the coal power plant through its repowering with a gas turbine has been used as an example. This type of modernization will affect the reduction of the emissions factor after completion of the modernization of the block, which is a necessary condition when using the derogation mechanism and at the same time will increase the power and efficiency of the block. In this chapter, all factors affecting the unit cost of electricity generation, which determine the most profitable investment in the framework of the derogation mechanism, have been analyzed. Moreover, the benefits and threats resulting from the use of the derogation mechanism were indicated. It should be emphasized that this is a voluntary mechanism and applicable only in some countries covered by the EU ETS, what is discussed in the monograph in more detail. The calculations based on a novel methodology to determine the unit cost of electricity production in a continuous time record.