As part of its Clean Energy Package, the European Commission has considered introducing a so-called “550g rule”. This would exclude plant capacities that emit more than 550g of CO2 per kilowatt hour from participating in capacity remuneration mechanisms (CRMs). Frontier has been commissioned by the German energy supplier RWE to review the impact of this rule.

CRMs enable payments to be made to electricity generators to be ready to supply electricity when demand is particularly high. The 550g rule would exclude all coal and oil plants, as well as many gas-fired plants, from participating in CRMs.

Frontier’s analysis concludes that:

• The rule will not have an effect on overall emissions in the EU power system. The “waterbed effect” in the EU Emission Trading Scheme (ETS) means that emissions reductions in coal power stations will be replaced by emissions elsewhere in the system (such as from other plants or other countries).
• The rule will increase the overall cost of CO2 emissions reduction in Europe, as closing coal plant capacity is a relatively high cost way of reducing emissions compared to other available options. However, at the same time, the price of CO2 emissions in the ETS will fall further, as the abatement options remaining in the market will have a relatively low cost. This could undermine the credibility of the ETS.
• Excluding certain controllable technologies from CRMs is likely to result in higher prices in the CRM, as the supply pool will be smaller; it could also mean the premature closure of some otherwise viable (and compliant) power stations, which causes additional costs. Both effects are likely to result in price increases for consumers.

Overall, the study argues that using an instrument like a CRM, which is designed to promote security of energy supply, to pursue environmental policy objectives is inefficient. Instead, it suggests that climate policy objectives should be pursued through dedicated instruments, in particular the EU ETS.

Frontier regularly advises public and private sector clients on issues relating to energy policy and market design in Europe.

For more information, please contact Miriam Rau on m.rau@frontier-economics.com, or call +44 (0)20 7031 7000.