Impact of CO2CO2 cap-and-trade programs on restructured power markets with generation capacity investments

• The model is used to assess the impact of CO2 cap-and-trade in electricity markets.
• The generators’ competition in a CO2 allowance market similar to RGGI is modeled.
• Investment decisions and electricity supply bids of generators are also modeled.
• The methodology is implemented on a sample power network from northern Illinois.
• Relationship between CO2 allowance prices and emissions, demand, LMPs are obtained.

A cap-and-trade program is the most widely discussed policy aimed at achieving CO2CO2 emissions reductions. Since power plants in the US and other industrialized nations are responsible for a sizable portion of CO2CO2 emissions, the implementation of a CO2CO2 cap-and-trade program will have a significant impact on the power generation sector. Assessing this impact is a challenging task, especially in restructured electricity markets. Cap-and-trade programs consider multiple design parameters and attributes as well as the creation of a new market for CO2CO2 allowances, all of which will affect the capacity investment decisions of generators and the bids that generators submit to the day-ahead and real-time electricity markets. In this paper, we develop a game theoretic model driven methodology to assess the impact of CO2CO2 cap-and-trade programs in restructured electricity markets. The methodology is implemented on a sample power network created from the electricity market data of northern Illinois in the US. The network is assumed to operate under a CO2CO2 cap-and-trade program similar to the Regional Greenhouse Gas Initiative (RGGI). The impact of cap-and-trade policy on the equilibrium generation expansion plan and the electricity market operation is examined via variations in prices, CO2CO2 emissions, demand, and evolution of technology mix in the generation portfolio over a planning horizon.