The problem of emissions has been on the rise with electricity generation accounting for up to 54% of the emissions in most countries (Braatz, 1996). Electricity generation relies on various sources of fossil fuel such as coal, gas and oil.
These fuels are known to emit carbon in the atmosphere leading to change of climate. The countries met in Japan to discuss the problem at core and Kyoto protocol came into being. The electricity market was put under certain regulations which affected its trading market.
According to See (2001), the pricing of electricity now depends on the markets for gas and carbon and it is for this reason that the three market need to relate. Carbon trading has had major impact in electricity trading causing major mishaps in the market.
The aim of this report is to discuss the challenges facing the electricity trade market as a result of limitation of electricity generation. It will further discuss the inter-relationship between the gas, carbon and electricity markets. It will also examine the natural gas prices and how it has affected the generation of electricity.
Electricity, Carbon and Gas Prices
Electricity prices seem to be increasing day in day out and this has been attributed to the market increase of fuels. Despite the report released by the EU over carbon emission reduction, its price has considerably increased over the past few months.
The demand for gas as a source of fuel has considerably risen to its effectiveness and this has made its prices to shoot up. gas fuel has been favored as it produces less carbon into the atmosphere hence reducing the climate changes witnessed by the emission.
Faure and Peeters (2008) argue that gas prices and carbon emission become integral components to determine the price of electricity in the competitive market. Therefore, in order to achieve the desired profit, the electricity company should have knowledge of how to relate these three markets.
With the aim of reducing carbon emission in the atmosphere, the company should balance the cost of fuel gas market price with the carbon credits available to generate in order to make profits once electricity has been supplied to the end consumer.
The pricing of natural gas has been unstable and it is very difficult to ascertain its future level reliance. Therefore, there is a conflict between the gas market and electricity producers.
This has resulted to the producers having a rough time pricing the end product causing a fluctuation in the electricity market. Though gas is the preferred source of fuel for its clean nature and environment friendly, it has caused the end user dig deeper into the pocket (Mitchell and Packer, 2002).
According to Miller et al (2009), the three markets will relate in the following manner. The electricity market will rely on gas in compliant with Kyoto protocol hence will purchase gas in order to generate electricity. If the gas price increases, then the electrical company increases the price of electricity. The electricity market is not only affected by increase of gas prices but also by trading carbon scheme.
If the company has to buy credit from another company, then it is forced to increase the price of electricity to its consumers. The step becomes very risky to the electricity company due to the liberalized and very competitive market.
In a field where there are many suppliers, consumer is at liberty to choose the preferred supplier who offers lowest rates to the consumer. Some companies would result to the other alternatives such as coal and oil which would cause climate change due to the increase of carbon.
The consumer in most cases is the one who suffers and policy makers should lay down some policies to remedy the problem. Gas demand could be reduced drastically and made available at cheap fixed price to the electricity generation companies.
Another solution is to diversify the fuels used to generate electricity to create a competition in the fuel markets. The remedial procedures would drastically reduce the pricing in gas, causing the electricity prices to decrease to the satisfaction of the consumer.
Carbon Trading In Electricity Generation
In order to fully understand the core problem of electricity trading, it will be important to give a brief summary of what the Kyoto Protocol entails and the role it plays in regulating electricity generation. Any electricity trading company is aware of the existence of this powerful agreement known as the Kyoto protocol.
It was a meeting that comprised of over 160 countries in Japan in 1997 with the aim of coming up with mechanisms to decrease the rate of carbon emission in the atmosphere. The agreement was discussed in 1997 and the countries agreed to adopt it in 1999. Though some of the countries have not ratified the agreement, it came into force in 2005 with more than 50 countries ratifying it (Stewart, 2009).
The fuel emissions resulted to climate changes especially in the industrialized countries and something had to be done urgently to stop further emissions. It was stated that the major causes of emission were the transport industries and electricity and heat generation industries with the latter accounting for the largest percent of carbon emission (Hillebrand, 2008).
It was agreed that electricity generation industries in most countries was the main source in greenhouse gas emissions with carbon being the largest cause of fuel emission. It was further agreed in generating electricity; the industries used a lot of carbon than the atmosphere could accommodate hence causing climate change. A policy had to be put in place to regulate this massive usage of carbon.
It was for this reason that the countries came up with several mechanisms to curb this problem. The aim was to commit the member countries to reduce fuel emission by 5% in a span of five years. One of the main mechanisms was to introduce carbon in the market as a tradable product in electricity generating industries.
This was to enable companies to trade their emissions credits with the companies that had exceeded their credits. (Freestone, 2009).
Different trading schemes have emerged in several countries such as the New South Wales Greenhouse Gas Abatement Scheme (GGAS). The EU Emissions Trading Scheme- EU ETS is also a common trading scheme that has emerged all with the same goal of drastically reducing carbon emissions (Zillman, 2008).
The Influence of Carbon Trading In The Electricity Market
According to Elsevier Science Direct (2001), the sole purpose of any electricity company is to make profits and with the introduction of carbon emission regulatory scheme, they have to increase the marginal cost of generating the electricity.
The strain is either felt by the end consumer or the company itself depending on the approach it takes to increase the marginal cost. The company can either reduce the level of its production, or if it is forced to trade for extra carbon credits, then the cost is billed to the consumer who is forced to pay more (Meadowcraft, 2010).
Most companies have resulted to use gas turbines or combined cycle gas turbines as they have emerged to be more efficient compared to other fuels. Gas fuel is known to emit the least amount of carbon due to its natural nature. For companies to maintain the profit margin and yet achieve the target of reducing carbon emission, they have to charge the consumer a higher amount.
Furthermore, most companies have to do away with generators that rely heavily on oil and coal and instead opt for gas fuel. It should be noted that maintenance of gas generation turbines is a bit expensive compared to the other fuel sources and this too will affect the electricity market (Gulli, 2008).
Challenges Facing The Electricity Markets
The issues and barriers facing the electricity power markets are a hindrance to creating a unified coordination in the national and international markets (Sioshansi, 2008). One major challenge is the different carbon trading schemes. As mentioned earlier, there are various trading schemes available under the Kyoto protocol and the European Unions.
This becomes a hindrance in the power markets due to different pricing caused by the particular scheme. The different types of fuels available in different companies also become a hindrance.
The profit margin of each company depends on the kind of fuel it has used. If for example company X uses gas as its fuel and company B relies on wind, company B will have a huger profit margin if both enter the market on the same pricing and capacity. This can be attributed to the fact that not all countries have ratified the Kyoto protocol and hence not bound to the agreement of relying on gas to reduce amount of carbon emission.
Differing market styles in the electricity companies is also a factor. Some countries for instance apply the Pool marketing style to trade electricity while others use bilateral contracts and other marketing styles. Uniformity should be maintained to be able to achieve the same goal in electricity markets whether nationally or internationally.
The different regulation policy is also a major hindrance. This is because every company follows certain regulations and this can cause a major problem if a foreign company wants to enter a particular market, then it has to be under a new regulatory body (IIic and Allen, 1999). Lastly, the intervention by the government in the market can be a hindrance as compared to the company entering a liberalized market.
For the electricity company to attain the set profitable margin it wishes to attain and at the same time maintain a clean environment by regulating its carbon emissions, it can adopt certain policies.
The company can allocate most of the marginal cost incurred to the consumers. The allocation should be like 90% so that the volumes of sales are not affected drastically and that the demand for the supply does not drop. The increase in revenues will also be able to compensate for the increase in marginal cost.
The company should also ensure that it uses less carbon credits allocated to generate electricity so that it is able to sell the remaining carbon credits to increase its net profit.
The company should also adopt new technology used to reduce the amount of carbon emitted in the atmosphere. This technology include Carbon Capture and Storage (CCS) which is a carbon control strategy and which is compatible with the state of art electric power infrastructure and easily determines the sources of carbon emissions. Though the initial construction of this new technology machinery is expensive, it is long lasting and its maintenance is very cheap.
It is evident that the three markets are so connected such that it becomes impossible to study one market in exclusion of the other two. The pricing of electricity is directly linked to the two markets in consideration to the fuel used and the amount carbon credit to be used.
On the other hand, the introduction of regulatory policies such as those in Kyoto protocol has caused a major increase in electricity pricing with the surplus cost being met by the end consumer. They failed to consider the impact of placing the policies in place. This factor should be considered to come up with cheaper recommendations that will also favor the consumer.
The electricity company too, due to the competition in the market will also benefit from any new policies put in place to decrease the price of generation. This will help the electricity trading become cheaper to the satisfaction of the customer and at the same time conserve the environment by producing less carbon in the atmosphere.
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