The effect of price-based demand response on carbon emissions in European electricity markets: The importance of adequate carbon prices

Markus Fleschutz, Markus Bohlayer, Marco Braun, Gregor Henze, Michael D. Murphy

Price-based demand response (PBDR) has recently been attributed great economic but also environmental potential. However, the determination of its short-term effects on carbon emissions requires the knowledge of marginal emission factors (MEFs), which compared to grid mix emission factors (XEFs), are cumbersome to calculate due to the complex characteristics of national electricity markets. This study, therefore, proposes two merit order-based methods to approximate hourly MEFs and applies it to readily available datasets from 20 European countries for the years 2017-2019. Based on the resulting electricity prices, MEFs, and XEFs, standardized daily load shifts were simulated to quantify their effects on marginal costs and carbon emissions. Finally, by repeating the load shift simulations for different carbon price levels, the impact of the carbon price on the resulting carbon emissions was analyzed. Interestingly, the simulated price-based load shifts led to increases in operational carbon emissions for 8 of the 20 countries and to an average increase of 2.1% across all 20 countries. Switching from price-based to MEF-based load shifts reduced the corresponding carbon emissions to a decrease of 35%, albeit with 56% lower monetary cost savings compared to the price-based load shifts. Under specific circumstances, PBDR leads to an increase in carbon emissions, mainly due to the economic advantage fuel sources such as lignite and coal have in the merit order. However, as the price of carbon is increased, the correlation between the carbon intensity and the marginal cost of the fuels substantially increases. Therefore, with adequate carbon prices, PBDR can be an effective tool for both economical and environmental improvement.

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