A Social Welfare Analysis of the Iberian Electricity Market Accounting for Carbon Emission Prices

Abstract

In this paper we analyze the social welfare impact of the integration of Portugal and Spain in the Iberian electricity market (MIBEL), taking into account the CO2 price for emissions trading. We model the impact of emissions trading on the daily clearing prices and generation scheduling, and its effects on the benefits of integration as a whole. We compare the impact of market integration in Portugal and Spain and show that the welfare impact of the MIBEL is dependent on the CO2 prices. From our analysis we conclude high CO2 prices lead to a change in the merit order. Moreover, natural gas is the generation technology that most benefits from transmission constraints and from high CO2 prices, as in the base case it is mainly used as a peak technology. We have also found that increases in the CO2 prices do not lead to higher profits. Overall, the introduction of the MIBEL will increase social welfare by reducing generation costs and prices.