District heating systems under high CO2 emission prices: the role of the pass-through from emission cost to electricity prices

Abstract: Low CO2 prices have prompted discussion about political measures aimed at increasing the cost of carbon dioxide emissions. These costs affect, inter alia, integrated district heating system operators (DHSO), often owned by municipalities with some political influence, that use a variety of (CO2 emis- sion intense) heat generation technologies. We examine whether DHSOs have an incentive to support measures that increase CO2 emission prices in the short term. Therefore, we (i) develop a simplified analytical framework to analyse optimal decisions of a district heating operator, and (ii) investigate the market-wide effects of increasing emission prices, in particular the pass- through from emission costs to electricity prices. Using a numerical model of the common Austrian and German power system, we estimate a pass-through from CO2 emission prices to power prices between 0.69 and 0.53 as of 2017, depending on the absolute emission price level. We find the CO2 emission cost pass-through to be sufficiently high so that low-emission district heating systems operating at least moderately efficient generation units benefit from rising CO2 emission prices in the short term.