CARBON-PRICING IN ELECTRICITY AND HEAT IN THE ENERGY

COMMUNITY CONTRACTING PARTIES

By Professor Pantelis Capros, E3Modelling
Modelling Coordinator: Dr Maria KANNAVOU, E3Modelling
Project Manager: Alkistis Florou, E3Modelling

Project: Energy Community Study on Carbon Pricing

February, 2021
Background
•Legal obligation EU Acquis includes EU ETS and others
•Objective:
• Impact assessment of carbon pricing in the power and heat
sector, prospectively as the EU ETS
• Implementation of the rest of EU Acquis, regarding
• Opt-out
• RES
• Market integration
• Combine carbon pricing with market integration
•Main challenges faced in the Energy Community region
• Opt-out and reluctance to invest in coal plants
• Coal-lignite mining subsidies
• Poor development of gas infrastructure and gas market
depth
• Renewables development is economically attractive but is
obstructed by grid expansion, land-use and electricity
system reserve resources
• Market integration is progressing too slowly
• Market competition and full cost recovery is not yet fully
established
•Costs, decommissioning program and baseline investment
in RES based on consultation with the CPs.
Coverage
OVERVIEW OF ASSUMPTIONS AND OUTPUT
•Energy Community countries, i.e. WB6 and Ukraine,
Georgia and Moldova included, and Romania, Bulgaria and
Greece
•South-east European region interconnected model
•Time horizon: 2015 to 2040
•Calibration to 2015 and estimation of 2020 using data until
2018
•COVID-19 impacts not included
Model outputs - projections
•Project into the future the electricity and heat production
sectors under scenario-based assumptions
•PRIMES-IEM model projections:
• Investment in power plants and heat units, Power generation
by individual plant and by type, Imports-exports
• Retail market prices, simulations of wholesale, balancing and
reserve markets
• Fuel consumption – CO2 emissions
• Unit cost of electricity and heat production, decomposed by
cost item
2
Five stylized scenarios and one variant

SCENARIO DESIGN IDEAS

Full_CP-M_Int
Towards integration
into EU ETS, the CPs Power and gas
BSL: Baseline – apply the carbon market integration
Asymmetric prices with full auction achieved
policies:
• EU MS apply EU
ETS and the CPs
do not
• The market
remains
fragmented

Variant:
Baseline and
Towards integration
Cross Border into EU ETS, the CPs Power and gas
Adjustment apply the carbon market remain
Carbon tax prices but with fragmented
different auction rates
per country
Gr_CP-M_Fr
3
 OVERVIEW OF SCENARIO LOGIC
Full Carbon Pricing Electricity and Gas market integration
•100% auctioning of EU ETS Carbon price (€/tCO2) • Electricity markets integrated from 2025 onwards
allowances from 2025 60 • Net Transfer Capacities increase at least at 70% of technical
52
onwards capacity
50 46
• Allocation of interconnection capacity based on market clearing
•Applies on power 40 prices, in Day-Ahead and Intra-Day markets
35
generation and district 29 • Couples wholesale markets in Day Ahead, Intra-Day and Balancing
30
heating 24
• Ancillary services procurement can be cross-border
•No exemptions 20
• Regional coordination of System Operation
•Recycling of revenues in 10 8
• Gas markets integrated
national public budget 0 • Diversification of gas origins thanks to infrastructure allowing
2015 2020 2025 2030 2035 2040 better connectivity, access to LNG and inverse-flows
• Gas supply possibilities increase in the WB area and average gas
Gradual Carbon Pricing – Auctioning rates prices decrease compared to fragmented gas markets
Auctioning rates 2025 2030 2035 2040
Bosnia & Herzegovina 25% 30% 75% 100% Electricity and Gas market remain fragmented
Serbia 25% 30% 75% 100% •Electricity markets
Ukraine 25% 30% 75% 100% • NTC remain as today and allocation of capacities do not
depend on wholesale markets
North Macedonia 30% 65% 85% 100% • Markets are not coupled
Montenegro 30% 65% 85% 100% • Ancillary services and balancing remain at a national level
Kosovo (*) 15% 35% 65% 85% •Gas markets fragmented
• Lack of gas-to-gas competition and poor development of gas
Albania 100% 100% 100% 100% supply discourage investment in gas power plants in the WB
Georgia 100% 100% 100% 100%
Moldova 100% 100% 100% 100% 4
CO2 Emissions Power and DH (Mt)

CO2 EMISSIONS POWER GEN. AND DISTRICT HEATING

• Carbon pricing reduces carbon 14.0
Bosnia & Herzegovina
40.0
Serbia
7.0
Kosovo*
dioxide emissions, as expected. 12.0 BSL 35.0

CO2 Emissions Power and DH

6.0
The system achieves a low 10.0 Gr_CP-M_Fr
30.0
5.0
carbon footprint until 2040, and 8.0
Full_CP-M_Fr
25.0
20.0
4.0

in several countries from 2030

(Mt)
6.0 3.0
15.0
onwards. Then carbon-free 4.0 Gr_CP-M_Int
10.0 2.0

electricity is suitable for carrying 2.0

0.0
Full_CP-M_Int 5.0
0.0
1.0

0.0
decarbonisation in heating and 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
mobility. North Macedonia Montenegro Albania
• The gradual carbon pricing policy
5.0 1.8 0.2
BSL 1.6 0.1

CO2 Emissions Power and DH

implies a delay in carbon 4.0
Gr_CP-M_Fr
1.4
1.2
0.1

intensity reduction until 2030; 3.0

Full_CP-M_Fr
1.0
0.1
0.1
the delay, however, is small in

(Mt)
0.8
2.0 0.1
0.6
several countries, unless 1.0
Gr_CP-M_Int
0.4 0.0

combined with market Full_CP-M_Int 0.2 0.0

fragmentation in which case 0.0

2015 2020 2025 2030 2035 2040
0.0
2015 2020 2025 2030 2035 2040
0.0
2015 2020 2025 2030 2035 2040
emission reduction until 2030 is Bulgaria Romania Greece
not obvious compared to 35.0
BSL
35.0 35.0

baseline trends. 30.0 30.0 30.0

CO2 Emissions Power and DH

25.0 Gr_CP-M_Fr 25.0 25.0

• However, the most decisive 20.0
Full_CP-M_Fr
20.0 20.0

factor for emission reduction is

(Mt)

15.0 15.0 15.0

market integration, especially if 10.0 Gr_CP-M_Int 10.0 10.0

seeking significant emission 5.0

0.0
Full_CP-M_Int 5.0
0.0
5.0
0.0
reduction by 2030. The 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
superiority of market integration Ukraine Moldova Georgia
100.0 1.0 1.4
compared to fragmentation BSL 1.2
CO2 Emissions Power and DH

remains visible until 2040. 80.0

Gr_CP-M_Fr
0.8
1.0

• Market fragmentation combined 60.0

Full_CP-M_Fr
0.6 0.8

with gradual carbon pricing leads

(Mt)

40.0 0.4 0.6

Gr_CP-M_Int
to emissions that differ only 20.0 0.2
0.4
0.2
slightly from baseline trends in 0.0
Full_CP-M_Int
0.0 0.0
2030; the emissions reduce after 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

2030 under such conditions. 5

 IMPORTS-EXPORTS OF ELECTRICITY
Bosnia & Herzegovina Serbia Kosovo*
Net Imports (GWh) 0
BSL
4000
3000
1400

Net Imports (GWh)

-1000 1200
2000
• Carbon pricing reduces exports -2000 Gr_CP-M_Fr
1000
1000

800
from or increases imports to -3000 Full_CP-M_Fr 0
600
carbon-intensive countries; -4000 Gr_CP-M_Int
-1000
400
gradual application of carbon -5000
-2000
-3000 200
Full_CP-M_Int
pricing delays the effects. -6000 -4000 0

• Market integration allows 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

carbon-intensive countries to 3500

North Macedonia
1,200
Montenegro
2500
Albania
increase imports while 3000 BSL 1,000 2000

Net Imports (GWh)

performing transition without 2500 Gr_CP-M_Fr
800 1500

caring about maintaining highly- 2000

600
400
1000
500
emitting domestic resources for 1500
Full_CP-M_Fr
200 0
system purposes; after 1000 Gr_CP-M_Int 0 -500

establishing a low-emission 500 Full_CP-M_Int

-200
-400
-1000
-1500
profile, the previously carbon- 0 -600 -2000
intensive countries may balance 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

trade again, thanks to market 4000

Bulgaria Romania
12000
Greece
0
integration. 2000 BSL -2000 10000
Net Imports (GWh)

• Integration facilitates the 0

Gr_CP-M_Fr -4000
8000

acceleration of RES deployment -2000

-4000 Full_CP-M_Fr
-6000
6000
4000
thanks to the cross-border -6000
-8000
2000
sharing of balancing resources. -8000
Gr_CP-M_Int -10000 0

• Market fragmentation hinders -10000

-12000
Full_CP-M_Int -12000
-14000
-2000
-4000
high deployment of RES and 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
maintains unnecessary carbon Ukraine Moldova Georgia
costs 3000 4000 600
BSL 3500
• The contrast of projections
Net Imports (GWh)

2000 500
3000
Gr_CP-M_Fr
regarding market integration 1000
2500
400

versus fragmentation is similar in 0 Full_CP-M_Fr 2000 300

both gradual and full application -1000 Gr_CP-M_Int

1500
1000
200

of carbon pricing. -2000

Full_CP-M_Int 500
100

-3000 0 0
2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

6
 Avg. Electricity Pre-tax price (€/MWh)

AVERAGE ELECTRICITY PRE-TAX PRICE

• Carbon pricing, based on auctioning of Bosnia & Herzegovina Serbia Kosovo*
85
allowances, pass through to consumer 80
110 140
BSL
prices high carbon costs when there is

Avg. Electricity Pre-tax price

100
75 120
inability to equally reduce emissions. 70 Gr_CP-M_Fr 90

• Maintaining heavy emitters in operation 80 100

(€/MWh)
65
Full_CP-M_Fr
for system purposes prevents high 60 70 80
55
responsiveness to rising carbon costs. 50
Gr_CP-M_Int 60
60
Similarly, poor conditions hindering the 45 Full_CP-M_Int 50
development of carbon-free resources 40 40 40
and their balancing facilities also reduce 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
resilience to carbon prices. North Macedonia Montenegro Albania
• Lack of market integration and poor gas 100 65 100
BSL
supply conditions imply high adverse

Avg. Electricity Pre-tax price

90 90
60
impacts on consumer prices of electricity 80 Gr_CP-M_Fr 80
when applying full carbon pricing. Unless 55

(€/MWh)
70 Full_CP-M_Fr 70
removing such hindering factors, gradual 50
carbon pricing is the only possible relief. 60 Gr_CP-M_Int 60

• But, implementation of market 50

Full_CP-M_Int
45 50

integration and facilitation of gas 40 40 40

investment can relax system constraints, 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
reduce costs through imports in the Bulgaria Romania Greece
medium-term and enable RES investment 85 75 90

and balancing facilities, an evolution that 80 BSL 70

Avg. Electricity Pre-tax price

75 80
can maintain electricity prices within a 70 Gr_CP-M_Fr 65
reasonable range throughout the 65 60 70
(€/MWh)

projection period. 60
Full_CP-M_Fr
55 60
• A possible combination of market 55 Gr_CP-M_Int 50
50
integration with gradual carbon pricing 45 Full_CP-M_Int 45
50

can be a successful solution for carbon- 40 40 40

intensive countries, to manage transition 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
and affordability in the medium-term. Ukraine Moldova Georgia
• Combining market fragmentation with 90 70 65
BSL
gradual carbon pricing leads to poor gains
Avg. Electricity Pre-tax price

80 65 60
in emission reduction in the medium- Gr_CP-M_Fr 60
term, as well as in the longer-term, which 70 55
(€/MWh)

Full_CP-M_Fr 55
prevents the system to transform 60 50
according to potential and, adversely, Gr_CP-M_Int 50

makes the electricity prices vulnerable to 50

Full_CP-M_Int
45 45

future full carbon pricing in a later stage. 40 40 40

2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
7
 CBAM scenarios CBAM tax per MWh exported 2500

CBAM SCENARIOS
2000
• Carbon tax on power flows exported by non-EU 90 1500
80
to EU 70 1000
• Taxation of transactions not feasible 60 500
50
• Taxation of physical flows is feasible. Alternative tax 40 0
bases: 30 CBAM tax revenues
• CO2 intensity of exporter 20 (million EUR) -
10
• Nominal CO2 intensity 0 cumul. 2025-2035
• Carbon tax = EU ETS 2025 2030 2035 CBAM -
• Model-based simulation CBAM - projected 2269
• PRIMES model – optimal power expansion and projected CO2- 15 20 54 CO2-intensity
operation in a full interconnected system of >40 intensity CBAM -
countries (incl. EU, other European countries and CBAM - nominal nominal CO2 1609
Energy Community CO2 intensity
21 30 85
intensity
• 2020-2035
• Russian exports depend on carbon price
Average cost of CO2 abatement (EUR/tCO2)
• Basic (no CBAM) scenario is the MIX55 projection
performing -55% GHG in 2030 and carbon 60.0
neutrality by 2050 in the EU 50.0
• Impacts on 40.0
• Emissions
• Trade and power investment 30.0
• Costs, prices 20.0
• Cost-effectiveness analysis of CBAM versus ETS- 10.0
type carbon pricing shows that CBAM in
proportion to CO2 Intensity of exporters is 0.0
CBAM - projected CO2-intensity CBAM - nominal CO2 intensity
superior to taxing according to a nominal CO2
ALL (EU28+ENCOM+RU exports) 30.6 32.4
intensity
EU28+ENCOM 41.9 52.2
• Total tax revenues are small compared to the
turnover of the whole EU power market

8
 CBAM SCENARIOS
Impact analysis of CBAM CO2 emissions (in Mt CO2) - Difference from "No CBAM"
EU28+EnCom+RU exports
•The CBAM implies substitution of 938
imported power flows by domestic -14 2035
726 -13
generation. Power capacity mix adjusts,
as well as system operation and trade. 492 -9 2030
•The CBAM implies a slight increase in 290
-8
CO2 emissions in the EU compensated
by reduction in emissions in the -6 2025
-6
exporting countries, including EnCom
and Russia. 2020 2025 2030 2035 CBAM - nominal CO2 intensity
•The net impact on emissions is No CBAM - MIX55 CBAM - projected CO2-intensity
negative, of the order of 1.2%
cumulatively 2025-2035
Net imports (in TWh) - EU28+EnCom+RU exports
•The CBAM has significant impacts on
EnCom power sectors: the dynamic 2030 2025 2020
evolution after readjustment of CBAM - nominal CO2 intensity
capacity expansion and trade

EnCom
CBAM - projected CO2-intensity
transforms several of the EnCom
countries from exporters to importers No CBAM - MIX55
and slow down investment.
CBAM - nominal CO2 intensity
•The overall impacts on EU trade are

EU27
small and mainly concern South East CBAM - projected CO2-intensity
area, Hungary, Slovenia, Croatia, No CBAM - MIX55
Romania and the Baltic countries.
Noticeable are the effects on Germany. -20 -15 -10 -5 0 5 10

9
 CBAM SCENARIOS
Impact analysis of CBAM Total power sector costs (in bn EUR) - Difference from "No CBAM"
EU28+EnCom+RU exports
•The CBAM cases are costlier than the 0.36
484 2035
no-CBAM case – the additional costs are 0.29
408
however small (0.1% cumulatively 331
2025-2035) 293 0.29
2030
0.28
•The cost impacts on the EU are
negligible 0.26
2025
0.21
•Conversely, the cost impacts on the
EnCom countries are significant 2020 2025 2030 2035 CBAM - nominal CO2 intensity
•Electricity prices in the EnCom countries No CBAM - MIX55 CBAM - projected CO2-intensity
affected by CBAM need on average to
increase by approx. 3 EUR/MWh (5% Difference in average electricity price from No CBAM - MIX55
above the no-CBAM case) 2035 2030 2025
------------------------------------------------------
•The CBAM cases involve higher RES but CBAM - nominal CO2 intensity

EnCom
also higher use of natural gas compared
to the no-CBAM case. However the CBAM - projected CO2-intensity

changes are small in the EU. The

reduction of coal use is significant in the CBAM - nominal CO2 intensity

EU27
EnCom countries, but also RES
generation is slightly affected CBAM - projected CO2-intensity

negatively.
-1.0 0.0 1.0 2.0 3.0 4.0
10
 CONCLUDING REMARKS
Concluding remarks
•The prospect of adhering to the EU ETS is an essential instrument within long-term climate-neutrality strategy.
EU ETS is the backbone of the strategy and is a major enabling condition for the policies for Renewables, the
Internal Market and System Integration
•Asymmetry exists among the Contracting Parties regarding resilience and adaptability to carbon pricing in
electricity and heat production. A coordinated approach towards the EU ETS can include different auctioning
shares by country during a transition period.
•The analysis has shown that electricity and gas market integration is of crucial importance for cost-
effectiveness and for mitigating adverse effects (prices, stranded assets, etc.).
•The case of persisting market fragmentation is detrimental both for consumer costs and the pace of adaptation
towards low emissions.
•If market integration is achieved, a transition involving gradual increase in auctioning shares is cost-effective for
system restructuring and for low emissions – no need to apply full auctioning immediately, if market
integration is effective.
•A CBAM carbon tax on EnCom exports is an alternative option to domestic carbon pricing. The CBAM has
negative cost impacts on EnCom, reduces CO2 emissions but also reduces trade of electricity. CBAM does not
help power system restructuring in the EnCom countries and dismantles market integration. CBAM is an
inferior policy option compared to domestic carbon pricing in the power sector.

11
12
Power Gen from Coal (GWh)

COAL-BASED GENERATION
•Carbon pricing reduces 12000
Bosnia & Herzegovina
30000
Serbia
6000
Kosovo*
BSL
power generation from

Power Gen from Coal (GWh)

10000 25000 5000

8000 Gr_CP-M_Fr 20000

coal, as expected. 6000 Full_CP-M_Fr 15000
4000

3000

•The gradual application of 4000 Gr_CP-M_Int 10000 2000

carbon pricing delays the 2000

Full_CP-M_Int
5000 1000

0 0 0
impacts on coal. 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

•Market integration is an 4500

North Macedonia
1,600
Montenegro
1
Albania
4000 BSL 1,400

Power Gen from Coal (GWh)

essential condition for 3500
Gr_CP-M_Fr
1,200
1
3000
performing coal phase-out 2500
Full_CP-M_Fr
1,000
800
1

2000
until 2030 or immediately 1500 Gr_CP-M_Int
600
400
0

1000
after 2030 without adverse 500 Full_CP-M_Int 200
0

0 0 0
effects on system reliability 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

and costs 25000

Bulgaria
20000
Romania
20000
Greece

•Market fragmentation
BSL
Power Gen from Coal (GWh)

20000
15000 15000
Gr_CP-M_Fr
conditions obliges the 15000
Full_CP-M_Fr 10000 10000

system to maintain coal in 10000

Gr_CP-M_Int
5000 5000
5000
operation until 2040. Full_CP-M_Int
0 0 0

•Gradual carbon pricing 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

Ukraine Moldova Georgia

combined with full market 60000
BSL
1 1
Power Gen from Coal (GWh)

integration is sufficient to 50000

40000 Gr_CP-M_Fr
1 1

enable coal phase-out in a 30000 Full_CP-M_Fr

1 1

0 0
reasonable time frame. 20000 Gr_CP-M_Int
10000 0 0
Full_CP-M_Int
0 0 0
2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
13
 Power Gen from Gas (GWh)

GAS-BASED GENERATION
• Carbon pricing promotes coal 6000
Bosnia & Herzegovina
14000
Serbia
4000
Kosovo*
substitution by gas, but this BSL 3500

Power Gen from Gas (GWh)

5000 12000
depends on gas supply 4000 Gr_CP-M_Fr 10000 3000

conditions, which also influence 3000 Full_CP-M_Fr

8000
2500
2000
large-scale deployment of RES 2000
6000
1500
due to balancing requirements. 1000
Gr_CP-M_Int 4000
1000
2000
• Thus, market integration of both 0
Full_CP-M_Int
0
500
0
gas and electricity is an essential 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

condition for smooth transition. 1600

North Macedonia
1
Montenegro
350
Albania
Improved gas supply conditions 1400 BSL

Power Gen from Gas (GWh)

300
include diversification of gas 1200
Gr_CP-M_Fr
1
250
origins to get cheaper, secure 1000 1 200
800 Full_CP-M_Fr
and more flexible gas. The broad 600 0 150

regional market perspective 400

Gr_CP-M_Int
0
100

facilitates new gas investment. 200 Full_CP-M_Int 50

0 0 0
• Under these conditions, the 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

projections show new CCGTs 12000

Bulgaria Romania
35000
Greece
emerging in the Western BSL
16000
14000 30000
Power Gen from Gas (GWh)

10000
Balkans playing an important 8000 Gr_CP-M_Fr
12000 25000
role in the balancing, the 10000
20000
6000 Full_CP-M_Fr 8000
facilitation of RES integration 4000
6000
15000

and electricity trade. 2000

Gr_CP-M_Int
4000
10000

• Under market fragmentation, Full_CP-M_Int 2000 5000

0 0 0
the new gas investment does 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

not take place, which obstructs 20000

Ukraine
1200
Moldova
2,500
Georgia
both the transition and BSL
Power Gen from Gas (GWh)

1000
deployment of RES. 15000
Gr_CP-M_Fr 800
2,000

• The options regarding the 10000 Full_CP-M_Fr 600

1,500

gradual or full application of Gr_CP-M_Int 400

1,000

carbon pricing play a minor role 5000

Full_CP-M_Int
200 500

as an enabler of gas investment. 0 0 0

2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
14
 Power Gen from RES (GWh)

GENERATION FROM RENEWABLES

• Carbon pricing accelerates RES 16000
Bosnia & Herzegovina
30000
Serbia Kosovo*
1800
deployment, significantly above 14000 BSL 1600

Power Gen from RES (GWh)

25000
baseline trends, which also are 12000
Gr_CP-M_Fr
1400

ascending. Carbon pricing can 10000

20000 1200
1000
induce a doubling of RES-E shares 8000 Full_CP-M_Fr 15000
800
6000
until 2040 in the majority of 4000
Gr_CP-M_Int 10000 600

simulated countries. 2000 Full_CP-M_Int

5000
400
200

• In most non-EU countries, the pace 0

2015 2020 2025 2030 2035 2040
0
2015 2020 2025 2030 2035 2040
0
2015 2020 2025 2030 2035 2040
of RES growth is modest before
2030 and much faster after 2030; 7000
North Macedonia
5,000
Montenegro
12000
Albania

this is related to the low cost of 6000 BSL

Power Gen from RES (GWh)

4,000 10000
coal. 5000 Gr_CP-M_Fr 8000
• Gradual carbon pricing delays the 4000
Full_CP-M_Fr
3,000
6000
deployment of RES and when 3000
Gr_CP-M_Int
2,000
4000
combined with market 2000
1,000 2000
1000
fragmentation RES deployment is 0
Full_CP-M_Int
0 0
slow. 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

• Market integration pushes RES Bulgaria Romania Greece

16000 60000
upwards in all cases of carbon 14000 BSL
60000
Power Gen from RES (GWh)

pricing (gradual or not) 12000

50000 50000

Gr_CP-M_Fr
• Market fragmentation, counteracts 40000 40000
10000
8000 Full_CP-M_Fr 30000 30000
carbon pricing, and significantly 6000
limit the potential of RES at least 4000
Gr_CP-M_Int 20000 20000

until 2030. Market fragmentation 2000 Full_CP-M_Int

10000 10000

combined with gradual carbon 0

2015 2020 2025 2030 2035 2040
0
2015 2020 2025 2030 2035 2040
0
2015 2020 2025 2030 2035 2040
pricing lead to almost unchanged
Ukraine Moldova Georgia
RES-E in 2030 compared to the 80000 1800 16,000

baseline. 70000 BSL 1600 14,000

Power Gen from RES (GWh)

60000 1400 12,000

• In contrast, market integration 50000
Gr_CP-M_Fr 1200
10,000
combined with gradual carbon 40000 Full_CP-M_Fr
1000
800
8,000

pricing is sufficient to induce high 30000

Gr_CP-M_Int 600
6,000

RES-deployment until 2030 in most 20000

10000 Full_CP-M_Int
400
200
4,000
2,000
countries. 0 0 0
2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
15
Storage discharge total (GWh)

STORAGE SYSTEMS - OUTPUT

•Storage development and 600
Bosnia & Herzegovina
3000
Serbia
350
Kosovo*
BSL
the discharging-charging

Storage discharge total (GWh)

500 2500 300

400 Gr_CP-M_Fr 250

2000
cycles are endogenous in 300 Full_CP-M_Fr 1500
200

the modelling 200 Gr_CP-M_Int 1000

150

100

•Market integration, 100

Full_CP-M_Int
500 50
0 0 0
combined with carbon 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

pricing, induces higher 1400

North Macedonia
450
Montenegro
80
Albania
BSL 400
RES and at the same time 1200 70

Storage discharge total (GWh)

350 60
1000 Gr_CP-M_Fr
implies an increase in 800
Full_CP-M_Fr
300
250
50
40
storage 600

400 Gr_CP-M_Int
200
150
30

100 20

•In contrast, storage 200 Full_CP-M_Int 50 10

0 0 0
increases much less under 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

market fragmentation 3500

Bulgaria
3000
Romania
4000
Greece
Storage discharge total (GWh)

BSL
conditions 3000
2500
2500
3500
3000
Gr_CP-M_Fr 2000
•The cross-border sharing 2000
Full_CP-M_Fr 1500
2500
2000
1500
of balancing resources 1000 Gr_CP-M_Int 1000
1500
1000

relaxes the use of storage 500

0
Full_CP-M_Int
500

0
500
0
facilities in the EU 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040

Ukraine Moldova Georgia

countries of the region 3000 300 80
Storage discharge total (GWh)

BSL 70

•Storage is of decisive
2500 250
60
2000 Gr_CP-M_Fr 200
50
importance in the cases of 1500 Full_CP-M_Fr 150 40
30
Montenegro, Kosovo and 1000 Gr_CP-M_Int 100
20
500 50
Ukraine. 0
Full_CP-M_Int
0
10
0
2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
16
Investment in production units (M€)

INVESTMENT EXPENDITURES IN PRODUCTION UNITS

• The transition towards low 3500
Bosnia & Herzegovina
6000
Serbia
1600
Kosovo*

Investment in production units

emission is capital-intensive, 3000
BSL
5000 1400
Gr_CP-M_Fr
as expected. The capital 2500
Full_CP-M_Fr 4000
1200
1000
2000
amounts needed in the future

(M€)
Gr_CP-M_Int 3000 800
1500
are much higher than in the 1000
Full_CP-M_Int 2000
600
400
recent past. 500 1000
200

• The bulk of investment

0 0 0
2011-20 2021-2030 2031-2040 2011-20 2021-2030 2031-2040 2011-20 2021-2030 2031-2040

expenditures takes place in 1800

North Macedonia
1,000
Montenegro
1600
Albania

Investment in production units

the first decade rather than in 1600 BSL
1400
800
the second, in the majority of 1400
1200
Gr_CP-M_Fr
Full_CP-M_Fr
1200
1000
countries. In the long-term, 1000
600

(M€)
Gr_CP-M_Int 800
800
the reduction of RES costs 600 Full_CP-M_Int
400 600
400
implies investment savings. 400
200
200
200

• The market integration 0

2011-20 2021-2030 2031-2040
0
2011-20 2021-2030 2031-2040
0
2011-20 2021-2030 2031-2040
context facilitates investment Bulgaria Romania Greece
7000 12000
and increases expenditures in
Investment in production units

14000
BSL
6000 12000 10000
the long-term, compared to 5000
Gr_CP-M_Fr
10000
8000
Full_CP-M_Fr
market fragmentation. 4000 8000
(M€)

Gr_CP-M_Int 6000
3000 6000
• In the medium-term, the 2000
Full_CP-M_Int
4000
4000

cases of Kosovo, North 1000 2000 2000

Macedonia and Montenegro 0

2011-20 2021-2030 2031-2040
0
2011-20 2021-2030 2031-2040
0
2011-20 2021-2030 2031-2040
are indicative of investment Ukraine Moldova Georgia
35000 1200 2,000
cost savings enabled by
Investment in production units

BSL
30000 1000
market integration, as market 25000
Gr_CP-M_Fr
800
1,500
Full_CP-M_Fr
integration implies lower 20000
(M€)

Gr_CP-M_Int 600 1,000

domestic resources for 15000

10000
Full_CP-M_Int 400
500
system purposes, compared 5000 200

to market fragmentation. 0
2011-20 2021-2030 2031-2040
0
2011-20 2021-2030 2031-2040
0
2011-20 2021-2030 2031-2040
17