“To what extent are carbon and fossil fuel costs passed through to day- ahead electricity prices in the Netherlands in 2024?”

Abstract

This thesis researches the extent to which carbon and fossil fuel costs are passed through to day-ahead electricity prices in the Netherlands during the year 2024, a pivotal period in the country’s energy transition. By adopting a quantitative approach, the analysis utilizes daily data and Ordinary Least Squares regression models to estimate the influence of EU Emissions Trading System carbon allowance prices and fossil fuel costs, using futures prices of natural gas and coal, on electricity price formation. Contrary to established theoretical expectations, the empirical findings did not turn out as expected, while a statistically significant negative relationship between carbon and fuel costs, and electricity prices across both gas-based and coal-based generation models was revealed. These results suggest a structural shift in market dynamics, potentially attributable to the increasing share of renewable energy sources and their displacement of fossil fuel-based generators from the marginal pricing role. This transition appears to attenuate the direct influence of input costs, particularly carbon pricing on electricity prices. Despite the models’ limited explanatory power, the findings could undoubtedly provide important implications for energy policy, indicating that carbon pricing alone may no longer suffice as an effective short-term price signal. Accordingly, the study underscores the need for complementary policy instruments, such as carbon price floors, capacity mechanisms, or investment incentives to maintain the effectiveness of decarbonization strategies. These findings contribute to the broader discourse on carbon pricing efficacy within electricity markets undergoing rapid structural transformation and highlight the importance of re-evaluating traditional market assumptions considering evolving generation portfolios.