Impact of Carbon market on China's electricity market: An equilibrium analysis

Abstract

China is starting to introduce generation electricity market (EM) in the power system. At the same time, carbon market (CM) is also going to be established in China. The power system in China will face bran-new environment, where the coupling mechanism of EM and CM remains ambiguous. This paper studies such situation by modeling both EM and CM and analysis its equilibrium. The EM is considered as a generation right trading market (GRTM) and the CM is based on cap-and-trade scheme. A supply function equilibrium model is built to describe the bidding and trading process of the coupling of these two markets. An empirical analysis on the China Southern Power Grid (CSG) is conducted using the proposed equilibrium model. The study quantifies its impact on energy generation of different plants and demonstrates the efficiency of GRTM and CM (coupling market) in terms of carbon emission reduction. The results show a high sensitivity of the equilibrium on the marginal profits of different plants.