Power down

Why the outlook for European electricity consumption will be crucial in determining carbon prices in 2023

One of the most important factors affecting demand for carbon allowances is electricity demand. However, it’s not simply a case of higher consumption equals higher power generation emissions. The mix of energy sources and their relative carbon intensities is crucial to understand.

The merit order dictates which sources of generation will deliver power to the electricity grid. The power stack, as its also known, ranks the various sources of power generation in ascending order of price, together with the amount of electricity generated by each energy source. This then determines the order in which power sources are brought onto the grid.

Sitting at the top of the merit order are renewable energy sources, such as wind and solar that have no fuel costs and very low operating costs. Nuclear power typically comes next as it continually generates a large amount of power for a low cost. At the opposite end of the merit order are fossil fuel power generation sources such as natural gas, coal, and oil. These latter forms of generation have high operating costs but can adjust rapidly to changes in demand - whether that’s short-term, within day volatility, or due to longer-term, seasonal variations in demand.