The effects of changes in EU emission trading scheme on the value of a gas fired power plant in Norway

Abstract

The purpose of this thesis was to study how changes in the carbon market influences the present value of the gas fired power plant operated by Naturkraft AS. The changes in focus here are the ones introduced in EU’s Emission Trading Scheme after 2012, for instance higher prices on emissions and no more free emission allowances to the power generating industry. Based on secondary data, I used a binomial real option’s model that I programmed with Microsoft Visual Basic 6.5. The principal conclusion was that the present value is only slightly affected by an increase in the price of emissions (3.8% reduction in PV in the highest price scenario), but much more so by the removal of free emission allowances (34% reduction in PV). Interestingly, I also found that the present value of the plant actually increases with higher prices of emission allowances given that the plant still receives free emission allowances.