Understanding the relationship between “bidding orders” and the National Electricity Market (NEM) is central to any understanding of the carbon price and its implications. This is where the carbon price rubber hits the carbon road and the market is intervened with. Again in this post I’m going to avoid the politics of the carbon price and talk about the where and how of the policy. Suffice to say the current policy is not exactly as I would have done it, but I’m not an elected representative, so it’s hardly my problem, is it?
This post is intended to address the common fallacy that since households are receiving compensation for the carbon price impact, there will be no change in consumer behaviour. Here I hope to demonstrate that firstly this isn’t true, but also that household behaviour doesn’t really matter either.
The NEM, is an odd short hand for the electricity network connecting Queensland, NSW, Victoria, SA, Tasmania and obviously the ACT. If you’re an enthusiast, here are 28 pages on the topic. There is a separate network on the western seaboard that hasn’t been connected across the Nullabor, called the South West Interconnected System, which I’m not that familiar with, but I understand they work very similarly. Internationally, the NEM is regarded as about the largest independent electricity network, which I assume means they’ve discounted the interconnected European grid. The trading practices are well regarded internationally, delivering low cost per kWh electricity, but in recent years the related electricity network expenses have dragged the whole electricity supply price up (PDF from Electricity Users Association, comparing international electricity prices).
This market determines which generators get dispatched, when, and at what price. For today’s post we’ll just concentrate on the burners, as intermittent renewables make this whole concept a lot more complex.
Everyday, each individual generator bids into the market the price they are prepared to offer capacity at. As an example, consider a 1000MW, black-coal burning plant, on an average day. I will be completely making these numbers up, but I assure you they are about right.
The generator will know what their cost of production is, as a bundled cost including fuel costs and operational expenses (OPEX). Let’s say the fuel to supply a MW for an hour costs $10 and the OPEX for the same amount of energy is also about $10. Adding these together the operators, or “traders” for the business might decide that they need to receive $40/MW to bother operating, so they offer their first 200MW at $40. They also decide that it’s unlikely to reach very high levels of demand today, so bid to get as much as possible dispatched. The next 400MW is offered at $50/MW; $150/MW for the next 200MW and they exclude the last 200MW to perform maintenance.
Every generator in the NEM does this everyday. There are some very complex rules about reserving bids and notifying of maintenance, but on a normal day this is what happens.
Then AEMO takes the bidding structures for each of the 50-odd generators across the network, and ranks their bids. Maybe the brown coal generators in Victoria fill most of the lower capacity, then black coal in NSW and Qld, then a few gas plants around the country if things get desperate.
As electricity demand rises during the day, AEMO keep dispatching from plants with higher bids. As a new price gets dispatched, everyone getting dispatched at that moment gets the new higher price.
Cheaper electricity gets dispatched the most frequently.
Pricing carbon dioxide emissions in this mix changes the OPEX calculations for each generator, and thus their bids into the NEM. Those with higher carbon intensity will probably bid more than those with lower carbon intensity and the bidding order will change.
The carbon intensity of each generator is strongly related to their fuel source and weakly related to the equipment the generator is using. A casual glance through the National Greenhouse Accounts Factors Workbook (page 12 of the pdf) gives a good indicator of the emissions intensities of each fuel source. Anthracite (black coal) and brown coal have similar emissions intensity (88.2 to 92.7 kg per GJ) but black coal contains almost three times the energy, per tonne (29 to 10.2 GJ/tonne).
Coming back to the example, the black coal generator in NSW would expect a carbon price of about $23/MWh added onto their OPEX calculations. So, where previously they might have bid in at $40/MW, they now bid in at $60/MW. However, as the fee only appears as an expense to the company, they may choose not to pass through the full cost.
This is why it is so difficult to accurately model the costs of the carbon price; each individual generator can choose how much of the price they pass through. Some of the higher-intensity plants might only pass through three-quarters of the price to ensure they are dispatched. Others might pass it all through because it suits their business model.
Overall though, the plants with the highest carbon intensities will be dispatched less frequently and Australia’s carbon emissions will probably decrease. Notice though that the purchasing decision happens well away from the consumer, who only experiences an increased cost. While electricity has always been a household cost, the trickle through of the carbon price may lead individuals to respond to this increase and improve their household energy efficiency. Maybe also this will encourage the generation sector to consider their efficiency options more carefully, as the benefits of energy efficiency are magnified by the carbon price. Many of Australia’s plants were built in the 1980s and well before, perhaps the carbon price will encourage a few to upgrade some significant bits of gear.
And so this price signal will play out throughout the economy. Again, electricity has always been a cost of manufacturing goods, so that proportion of the cost of manufacture will increase a little bit, and may differentiate some products. My suspicion though is you probably wouldn’t notice it until you were buying aluminium by the tonne.