Category Archives: Carbon Price

Contracts for Closure: Dead.

Contract for Closure negotiations cease.
“Not angry, just disappointed” seems to sum up the reaction to the untimely death of the Contracts for Closure process. Electricity market observers in the circles I move in weren’t that surprised to see the program cancelled, mostly due to forces beyond their control, but disappointed that it had to come to this

Contracts for Closure (CfC) sought to effectively purchase some of the dirtiest generating capacity in the NEM, and close it in an orderly fashion. Participation was determined entirely by the emissions intensity of the business (above about 1.3T/MWh from memory), which captured:

  • Alinta Energy (Playford B in Port Augusta, South Australia);
  • HRL (Energy Brix in Morwell, Victoria);
  • Hazelwood Power Partnership (Morwell, Victoria) (91.8% owned by International Power GDF Suez Australia);
  • RATCH-Australia (Collinsville, Queensland); and
  • TRUenergy (Yallourn, Victoria).

Hazelwood is the big hitter in that group, at 1760MW, and regarded as probably the highest carbon intensity of any power-station in the world. Yallourn is just up the road from Hazelwood, and uses roughly the same sort of coal and slightly newer technology. It’s still not that great. Playford B and Collinsville are both small plants in the 200MW range, used principally during the summer/winter peaks. Peaking baseload if you like. HRL’s Energy Brix is right next door to Hazelwood, and uses Hazelwood coal to run a boiler, which dries and compresses Yallourn coal into briquettes. There is a heat recovery system installed in this boiler, which runs a small (~40MW) steam turbine, but my understanding is that this hasn’t provided electricity for some time. When it did though! Their emissions would have been amazing.

CfC was in a difficult policy position, but for a laudable goal. As I’ve mentioned previously, the carbon price is there to distort the trading market in favour of lower-emissions electricity. The factor that balances “cleaner generation” with “energy security” is the carbon price; politicians want to distort the market, but there is a risk that if they distort it too quickly generators can’t operate and we lose supply. Many would argue that $23 a tonne is much closer to the energy security end of this spectrum, but in the first couple of years that’s okay. CfC then was created to bridge the gap between the desire to drive change in the market and the desire to keep electricity coming out of the wall. Rather than waiting for the slow attrition of businesses failing, or even the spectacle of proper destruction, Government decided to take a couple of GW out of the market, and make sure that it was replaced. Sounds simple?

But the process has been very difficult from the start. No one knew how much money Government had for the job; no one could know, or their bargaining position would have been severely compromised. Then there’s the question of how much are these businesses worth? This too is a ridiculously complex question. Taking Hazelwood as an example; they have the world’s cheapest fuel source, right next door, and it will probably last for 300 years. The capital is already invested, so their costs are mining, maintenance and operation and now an additional carbon price. None of the other costs change, so how long until a carbon price renders the business unprofitable and they close? Then what profit would they have made in that period, and if someone paid that upfront would they close now? There are also questions of how to contract an orderly retreat from the market? Does the plant need to be operable but mothballed in case of emergency? If the plant caught on fire before the contract ran its course do they still qualify? All of this was known before they started and a bunch of smart people had some answers organised.

Then once the negotiations opened, matters turned out to be more complex than imagined. Electricity demand data was released that showed network demand had dropped for each of the last three years; this severely impacted Treasury forecasts of future profitability of these plants, but intuitively one expects this decreased the value of the plants. Less electricity to supply, same amount of generators. Concerns were raised about the flow on effects of closing Energy Brix; the briquettes are used throughout the La Trobe for starting coal-boilers, but also, they are used to drive thermal processes in large dairies throughout Victoria. Pasteurisation and dried milk products could mean that the Government was no longer going to close an electricity generator. Talk about perverse outcomes.

Here is Minister Ferguson’s official reasoning

“The Contract for Closure negotiations have taken place constructively and in good faith, but there remains a material gap between the level of compensation generators have sought and what the Government is prepared to pay,” Minister Ferguson said.

“Recently published forecasts for lower energy demand in Australia presented serious questions around the value for money evaluation of proposals. The recent announcement to link with the European emissions trading scheme and remove the price floor did not alter this outcome.

“I have said throughout this process that we had a set envelope of funding and were not willing to enter into contracts at any cost – this is about the responsible expenditure of public funds.”

So they didn’t have enough money? Among other things sure, but this points to what I consider a major problem with energy policy in Australia; that since Kevin Rudd changed the influence of the Department of Prime Minister and Cabinet, to essentially the political arm of the APS, unsubstantiated policy ideas have come thick and fast, with the Departments delivering them left to sort out the details. Maybe with a bit more work up front this wouldn’t happen? God forbid.

And so now all that is left to close the worst generators in the country is the carbon price and public opinion. I have wondered for a while if we’ll see more community direct action against these guys, and recent reports from Newcastle suggest this is already happening.



The NEM, Bidding Orders and the Carbon Price

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.