Australia’s Carbon Tax – One Year On

Is it responsible for reduced CO₂ emissions in the electricity sector?

Guest essay by Phil Hutchings

The Australian carbon tax of A$23/t of CO₂ became effective one year ago on 1 July 2012. And with an automatic increase after the first 12 months, it is now set at $24.15/t.

Last week, the Australian Government’s Department of Climate Change published a 16 page paper titled “How Australia’s carbon price is working One Year On”.[1]

http://www.climatechange.gov.au/climate-change/news-article/how-australia%E2%80%99s-carbon-price-working-%E2%80%93-one-year

I decided to take a look at what has been happening.

The ‘One Year On’ report focuses on the electricity sector. That’s not surprising perhaps as Australia’s electricity generation industry produces approximately 35% of our greenhouse gas emissions. And that’s because 75% of Australia’s electricity comes from coal fired generation. Of that, two-thirds is from black coal and one-third from brown coal.

Victoria’s four big brown coal-fired power stations (Hazelwood, Loy Yang A, Loy Yang B and Yallourn) are the lowest cost power generators in Australia but they are also the least efficient. That means they emit the highest amount of CO₂ for each unit of electricity produced.

The black coal fired stations are located mainly in NSW and Queensland.

It is these coal operators who are targeted in Australia’s carbon tax as they comprise a small number of large CO₂ emitters. The less-efficient brown coal fired power stations in Victoria emit approximately 1.3 tonnes of CO₂ per MWh of energy produced. The black coal fired power stations are more efficient and emit 0.8 to 0.9 t CO₂/MWh.

On page 3 of the ‘One Year On’ report, a fascinating chart takes centre-stage.

This shows Australia’s emission intensity (amount of CO₂ per MWh of electricity generated) before and after the introduction of the carbon tax. It covers the National Electricity Market (the NEM), comprising the interconnected electricity system over the populous eastern two-thirds of Australia.

At face value, it’s a stunningly successful picture for the carbon tax policy – a sudden drop in the amount of CO₂ produced for each MWh generated.

Australia’s emissions intensity dropped significantly after the carbon tax

(Source: How Australia’s carbon price is working One Year On)

According to the One Year On report says, the amount of ‘carbon pollution’ for each MWh dropped from an average of 0.92 tonnes before the carbon tax to 0.87 tonnes afterwards. As the report says:

“As a result, electricity generation is switching away from high-polluting fuels like brown coal and towards lower-polluting fuels like natural gas and renewable energy sources. In fact, renewable energy output increased by almost 30 per cent and the output from the seven most highly-polluting coal generators was down 14 per cent from the same period in 2011-12.”

Knowing the long development periods in the electricity industry and its nature of very slow changes, this seemed to be an amazing outcome.

The report goes on to give more detail of electricity generation by fuel type:

Australia’s electricity moved away from coal stations after the carbon tax

(Source: How Australia’s carbon price is working One Year On)

There are all sorts of things about this chart that surprised me. Like for example:

Ø Did the carbon tax really stimulate a 28.5% jump in Australia’s renewable energy production in the NEM?

Ø What was behind the 13% drop in electricity generation from brown coal?

Ø Perhaps most disconcertingly, what caused Australia’s electricity consumption to drop by 3% year-on-year?

(I found this chart was inconsistent with NEM electricity generation reported in Australia’s National Greenhouse Accounts. The One Year On report is showing NEM electricity demand to be almost 10% less than the figures shown in the Greenhouse Accounts.)

The One Year On report itself goes on to say:

A year after the carbon price started, the evidence shows these Clean Energy Future policies are:

· reducing carbon pollution;

· driving investment in clean and renewable energy; and

· transforming Australia’s economy to be more competitive as the world tackles climate change.

Pretty compelling, huh?

Intrigued, I thought I’d dig a little deeper. Real data is hard to come by, and I had to check a number of sources. Perhaps not surprisingly, there are inconsistencies in the data.

Wholesale electricity prices – before and after the carbon tax

Let’s have a look at what happened to wholesale electricity prices after the carbon tax. The body which operates Australian electricity market, the Australian Energy Market Operator (AEMO) publishes some data on NEM electricity prices which we can use as guide.

These generators bid into the National Electricity Market (NEM) to supply electricity in 30 minute blocks during the day. In theory, the lowest bid price for any power station should correspond to the short-run marginal cost of operating it. The imposition of the $23/t carbon tax in theory sees the costs of the brown coal generators rise by around $30/MWh and by approximately $21/MWh for the black coal generators.

That increase in cost should be reflected in realised NEM wholesale prices, and indeed, this was the case. True volume weighted price data is not available, but if we use NSW price data as a proxy, the step change in wholesale prices from July 2012 is clear.

NEM electricity prices increased significantly after the carbon tax

(Source: AEMO)

So in this sense, the carbon tax is working correctly – sending a signal to electricity generators of much higher prices. That rise in electricity price will benefit any generator that doesn’t have to pay a commensurate carbon tax – such as any renewable generator like wind, hydro or solar.

But – did this rise in electricity price due to the carbon tax really trigger a sudden shift to lower carbon emissions in the electricity sector?

To answer that question, I had to look a little deeper…..

Australia’s electricity consumption has been declining since 2010

Interestingly, a good source of more information is Australia’s National Greenhouse Accounts, which are published every six months.

http://www.climatechange.gov.au/climate-change/greenhouse-gas-measurement-and-reporting/tracking-australias-greenhouse-gas-emissio-0/quarterly-update-australias-national-greenhouse-gas-inventory-december-2012

The Greenhouse Accounts include historical NEM demand data. This data shows that there has been a marked reduction in Australia’s electricity consumption over the past three years.

Annual consumption in the NEM has declined by approximately 9 TWh/yr or 4.5% since 2010 – from 206 TWh/yr to 197 TWh/yr.

Electricity demand in the NEM has been declining since 2010

(Source: December 2012 issue of Australian National Greenhouse Accounts)

Some of this falling demand is undoubtedly due to much higher retail electricity prices over recent years. Retail prices have risen nationally by 70% to 80% over the past five years.

Other factors have been residential solar PV installations and energy efficiency savings by businesses and residences.

Residential solar PV has grown dramatically due to State incentives

Solar PV in Australia has seen boom times in the past three years.

The boom in solar PV in Australia since 2009

(Source: 2012 Clean Energy Council Report))

The Clean Energy Council says that of the total Australian solar PV capacity of 2,300 MW at the end of 2012, approximately 95% of that was installed in the past three years.

http://www.cleanenergycouncil.org.au/cec/resourcecentre/reports/cleanenergyaustralia

This very high rate of installation growth was driven some overly generous State Government schemes. State Governments quickly realised the very high true cost of these incentives. Faced with the large impact on state budgets, Governments responded by dropping or heavily reducing the incentives in 2012 and 2013. In Queensland for example, the tariff for solar PV electricity exported to the grid was 44 ¢/kWh, guaranteed until 2028. That was abandoned in July 2012 and replaced with an 8 ¢/kWh rate, fixed just until 2014.

Right across Australia, the State Government incentives for solar PV have been slashed.

That led to a late rush on installations of solar PV with calendar 2012 being the biggest year yet for PV installation.

In 2012, the CEC estimates that these solar PV units generated 2.4 TWh in 2012. Allowing for the 13% of these units that are in Western Australia and Northern Territory (i.e. outside the NEM), that means that the residential solar PV are contributing approximately 2 TWh in the NEM.

That residential solar PV is shown as a reduction in demand rather than as NEM generation supply.

So of that 9 TWh reduction in electricity demand in the NEM over the past three years, around 2 TWh is attributable to the more than 900,000 solar PV systems installed on Australian houses.

Wind generation in also increasing

Wind generation has also grown, but from a low base. Total Australian installed wind capacity was 2,600 MW at the end of 2012. A further 1200 MW is under development.

Total wind generation in the NEM in 2012 was approximately 6 TWh according to the CEC. That represents 3% of NEM supply.

AEMO however, in its report, says ‘wind generation supplies less than 2%’ in the NEM.

Australia’s hydro generation

The core of Australia’s renewable generation is in fact hydro power. Hydro power makes up about one-eighth of the generation in the NEM. This principally comes from two big players – Snowy Hydro and Hydro Tasmania. And the amount of hydro generation principally depends on water inflows.

Hydro Tasmania is by far the largest renewable generator in Australia. It has produced 7 to 9 GWh/yr over recent years. In the 2011/12 year (i.e. the year prior to the carbon tax introduction), Hydro Tasmania produced approximately 45% of the renewable generation that AEMO reported in the NEM.

Snowy Hydro has approximately half of the hydro capacity of Hydro Tasmania and produces 3 to 5 GWh/yr. This includes output from its 620 MW of gas fired capacity, as Snowy does not publish its generation by fuel source (hydro or gas). Like all hydro generators, its output depends on rain and snowfall. And as a guide to the variability of Snowy’s catchment, the amount of water it has released has varied from 1,324 GL/yr to 2,311 GL/yr over the past four years.

There’s been little additional hydro generation developed in Australia for several decades. But with ample lake storage, the hydro operators can decide when to generate – at least within the limits of dam capacity.

Gas fired generation has been stable

There was been additional investment in gas turbine peaking and shoulder plants in the years before 2010. But since then, gas fired generation has been reasonably stable at approximately 22 TWh/yr.

So – What are the coal fired generators doing?

Against that background of declining electricity demand, and slowly increasing supply from solar PV and wind generation, the traditional coal fired generators are responding with reduced supply.

And the ongoing rate of decline of coal fired generation in the NEM is striking.

Coal fired electricity generation has been shrinking for four years

(Source: December 2012 issue of Australian National Greenhouse Accounts)

Both the black coal and brown coal generators have been reducing output. For the black coal generators, it has been a consistent downtrend over the past four years. And the brown coal generators have been reducing over the past two years.

All of this has been happening well before the carbon tax came in on July 1 2012.

Australian Energy Market Operator published its own analysis of the carbon tax effects

As it turns out, AEMO had published its own analysis of the impact of the carbon tax in November 2012 – seven months ago.

AEMO’s analysis “Carbon Price – Market Review”[2] covers the first four months of the life of the carbon tax. http://www.aemo.com.au/Reports-and-Documents/Reports/Carbon-Price-Market-Review

This report actually provides a lot more data, and lets the informed reader see what is really going on – at least in those first four months.

There was an interesting observation from AEMO in relation to an incident that led to a shutdown of one of the brown coal fired generators.

Soon before the start (on 6 June 2012) of the carbon tax, the big Yallourn brown coal station in Victoria was affected by flooding and was shut until October 2012.

That event alone had a significant effect on CO₂ emissions, lowering them across the NEM generation sector. AEMO refers to this as the carbon dioxide intensity index (CDEII) – amount of CO₂ emitted per MWh generated.

The CDEII varies frequently during the day or week depending on which generating plants are supplying power. If more wind and hydro is supplying energy, the CDEII falls. Conversely, a shift towards coal fired generation will lift the CDEII.

Looking back at 2012, AEMO says the big structural change in CDEII actually occurred as a result of the Yallourn flooding. As a brown coal fired station, it has one of the highest CO₂ emissions of all of Australia’s sources of electricity. And its closure due to flooding on 6 June 2012 led to a noticeable reduction in CDEII.

AEMO highlighted this in the chart below.

CO₂ emissions fell after temporary closure of a brown coal plant

(Source: Carbon Price- Market Review Australian Energy Market Operator 8 November 2012)

In effect, AEMO is saying that (at least in the first four months of the carbon tax), the reduction in CO₂ emissions was due more to the shutdown of an inefficient brown coal fired power station by flooding than by market effect of the carbon tax!

CO₂ emissions from the electricity sector have been falling for four years

The Greenhouse Accounts publication show the reduction in CO₂ emissions from Australia’s electricity sector has been occurring since 2008/09.

It is a clear trend, shown in the chart below from December 2012 issue of the Greenhouse Accounts.

CO₂ emissions from electricity have trended down for the past four years

(Source: December 2012 issue of Australian National Greenhouse Accounts)

So – What conclusions can we draw?

The cut in CO₂ emissions from Australia’s electricity sector has been a four year trend.

Yes, the sector is responding to Government incentives with wind and solar PV installations.

However, the fall in electricity sector emissions intensity in 2012 was due to a combination of events and not necessarily due to the carbon tax:

a) Australia’s electricity demand was falling anyway due to higher retail prices.

b) There was a massive burst of residential solar PV installations in 2011 and 2012 which further decreased electricity demand.

c) Wind generation is steadily increasing.

d) Hydro generation remains stable.

e) Faced with the falling demand, the coal fired generators have been reducing output.

f) A once-off flood event temporarily closed one of Australia’s four brown coal fired stations in June 2012.

Did the carbon tax have an immediate effect on 1 July last year? On the face of it, it seems longer term policy factors were more at play in delivering this result than the carbon tax itself.

[1] “How Australia’s carbon price is working One Year On”. Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education

[2] Carbon Price- Market Review Australian Energy Market Operator 8 November 2012