Adapting Energy Markets to a Low-Carbon Future by Greg Houston.pdf · Adapting Energy Markets to a ... Loy Yang A Hazelwood Loy Yang B Northern Yallourn ... Surat Basin Ballera Roma

Adapting Energy Markets to a Low-Carbon Future

Twelfth ACCC Regulatory Conference

Brisbane

28 July 2011

Greg Houston

Director

1

A High-Carbon Starting Position

� NEM is the highest carbon-emitting market in the OECD– Surpassed only by Cambodia, Cuba and India!

Gas 11%Hydro

6%

Brown Coal27%

Black Coal54%

Wind3%Source: ESAA, Electricity Gas Australia 2011, Table 2.6.

2

0.43-1.05Gas—OCGT, Steam Turbine 0.75

0.40-0.60Gas—CCGT 0.47

A High-Carbon Starting Position

Emissions Intensity Factors for Existing Generationin the NEM (Tonnes CO 2/MWh)

Range

0.86-1.19Black Coal 1.01

0.95-1.53Brown Coal 1.37

AverageFuel

Source: AEMO, Spreadsheet entitled Generation C02 intensity.xls

3

Key Policy Parameters…

� $23/tonne carbon tax from 1 July 2012

� Trading of permits from 1 July 2015, $20/tonne price floor

� Energy Security Fund– Payments for ‘managed closure’ of 2000MW high emitting

generation by 2020– $5.5bn allocation of free permits, cash until 2016-17– Loans to distressed generators, to refinance debt, buy permits

� Renewable energy target (RET) of 45,000GWh by 2020– Large-scale renewable energy target (LRET)– Small-scale renewable energy scheme (SRES)

Carbon -related initiatives affecting electricity market

4

Carbon Price Effect on Generators

Effect of Alternative Carbon Prices on Generation C osts by Fuel Type

0

10

20

30

40

50

$60

$23 Carbon Price $30 Carbon Price $40 Carbon Price

Brown Coal Black Coal Gas

Notes: Emissions factors based on average measures recorded in: AEMO, Spreadsheet entitled Generation C02 intensity.xls.

5

Hydro

Carbon Price Effect on Merit Order

NEM Merit Order Pre-Carbon Price

0

20

40

60

80

100

120

140

$160

1 4,384 8,767 13,150 17,533 21,916 26,299 30,682 35,065 39,448 43,831

Loy Yang A

Hazelwood

Loy Yang B Northern

Yallourn

Projected Energy Requirement 2012/13 (Medium Growth)

24,712 MW

Projected Maximum Demand 2012/1338,129 MW

(50% PoE—Medium Growth)

SRMC ($/MWh)

Brown CoalBlack CoalGas Wind

Playford

Sources: SRMC data from ACIL Tasman, Fuel Resource, new entry and generation costs in the NEM; Projected energy and maximum demand from AEMO, 2010 Electricity Statement of Opportunities; Emissions factors from AEMO, Spreadsheet entitled Generation C02 intensity.xls

HydroBrown CoalBlack CoalGas Wind

6

Effect of $23 Carbon Price

NEM Merit Order $23 Carbon Price



Loy Yang AHazelwood

Loy Yang B

NorthernYallourn

Hydro

1 4,384 8,767 13,150 17,533 21,916 26,299 30,682 35,065 39,448 43,831

Brown CoalBlack CoalGas Wind

0

20

40

60

80

100

120

140

$160

SRMC ($/MWh)


24,712 MWPlayford


7



Loy Yang A

HazelwoodLoy Yang B

Yallourn & Northern



0

20

40

60

80

100

120

140

$160

SRMC ($/MWh)

1 4,384 8,767 13,150 17,533 21,916 26,299 30,682 35,065 39,448 43,831


24,712 MW

Playford


Sources: SRMC data from ACIL Tasman, Fuel Resource, new entry and generation costs in the NEM; Projected energy and maximum demand from AEMO, 2010 Electricity Statement of Opportunities; Emissions factors from AEMO, Spreadsheet entitled, Generation C02 intensity.xls

8



Loy Yang A

HazelwoodLoy Yang B

NorthernYallourn



0

20

40

60

80

100

120

140

$160

SRMC ($/MWh)

1 4,384 8,767 13,150 17,533 21,916 26,299 30,682 35,065 39,448 43,831


24,712 MWPlayford



9

General Observations

� RET ensures that load growth to 2020 is effectively served by renewables – but significant idle capacity needed as ‘backup’

� Black coal output increases, displacing brown coal that has morefrequent/longer periods of minimum-level operations (night time)

� Some gas fired generators move up merit order, but limited to Queensland coal seam supplied plants with cheap legacy fuel contracts

� Effect on individual brown coal plants differs significantly given varying emissions intensity factors (ranging from 1.21-1.53)

� Increased reliance on black coal likely to cause increased imports into Victoria, from NSW

� Load growth uncertainty given substantial assistance to energy efficiency and significant retail price effects (both carbon- and network cost-related)

10

Most Pronounced Effects in Victoria

� Brown coal presently accounts for 63% of installed capacity and over 90% of electricity generated in Victoria

� Of the four large brown coal generators, Hazelwood and Yallourn are ‘natural candidates’ for the government’s 2,000 MW retirement plan

Scheduled Victorian Brown Coal Generators

0.1%

2%

16%32%21%21%

% of Electricity Produced in Victoria

2009-10

1.21150Anglesea

1.49195Energy Brix

1.241,000Loy Yang B 1.212,120Loy Yang A1.421,480Yallourn 1.531,600Hazelwood

Emissions Intensity Factor

(tCO2 /MWh)

Registered Capacity (MW)Plant

Source: AEMO, 2010 Electricity Statement of Opportunities, pp. 108 and 113; AEMO, Spreadsheet entitled Generation C02 intensity.xls

11

Case Study: Closure of 2000 MW

� ‘Managed closure’ of 2000 MW high emissions plant by 2020 most likely to result in:– Complete shutdown of Hazelwood (1600 MW)– Partial shutdown of Yallourn (400 MW)

� Gas-fired CCGT is the only credible technology/fuel source capable of replacing base load capacity in that timeframe.

� Energy market implications begin with fuel supply– 2000 MW running as base load represents ~120 PJ gas per annum– Victorian total gas demand in 2009-10 was 266 PJ* – Demand increment represents a 45 per cent increase!

Substantial implications for eastern Australia gas market!

* Source: ABARE, Australian Energy Statistics, 29 June 2011

12

Eastern Australia Gas Market

Brisbane

Gladstone

Maryborough

Newcastle

Rockhampton

Mt Isa

Adelaide

Melbourne

Hobart

Canberra

Moomba

Cooper/Eromanga Basin

Gippsland BasinBass Basin

Otway Basin

Sydney Basin

Wallumbilla

Moranbah

Townsville

SWQP(66 PJ)

MSP (158 PJ)

MAPS(92 PJ)

Interconnect(33 PJ south 26 PJ north)

EGP(98 PJ)

PTS(376 PJ)

CGP(43 PJ)

QGP(50 PJ)

TGP(47 PJ)

Bowen/SuratBasin

Ballera

Roma

SEAGasPipeline(115 PJ)

NQGP(40 PJ)

QSN Link (91 PJ)

Sydney

RBP(76 PJ)

Proposed LNG Facilities

GunnedahBasin

SWP(130 PJ)

Brisbane

Gladstone

Maryborough

Newcastle

Rockhampton

Mt Isa

Adelaide

Melbourne

Hobart

Canberra

Moomba



Otway Basin

Sydney Basin

Wallumbilla

Moranbah

Townsville

SWQP(66 PJ)

MSP (158 PJ)

MAPS(92 PJ)


EGP(98 PJ)

PTS(376 PJ)

CGP(43 PJ)

QGP(50 PJ)

TGP(47 PJ)

Bowen/SuratBasin

Ballera

Roma


NQGP(40 PJ)

QSN Link (91 PJ)

Sydney

RBP(76 PJ)

Proposed LNG Facilities

GunnedahBasin

SWP(130 PJ)

NERA Stylised Map.Source for pipeline capacities: AEMO, 2010 Gas Statement of Opportunities

13

Effect on Demand for Gas in Victoria

Effect on Demand for Gas in Victoria

0

100

200

300

400

500

600

2009-10 2019-20 (f)

Additional 120 PJ Required if Retired Assets Replaced by Gas Fired Generation

Exports of Victorian Produced Gas to NSW and SA

Victorian Demand

45% Increase in Demand By 2019-20

PJ

Sources and Notes for 2009-10 data: Victorian demand data: ABARE, Australian Energy Statistics, Energy Update 2011Exports derived from the difference between production from Victorian basins and Victorian demand. Production data: EnergyQuest, Energy Quarterly, August 2010.

14

Effect on Gas Reserves

Effect on Gas Reserves (2P) in Victoria

6,754 PJ

2,989 PJ

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2009-10 2019-20 2025-26 2029-30

Reserves (Proven and Probable)

20 Year Implied Remaining Lifeassuming maintenance

of 2009-10 production andno additional reserves

6 Year Implied Remaining Life

based on 2019-20 reserves and demand forecast (incl. 120 PJ)

PJ

Source for reserve estimates: EnergyQuest, Energy Quarterly, May 2011.

15

Effect on Gas Prices, Pipeline Flows?

Brisbane

Gladstone

Maryborough

Newcastle

Rockhampton

Mt Isa

Adelaide

Melbourne

Hobart

Canberra

Moomba



Otway Basin

Sydney Basin

Wallumbilla

Moranbah

Townsville

SWQP(66 PJ)

MSP (158 PJ)

MAPS(92 PJ)


EGP(98 PJ)

PTS(376 PJ)

CGP(43 PJ)

QGP(50 PJ)

TGP(47 PJ)

Bowen/SuratBasin

Ballera

Roma


NQGP(40 PJ)

QSN Link (91 PJ)

Sydney

RBP(76 PJ)

GunnedahBasin

SWP(130 PJ)

Brisbane

Gladstone

Maryborough

Newcastle

Rockhampton

Mt Isa

Adelaide

Melbourne

Hobart

Canberra

Moomba



Otway Basin

Sydney Basin

Wallumbilla

Moranbah

Townsville

SWQP(66 PJ)

MSP (158 PJ)

MAPS(92 PJ)


EGP(98 PJ)

PTS(376 PJ)

CGP(43 PJ)

QGP(50 PJ)

TGP(47 PJ)

Bowen/SuratBasin

Ballera

Roma


NQGP(40 PJ)

QSN Link (91 PJ)

Sydney

RBP(76 PJ)

GunnedahBasin

SWP(130 PJ)

� Prevailing Victorian/NSW wholesale gas prices are ~$3.50-$4.00/GJ*

� Certified Victorian reserves are based on economic extraction at prevailing prices

� Queensland LNG developments represent long term demand sink at ~$6-12/GJ, depending on world oil prices*

� Queensland to Victoria gas transport costs ~$2/GJ**

NERA Stylised Map.Source for pipeline capacities: AEMO, 2010 Gas Statement of Opportunities

Sources:* EnergyQuest, Energy Quarterly, May 2011** Estimated using SWQP and QSN charges information from EnergyQuest, Energy Quarterly; MSP, Interconnect and PTS charges from APA website.

16

Effect on Transmission Networks

� Latrobe Valley to Melbourne transmission capacity will presumably become spare, although its costs will still need to be met

� If gas pipeline costs are met by CCGT developers and electricity transmission build is not, CCGT will want to locate close to gas supply

� Potential reduction in gas supply from Victoria to NSW and SA (100PJ pa) could reduce demand for SEAGas and EGP pipelines, but expand demand for MAPS and MSP

17

Can our Current Institutions Cope?

� Adapting to a low-carbon future involves energy market restructuring well beyond the experience of the NEM institutions

� The challenges for policy makers, regulators, business decision-makers and financiers are unprecedented

� Big market adaption questions arise in relation to: – achieving sufficient certainty to finance substantial infrastructure

investment across gas and electricity markets

– managing risks to security of supply in the face of major change

– electricity market design - can it cope with lumpy base load retirements and new investment needs?

– transmission frameworks, and the relative roles of planning vs pricing

18

New Institutional Arrangements and Assistance Measures are Planned

Assistance MeasuresInstitutional ArrangementsEnergy Security Council

Advice to government on:

• Emerging risks to energy security

• Measures to avert risks arising from financial impairment and carbon pricing

• Loans to generators for refinancing existing debt

AEMO – new responsibilities

• Advice on generation closure timetable

• Implications of greater renewables for transmission network

AEMC – new reviews

Market and regulatory reforms to encourage efficient balance between demand and supply of electricity.M

easu

res

to P

rom

ote

Tra

nsfo

rmat

ion

to L

ow E

mis

sion

s G

ener

atio

n

Assistance to emission intensive generators through

• Payment for closure of around 2,000 MW by 2020

• Transitional assistance to generators facing ‘sizeable asset value losses’, including:

– Up to $5.5 billion of free permits over six years;

– Limited term loans where generator is unable to obtain refinancing on reasonable terms from the market

• Assistance conditional upon development of clean energy investment plans

Energy Security Fund

New Institutions to Administer Funding

Australian Renewable Energy Agency Responsible for administering $3.2 billion of existing funding

Clean Energy Finance Corporation

Investment of up to $10 billion on clean energy initiatives

$10 billion of new funding for commercialisation and deployment of renewable energy, energy efficiency and low pollution technologies

Funding to encourage clean energy

Mea

sure

s to

E

ncou

rage

Inno

vatio

n

$3.2 billion of existing funding for R&D, demonstration and commercialisation of renewable energy technologies

19

Concluding Observations

� Electricity and gas markets are integrating, but policy-development may be lagging

� Continuing, critical need for long term policy certainty, eg, an announced program for plant closures, parameters that affect long term carbon price

� Prices should be allowed to do their work – wholesale gas and electricity prices need to find the ‘right’ level

� The list of wholesale market ‘interventions’ is growing, and risks unintended consequences (eg, insufficient capacity)– RET is a disguised tax on fossil fuelled-base load (yet, we may need it)

– New technology-based subsidies risk having the same effect

– Generation market power is hardly our most pressing problem

– Restrictions on the introduction of time-of-use tariffs hampers the development of demand side response

� Setting up additional institutions gives rise to increased risk for policy coordination and execution

Contact UsGreg Houston

DirectorNERA-Sydney+2 8864 [email protected]

© Copyright 2011NERA Australia Pty Ltd.

All rights reserved.

Documents

Adapting Energy Markets to a Low-Carbon Future by Greg Houston.pdf · Adapting Energy Markets to a ... Loy Yang A Hazelwood Loy Yang B Northern Yallourn ... Surat Basin Ballera Roma