24 Apr 2013
What has been the effect of the Carbon Price on the electricity market?
by Graeme Dennis
In the nine months since introduction of the carbon price, the average intensity of greenhouse emissions from the National Electricity Market has reduced by about 5%, year on year. And the average wholesale spot price of power in the National Electricity Market has increased by 110%, year on year.
The Commonwealth's Carbon Price Mechanism commenced on 1July 2012, and we now have nine months of data concerning its impact on the National Electricity Market (NEM).
Below is a graph showing the average monthly emissions intensity of sent out electric power generation for each region of the NEM, in the 12 months preceding the carbon price and the nine months since the carbon price. Also shown (by the horizontal dotted line) is the average emissions intensity across all regions of the NEM:
According to the Emissions Intensity Index published by the Australian Energy Markets Operator (AEMO), in the nine-month period from July 2012 to March 2013, since the introduction of the carbon price, the average emissions intensity of the NEM across all regions was about 0.87 tonnes of CO2e per MWh of sent out energy. In the same nine-month period of the prior year (2011-2012), without the carbon price, the average emissions intensity of the NEM across all regions was about 0.92 tonnes CO2e of per MWh of sent out energy. This translates into a reduction in emissions intensity of about 5%.
There was also a 2.2% reduction in total demand for grid energy from the prior year period to the current year. This, coupled with the reduction in emissions intensity, made the total emissions from sent out generation in the NEM, in the nine months since the introduction of the carbon price, 7.6% less than the equivalent 9 month period in the prior year.
Part of that reduction in demand is likely attributed to a decrease in industrial production demand for energy, and some is likely attributable to the rapid growth in rooftop solar PV systems, which will usually reduce grid energy imports.
More dramatic is the shift in spot prices in the NEM following the introduction of the carbon price.
According to AEMO's price and demand tables, in the 9 month period from July 2012 to March 2013, since the introduction of the carbon price, the average spot price of the NEM across all regions was about $59.74 per megawatt hour of electric energy. In the same nine-month period of the prior year (2011-2012), without the carbon price, the average spot price of the NEM across all regions was about $28.26 per megawatt hour. This translates into an average spot price increase of about $31.49 per megawatt hour, or a 111% increase in wholesale market power prices.
There are many factors other than the carbon price which can affect emissions intensity and spot market prices, including weather, power demand, plant and transmission outages, fuel prices and market behaviours generally. For instance, there was a large shift in emissions intensity in Victoria shortly before the carbon price commenced, due to plant outages in Victoria, which can be seen in the first graph as having a significant effect on emissions intensity in that state.
Also, spot market power prices are not indicative of the net revenue received by generators or the net costs paid by power retailers, because in most cases a large proportion of their wholesale sales and purchases of energy are priced according to forward hedging contracts rather than spot purchases, and the NEM spot price mostly represents only a dispatch and balancing price, against which those forward hedging contracts are settled.
Some of the spot market price increases, particularly the peak that occurred in the Queensland region in January 2013, were influenced mainly by unexpected weather impacting on generation and localised market dynamics, rather than the carbon price. But the trend line for NEM spot prices, and futures exchange prices, appears to be about 90-100% above where it was prior to the introduction of the carbon price.
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