Potential Impact of the Forthcoming Australian Carbon Price on the Australian NEM - Assignment Example

Where the new gas plants will be located Regarding the location of new gas plants, it is important noting that in Australia, there are transmission networks in almost every territory and state. Therefore, just like the proposal made by National Electricity Market as cited by (Abbott, 2002), one of the gas plants needs to be located in Queensland through to New South Wales. Following the earlier power plants and gas plants such as Singapore Power International which had the acquisition of Victoria state transmission network around 2000, I will strongly recommend that one gas plant be located here as the region already has the needed facilities. Another reason to support Victoria is the fact that it has a very unique transmission structure. I would also suggest another gas plant be located at New South Wales. Not because there already exists TransGrid network but because by going with the AER annual regulatory report published by (National Electricity Market Management Company 2006) there has been range of profitability as well as efficiency indicators that has been recorded. These efficiency indicators have been for the benefit of transmission business in the NEM. Basing on the statistics released by (National Electricity Market Management Company 2006) the return on assets has been on operating profits. That is to say that the plant has been recording net profit before taxation and interest. In the period between 2007 and 2008, government owned network business managed to get annual returns on assets of 6-9 per cent as a strong indication that if new gas plant is located in this region then annual returns on assets will be favourable. However, (Newbery, 2002a) warns that though the region is profitable to locate plants on, there are some factors that affect performance in the region. A well cited example is what the report suggests as, “cost outcome and demand that can sometime differ from the forecast in the regulatory process.” According to AER data as cited by Transend 2010 APR report titled, “Future wind generation in Tasmania” states that all major networks in Southern and Eastern Australia have been performing above what said to be “satisfactorily against target levels of their service quality.” Such are areas where new gas plants ought to be placed. The other reason to go for Southern and Eastern Australia is that according to data released by Australian Energy Regulator, Final Decision (2010), these areas have been achieving high rates of transmission. Besides, the data has it that these areas have been recording the lowest minutes of supply despite their economical potential. Again, figures released by NEM shows that unsupplied energy to these areas was totaling to about 312 minutes with Eastern Australia experiencing the highest minutes of off supply. How will the electricity or gas be transmitted across the country? According to AEMO strategies as cited in (Australian Energy Market Commission 2010, p.2), electricity needs to be converted to high voltages for effective transmission to various parts of the country. The conversion before transmission will ensure that there is minimal loss of electrical energy. AEMO has laid down transmission networks which consist of designed equipment transmitting power at 220 kilovolts (kV), along assets that can operate at 66-220 kV parallel to but provide support to transmission network which is higher than the voltage (Australian Energy Market Commission 2010, pp. 23-32). According to NSW Treasury (2010), “A risk management proposal for New South Wales' electricity businesses”, the higher voltage transmission will ensure among others things; efficient generators which even if located far from customers will guarantee access to large and very efficient power supply. Draft decision from Queensland Competition Authority (QCA) on retail cost index for 2011-2013 adds that when there is higher transmission of voltage then generators will be able to compete in the electricity market which will ultimately reduce the risk of market power. Back to transmission of the gas or electricity, we can argue that there are transmission networks in each territory and state which according Pirrong (2009) has been what can be termed as “interconnectors” which is able to link other networks around the country. Let us consider for instance a report published by (National Electricity Market, 2011) which states that Southern and Eastern Australia provides a fully interconnected transmission networks from New South Wales through to Queensland. However, the report suggests that the transmission networks in Northern Territory and Western Australia do not interconnect with each other. To make the transmission of the gas and electricity across the country unique, National Electricity Market has designed a low density and long thin structure to reflect long distance between fuel sources and demand centers. A practical example of a unique transmitter that can be used to transmit electricity and gas is the over 280 kilometers that links between Tasmania and Victoria. This factor has been a contributor in ending transmission charges that has always been put on customers. For instance, transmission charges are about 11% of retail prices in the NEM if this figure is compared with the 5% prices found in United Kingdom (National Electricity Market p.31). According to (Combet, 2010), the gas can also be transmitted over individual elements of the network. When transmitting electricity, he adds that it will be done over alternating current or as a direct current though most of transmission networks have been done as alternating current. How is the price of gas going to affect the uptake of gas powered generation? According to Mackenzie (2007) as cited in (Combet, 2010), when emission between carbon and CCGTs is compared, it will be noticed that the latter has almost half of the carbon emission of power stations powered by coal. It therefore means that if price on carbon is not fixed then when there will be high fuel cost of a gas, there will be a situation where CCTG is not going to be competitive especially when coal is used as baseload. However, (Treasury, 2011) adds that when working with enough carbon, price of the CCTG technology becomes an important aspect for generating electricity. Consequently, a price on carbon is likely to increase competitiveness of gas powered generation as well as that of energy technology from renewable sources. However, the choice of moving completely to a gas-fired generation will solely be dependent on trends of gas prices in future. How decisions are made for transmission and distribution upgrades Decision making on transmission and distribution upgrades depends on a number of issues. For instance, in recent years, in its transmission and distribution, AEMO explored alternative approaches and subsequently looked into the difference between building electricity transmission lines and gas pipelines so as to deliver gas to main electricity load center. A decision made so as to provide high-level design and indicative costs approximates for some cases that they had examined before. This decision was made based on electricity transmission congestion. (Chester, 2006) argues that sometimes transmission networks have no unlimited capacity to carry electricity from one point to the other. The graph below shows monthly costs of transmission congestion for years between 2007-08 and 2008-09. Instead, there could be some limitations created by physical characteristics on the amount of power that can be channeled over region of the network. And when transmission lines are so affected, Chester adds that AEMO will be forced make decisions based on such factors. Therefore decisions on transmission and distribution upgrades will depend on how the transmission line is congested or may be constrained. According to (IPART 2010) the Journal they published as, “Review of regulated retail tariffs and charges for electricity 2010-2013”some constraints are caused by factors that could be beyond service provider. For instance, its maintenance and operating procedures and alterations in its network monitoring processes, decision on transmission and distribution upgrades could be made. Who will decide what happens with network upgrades and what a carbon price mean for that The effect price of carbon will have on the decision made with network upgrade will entirely depends on the marginal cost of abatement of the very many options available to the generators in the tandem with the industry-wide cap on emissions. According to Powerlink Regulatory Test Final Report on “Maintaining a reliable electricity supply within Central Queensland” the short term choice of abatement will wholly occur through fuel switching to gas plants with lower emissions intensity. Bertz and Owen (2010) as cited in Australian Energy Market Operator (AEMO) (2010) agree that at the end of the day, the abatement will have been increased to reflect increase in the price of carbon. According to the report, a marked increase in the level of renewable generation will lead to; a) “Conversion of integrated gasification combined cycle (IGCC) coal plant to include pre-combustion carbon capture and storage (CCS); b) Change in the dispatch order of existing plant; and c) Limited retirement of some old coal-fired plants in the NEM” (pg. 35) (Betz & Owen, 2010) However, according to statement released by Treasury Modeling (2011), introducing a carbon price changes the composition of electricity generation in Australia. Therefore a price on carbon is likely to up competitiveness of gas powered generation and renewable energy technology generation which comes from wind power generation but can be overtaken by geothermal. “The extent of switching to gas-fired generation will heavily depend on future gas prices and the availability of other low-carbon technologies like coal carbon capture and storage.” (Treasury Modeling, 2011 p.46) While the country will witness a situation where the share in electricity generation by coal will inevitably go down with the introduction of a carbon price, an increase in prices of gas have been predicted to help coal-fired generation remain very competitive for what the Treasury calls “baseload” generation (p. 51). Important fact to note is that carbon prices will always push the coal plants to diminish quickly. A very good example is the Latrobe valley which has been or will be forced to replace their coal fired projects with gas-powered ones. Taking transmission lines in NSW (Liddell and Wallerwang) and Queensland (Collinsville), the table below shows what a carbon price will mean for decision made with network upgrades Carbon prices on and decisions on network upgrades What transmission lines will need to be upgraded in the next 10-15 years? Changes in generation technology are one factor that has been argued to be the reason behind the need to upgrade transmission lines over a given period of time. Considering projection of 10-15 years, a transmission line to be upgraded will depend on cost of connection which Council of Australian Governments (COAG) Energy Market Review (2009) explain that the upgrade must also factor in related generation projects’ proximity which should be in existence with transmission infrastructure. Considering this factor, current AEMC upgrading system issue reviews encompassing upgrading frameworks and such frameworks are that while considering a transmission line to upgrade for longer period of time, such line must work with Climate Change Policies (Department of Climate Change and Energy Efficiency, 2010). Therefore basing on the above factors, the first transmission line that needs to be upgraded is that at New South Wales: TranGrid transmission line. Other than the above factors, report on Council of Australian Governments explains that in 2009 alone, the maximum demand for power in the region increased by over 87 MW. The data represented in the chart below shows how gas-fired electricity has been on increase in Queensland, TransGrid, Powerlink, EnergyAustralia, SP AusNet, ElectraNet, Transend and Western Power. Chart1. Gas-fired electricity generation Increase from today's level (Courtesy of Department of Climate Change and Energy Efficiency, 2010) Looking at the graph, increasing GPG has the implication that the concerned transmission line to be upgraded must comply with the above demands. A factor that led to the increase in demand of the power was due to Kurri Kurri Aluminium which increased its output by almost two-third. Again when data from the regulated asset base (RAB) are compared, capital expenditure and asset value obtained suggests that transmission lines such as Powerlink from Queensland and TransGrid from New South Wales have higher value of RAB when compared with other transmission lines. Therefore upgrading this line will work smoothly with the new plants. Effective congestion management system will also be a factor in choosing what transmission lines will be upgraded over the stated period of time. Owing to the studies which were conducted by (Chester, 2006) with respect to transmission congestion coming due to renewable generation and effects of climate policies on the regional interconnectors, Powerlink in Queensland will be another line that will require upgrading. A good reason why the transmission line will need upgrading is that due to economic forecasts which were recently published by local jurisdiction planner shows that Powerlink has had its maximum demand forecast on increasing trend. On the other hand, the report released by the National Transmission Network Development Plan (NTNDP) in 2010 predicted that Powerlink will have to generate a substantial renewable energy which will be needed to meet the Large-scale Renewable Energy Target (LRET) that is in line with the projected 2020 time frame. This demand will require effective transformation network planning. And such transformation network planning includes upgrading the transmission lines. On the same note, gas pipelines have been constructed with an aim of transferring gas to any GPG which is closer to any existing electricity transmission networks. Therefore while AEMO was exploring options, GPG need to be located either closer to the already existing transmission line or existing electricity transmission line but with its fuel supplied by a gas pipeline. And therefore as these factors stands, Powerlink in Queensland remains ideal transmission line to be upgraded. However, it is important to note that there are possible areas where transmission lines may be upgraded at. Will there be less upgrades needed/less money spent on upgrades? Regarding the amount of upgrades and money to be spent, a report issued in November 2010 by AEMO and ElectraNet indicates that there will be relatively low cost in upgrading transmission lines. This feasibility study took a case study of transmission lines around Heywood in Victoria. In this region for instance, there will be low cost incremental upgrade facilities required because the initially installed facilities can be used in enhancing new transmission lines. AEMO and ElectraNet also examined the economic and technical feasibility of upgrading Powerlink in Queensland. The results published indicate that with the already existing facilities, if upgrading is carried out it will provide a positive net profit at low cost with optimal timing reported to be between 2013 and 2017.50. Based on the 2008 QNI as reported in Queensland Competition Authority (QCA) shows that a study undertaken to investigate cost and extent of upgrades that will be needed on PowerLink and TransGrid revealed that figures that were reported as ‘economical”. The study estimates included mooted generation investments, Regulatory Test revisions and changes in the national RET scheme while coming up with the estimates. On economic viability, the report suggests that depending on the demand of consumers, upgrading Powerlink and TransGrid will be cost effective. On the other hand, the 2010 NTNDP gave results from its pre-feasibility study of NEMLink upgrading. Being a high capacity electricity transmission line, its upgrading cost can be a good benchmark. In determination of potential cost and benefits resources required for its upgrade, the analysis put in consideration two of the five NTNDP scenarios; high carbon price scenario, fast rate of change, as well as the Uncertain World. There finding showed that, “Maximising NEMLink through upgrading certain components will improve the net market at relatively low cost.” And just to concretise the above findings, (Combet, 2010) agrees that power generated from gas technologies have very low capital cost and time engineers need to construct when compared to others such as coal-fired plants. Besides, there will be less upgrades needed since these transmission lines carry benefits with them and can be build in modular form and when done so, they can be expanded with time so as to meet growing demands of Australian. Conclusively, capital outlay needed for upgrading in the next 10 or 15 years will be lower. References Abbott, M. (2002), 'Completing the introduction of competition into the Australian electricity industry', Economic Papers, 21(2): 1-13. Australian Energy Market Operator (AEMO) (2010), An introduction to Australia's national electricity market, July 2010, Accessed 12 February 2011: http://www.aemo.com.au/corporate/publications.html Australian Energy Market Commission (2010), Draft Rule Determination, National Electricity Amendment (Inter-regional Transmission Charging) Rule, 2 December 2010, p. 2. Australian Energy Regulator, Final Decision, New South Wales distribution determination 2009- 10 to 2013-14, April 2009, p. 10. Chester, L. (2006), 'The conundrums facing Australia's national electricity market', Economic Papers, 25(4): 362-77 (2007), What are the outcomes and who benefits from the restructuring of the Australian electricity sector? Unpublished PhD thesis, University of New South Wales. Available at: http://www.library.unsw.edu.au/~thesis/adt-NUN/public/adt-NUN20071017.113919 Combet, G. (2010), ‘Put a price on a cleaner future’, The Australian, 13 October 2010: 16. Council of Australian Governments (COAG) Energy Market Review, (2009), Towards a truly national and efficient energy market, AusInfo, Canberra, Final report (W. Parer, Chairman), 20 December. Department of Climate Change and Energy Efficiency. “Report of the Prime Minister’s Task Group on Energy Efficiency”. July 2010. Available http://www.climatechange.gov.au/en/publications/energy-efficiency/report-prime-ministers-taskforce-energy-efficiency.aspx 11 March 2011. IPART (2010) Review of regulated retail tariffs and charges for electricity 2010-2013, Electricity-Final Report, March 2010, p. 179. National Electricity Market (NEM) Carbon pricing: Implications for the Power and Utilities sector, PWC August 2011) National Electricity Market Management Company (NEMMCO) (2006), Annual report, Melbourne: NEMMCO (2003), 'Financial risk management', NEMMCO, Accessed 15 May 2005: http://www.nemmco.com.au/publications/whitebook/financial.htm Newbery, D.L. (2002a), Issues and options for restructuring electricity supply industries, University of Cambridge (Mass) and Cambridge-MIT Institute, DAE-CMI Working Paper (Cambridge-MIT Electricity Project), 0210 (2002b), 'Problems of liberalizing the electricity industry', European Economic Review, 46(4-5): 919-27. NSW Treasury (2004), A risk management proposal for New South Wales' electricity businesses, Research and information paper, TRP 04-1, Sydney: New South Wales Treasury. Pirrong, C. (2009), Market oversight for cap-and-trade: Efficiently regulating the carbon derivatives market, The Brookings Energy Security Initiative, Policy Brief 09-04 Powerlink Regulatory Test Final Report (27/9/10), ‘Maintaining a reliable electricity supply within Central Queensland’ http://www.powerlink.com.au/data/portal/00005056/content/06049001285550212538.pdf Queensland Competition Authority (QCA) (2010), Draft decision: Benchmark retail cost index for electricity 2001-12, December. Transend 2010 APR, Section 2.3.2, and Transend report: ’Future wind generation in Tasmania‘ published in May 2009. Read More