Australia's energy options: policy choice not economic inevitability

Executive summary A reliable and affordable supply of energy is a fundamental component to a vibrant economy. As a major source of commodities, including significant known reserves of low carbon emission energy sources, Australia is well positioned to supply the world’s future energy needs. In order for that to occur, Australia needs to examine all its energy options. The Government released a Draft Energy White paper in November 2011. CEDA considers this an opportunity that the Government should not miss in ensuring that Australia not only develops its energy resources for national economic gain but also to guarantee access to reasonably priced energy for Australian consumers. CEDA determined it would contribute to this significant debate by undertaking a year-long research project that examined Australia’s future energy options. As part of this research project CEDA published three policy perspectives that addressed Australia’s nuclear, renewables and efficiency and unconventional energy options. Recommendations in each of these perspectives were made with the specific aim of providing policy-makers with evidence-based research on the various energy sources either currently available or being actively explored and researched, often funded through the public purse. Fundamental governance decisions underpinned by strong economic policy arguments were at the centre of these recommendations. This final research report canvasses one of the more significant current debates associated with the availability of energy – the Australian electricity market. It puts forward a series of recommendations designed to enhance this element of the energy sector’s efficiency, security and effectiveness by placing consumers at the centre of the energy market and a reform agenda is proposed. Related identifier: ISBN 0 85801 284

Australian Residential Solar Feed-in Tariffs: Industry Stimulus or Regressive Form of Taxation?

Feed-in Tariffs (FiT) for residential photovoltaic solar technologies are available in most Australian jurisdictions. Financial incentives under FiT are in addition to those provided by the Small-Scale Renewable Energy Scheme which forms part of the national 20% Renewable Energy Target. Little attention has been paid to the welfare impacts of FiT on retail electricity prices and social policy objectives. Our analysis indicates that current FiT are a regressive form of taxation. By providing estimates of household impact by income groupings, we conclude that wealthier households are beneficiaries and the effective taxation rate for low income households is three times higher than that paid by the wealthiest households.Feed-in Tariffs, Electricity Prices

General equilibrium impact evaluation of food top-up induced by households’ renewable power self-supply in 141 regions

This article employs a global computable general equilibrium economic model (GTAP-E-PowerS) to examine the impact on the world economy if households in every country self-supply power to meet 30–100% of residential demand, with subsequent monetary savings diverted to consuming more food. Results show the power generation sector reduces output levels by 14%–42% across various countries if households 100% self-supply. Coal mining sectors are adversely affected in numerous countries with contractions of 9%–28% ($6,086-$18,935 million) in the United States and 4%–13% ($2,505–$8,143 million) in Australia. Improved outcomes for the world environment are found with reductions of CO2e emission levels of 2.24%–7.38% (or 924–3,042 MtCO2 equivalent). The agriculture and food-processing sectors expand significantly in many countries but also cause major increases in land prices, particularly in land-scarce countries in Middle East, Europe, Japan, and Taiwan. Results also show the security of food and energy supply are improved along with environmental gains from lower emission levels. However, the energy sector is adversely affected and those countries with a heavy reliance on fossil fuel extraction and mining activities experience significant reductions in real GDP

On the Stability of Energy-Only Markets with Government-Initiated Contracts-for-Differences

Rising levels of variable renewable energy (VRE) in Australia’s National Electricity Market have been driven by a 20% renewable energy target by 2020. This certificated renewable portfolio standard has successfully driven new investment, allocated risk amongst buy- and sell-side market participants and met overall policy objectives. But a policy vacuum for achieving long-term CO2 emission targets post-2020 has led to sub-national and, potentially, national governments initiating contract-for-differences (CfDs) to drive further investment activity in new plant—with virtually no coordination between the jurisdictions. In a gross pool energy-only market setting, replacing on-market transactions between retailers and generators with off-market transactions between governments and generators may have unintended side-effects vis-à-vis market stability. In this article, an energy-only gross pool is modeled with rising levels of off-market government-initiated CfDs, with a specific focus on spot and forward contract market outcomes. Model results show that as VRE plant enters, coal plant exit, and on-market firm hedge contracts historically supplied by coal plant are progressively replaced by off-market CfDs. In the event, while a tractable equilibrium can be maintained in the spot market, shortages of “primary issuance” hedge contracts emerge in the forward market. Any shortage of hedge contract capacity is likely to raise forward contract price premiums above efficient levels, force price-elastic customers into accepting unwanted spot market exposures and may unintentionally foreclose non-integrated (2nd tier) energy retailers, all of which harms consumer welfare. A wide-ranging program of government CfDs may therefore not be compatible with an energy-only market design

Resource Adequacy, Capital Adequacy and Investment Uncertainty in the Australian Power Market

Ignoring the importance of capital markets risks overlooking one of the most fundamental drivers of investment and price in the utilities industry. While the worst effects of the financial crisis are beginning to subside, the residual fallout will be more than a passing fad for energy utilities.

Excess Entry in the Deregulated Queensland Power Market

When Queensland's electricity industry was deregulated in 1998, it faced supply shortfalls. Since then, a substantial number of new capacity proponents have emerged. If all proposed projects were to proceed as planned, reserve plant margin would rise from an acceptable 30 per cent to about 100 per cent, representing excessive oversupply. Incumbents appeared to follow strategies typically associated with the theory of barriers to entry, viz. limit pricing and creating excess capacity. However, it would seem that such strategies have failed, with new entrants continuing to emerge. The mix of plant entering the market is likely to comprise predominantly low-cost, inflexible baseload plant. The initial consequences are likely to be intense supply-side price competition, which will provide windfall gains to consumers, while producers (viz. debtholders and bondholders) incur extensive losses, at least until a number of incumbent plants and adjoining mines are closed down, which will have its own welfare implications.Electricity, Entry, Pricing

Vertical integration, credit ratings and retail price settings in energy-only markets: Navigating the Resource Adequacy problem

Energy-only markets are prone to the Resource Adequacy problem, i.e. the timely entry of new plant. The reason for this is that competitive energy-only markets struggle to be remunerative given reliability constraints and market price caps. Historically, Australia's 45,000 MW National Electricity Market has managed to navigate this well understood problem, albeit with government entities directly or indirectly responsible for a surprisingly large 73% of all new plant investments to 2007. But government involvement in direct investment has now ceased. So what will enable the industry to navigate the Resource Adequacy problem into the future? Quite simply, industrial organisation, the presence of merchant utilities with investment-grade credit ratings and setting any regulated retail prices or 'price to beat' with an LRMC floor.Resource Adequacy Vertical integration Electricity prices

On Emissions Trading, Toxic Debt and the Australian Power Market

Implementation of emissions trading will have profound effects on the financial stability of coal generators. While the impact on equity capital is well understood, the potential fallout in the market for project finance is not. During the current global financial crisis, the form and quantum of transitional assistance to coal generators will be crucial to ensure ongoing participation of domestic and foreign project banks in the power markets.