No surprises from carbon price 3 months on

The Australian Energy Market Operator today released an analysis of the impacts of the carbon price on the eastern seaboard wholesale electricity market (the NEM) over its first three months of operation. This provides some interesting charts for our charts of the week

The findings in short from their analysis are:

-There was a clear discernible increase in wholesale electricity prices of around $21 per megawatt-hour (MWh), not all that far off general modelling and market expectations of about a $20 per MWh rise. The average wholesale market spot price in June 2012 was a little under $37/MWh. The average spot price after 1 July 2012 was just over $58/MWh.

-Hydro generation lifted, coal generation decreased and gas output was pretty much the same.

-Assessing the impact on reducing the overall emissions intensity of the NEM was complicated by flooding that took out generation at the Yallourn brown-coal generator a few weeks before the carbon price commenced on July 1.  The average NEM generation emissions intensity for 2012 up to the Yallourn flooding was 0.92 tonnes of CO2 per MWh and after the flooding it was 0.85tCO2.  This has remained the case over the first 3 months of the carbon price.

-Supply of electricity and market operation overall remained “reliable and secure”.

Looking at prices in more detail the chart below shows average prices per MWh across the entire NEM in red, with extreme price event volatility filtered out (prices above $300 and below $0) to see general trends. In the first week there was a huge spike driven by an unusual combination of factors unrelated to the carbon price (detailed by WattClarity: basslink interconnector falling over, low wind in SA, other transmission constraints).  Since then prices quickly dropped away and have reached a degree of stablility at around $50 to $60.

Source: AEMO

If we then dive down into the next level of detail the chart below which provides the range of bids the generators offered their capacity, we can see a clear step change before and after the introduction of the carbon price. The green band of bids of $15/MWh and purple band of $25 shrink decisively, and blue bids above $35 also shrink but less significantly. These are largely replaced with bids above the $55 range in orange as the dominant determinant of end market prices. 

Source: AEMO

Really all of this isn't rocket science. The emissions intensity of the marginal generator in the NEM for most periods of time is a black coal generator in NSW with about 0.9 tonnes of CO2 emitted per MWh. Multiply 0.9 by a $23 carbon price and guess what you come up with - $20.70, pretty close to the $21 estimate AEMO has calculated as the impact on the wholesale market.

Looking at change in generator mix in the chart below there is no particularly clear pattern.

Source: AEMO

Black coal output has declined but according to AEMO this is a relatively normal seasonal effect as demand for electricity for heating drops away.  Hydro is up significantly initially which some have speculated could be due to them banking up water in anticipation of higher prices after July 1. Whether this higher output can be sustained is largely a function of rainfall rather than the carbon price.  

Complicating analysis is the step down in brown coal output prior to the carbon price due to flooding at Yallourn power station.  Based purely on operating cost and carbon intensity, one would have thought that this would have been a temporary and Yallourn would come back up to full output. However this hasn't happened and the owner, EnergyAustralia, announced recently they would take one of the generating units out of operation.  While Yallourn has low operating costs it is old and highly emissions intensive, therefore keeping the plant operating becomes increasingly challenging.  The flood may have acted as a circuit breaker that forced a decision from management about whether they should sink further money into a plant that ultimately should be put out to pasture if we're serious about addressing carbon emissions.