Electricity Price Impact Sub-Group Addendum to the Final Report of the Technical Advisory Group — Stationary Energy and Industrial Process Component of the New Zealand Emissions Trading Scheme

November 2008

Electricity Price Impacts

The purpose of the sub-group was to identify the electricity price impact of the introduction of the New Zealand Emissions Trading Scheme (‘NZETS’), and develop and recommend a methodology by which the Minister could compensate eligible firms for the increase in the electricity price through the transitional allocation of NZUs.

The Approach

The sub-group considered how to develop a robust methodology for allocation.  Through discussion it was agreed that the period of focus should be Commitment Period I (2010-2012 for this sector) but consideration of how the methodology could transfer into a subsequent post 2012 allocation plan was worthwhile.  It was agreed that the recommended methodology should be part of any review process of the NZETS prior to the commencement of the next commitment period.

As noted in the SEIP TAG final report, the sub-group requested that the Ministry of Economic Development (MED) undertake or commission two separate pieces of analysis to assess the electricity price impact on eligible firms in the period 2010-2012.

In consideration of the joint GEM (Generation Expansion Model) and the SDDP (Stochastic Dual Dynamic Programme) modelling the sub-group is of the view that the modelling fairly determines an electricity price impact on participants of the introduction of the NZETS, and that as a result of this modelling a reasonable methodology for allocation has been derived.

The modelling ascertained a “non-ETS” base case electricity price scenario (i.e. carbon price = $0) and compared it to a number of ETS carbon price-inclusive scenarios.  The base case was representative of existing generation, known new build coming on line  plus some additional capacity to meet load growth for the period 2010-2012. The NZETS carbon inclusive scenarios included carbon prices of NZ$20, $40, $60 & $80/tCO2.

It should be noted that the following assumptions were made:-

  • modelling was completed utilising the available historical hydrological inflow sequences (i.e 74 years) and the average results were used for calculating the emissions factor
  • the carbon cost has been included as an addition to relevant plant’s assumed fuel cost (2010 costs are $6.50/GJ for gas and coal $4/GJ)
  • some thermal units were assumed to have a “must-run” tranche reflecting fuel contracts and operational constraints
  • modelling reflects only the incremental cost of generation expansion. Further costs that may arise from additional electricity transmission or ancillary services, as may be needed under high renewable scenarios, have not been incorporated into the modelling.

The outcome

The modelling converted the incremental increase in the electricity price into an electricity factor, which for all scenarios remained relatively constant over the 2010-2012 period.  The average electricity factor derived for the period 2010-2012 for all the carbon inclusive scenarios was estimated at 0.52 NZUs/MWh.

Completion of the modelling and applying this in accordance with the Climate Change Response (Emissions Trading) Amendment Act 2008, the sub-group proposes the following methodology for determining the allocation of emission units to eligible firms to compensate for an electricity price impact:-

A * 90% * B = NZUs

Where:-
A = derived electricity factor (0.52 tCO2/MWh))
B = eligible firms’ annual consumption of electricity (in MWh) for 2005

Recommendation:  The sub-group agree that the methodology is broadly representative of the electricity price impact resulting from the introduction of the NZETS for the first commitment period (2010-2012), and therefore recommends that the methodology (outlined below) is incorporated into the allocation plan process.

NZUs allocated = 0.52 * 90% * 2005 electricity use in MWh of eligible firms

General comments

In addition to the recommended methodology, the industry members of the sub-group would like to make the following observations for general consideration:-

  • Transmission and ancillary services costs are likely to increase under a strong or high renewable future, with a consequential affect on wholesale electricity price.  It is the view of the group that this needs to be taken into consideration in any future analysis.
  • Assumptions around the principle of pass through (of carbon costs by thermal generators) are not as simple as originally thought by some members of the group. Modelling predicts that under higher carbon prices the utilisation or load factor of higher emitting thermal plant will decline dramatically. Under low utilisation, the ability of such plant to recover all of its operational costs (including the cost of carbon) will be limited. The extent of this issue, the affect it has on the viability of affected thermal plant and whether it warrants compensation for potentially stranded assets requires further investigation1.
  • Timely completion of the allocation plan, and hence the determination of the allocation of units to eligible firms is imperative to provide industry a level of “business certainty”.

1 This issue was partly considered in the select committee deliberation on the NZETS where officials advised the committee that under high carbon price scenario, thermal generation would be constrained, and either increased price volatility, plant retirement or a change to the market design to incorporate capacity payments (to compensate generators for lower wholesale revenues) could result. The potential for compensation for stranded assets was not discussed during the select committee consideration of the NZETS.

Last updated: April 2009