CARBON PRICE - MARKET REVIEW
PREPARED BY:
Market Operations and Performance
VERSION:
1
DATE:
8 November 2012
FINAL
CARBON PRICE - MARKET REVIEW
Contents
1
Executive Summary ......................................................................................... 3
2
NEM Pricing ..................................................................................................... 5
3
NEM Supply ..................................................................................................... 7
4
NEM Demand................................................................................................... 9
5
Generation Mix ................................................................................................10
6
Interconnector Flows .......................................................................................13
7
CO2-e Intensity Index ......................................................................................14
8
Gas Markets ....................................................................................................15
8 November 2012
Page 2 of 15
CARBON PRICE - MARKET REVIEW
1
Executive Summary
A carbon price of $23/tonne CO2-equivalent was introduced on 1 July 2012. Treasury modelling,
futures prices, and average CO2 intensity in the National Electricity Market (NEM), created an
expectation in the market ahead of July that the introduction of carbon pricing would increase
electricity spot prices by approximately $20/MWh, with little impact on gas markets. Additionally, in
the lead up to carbon pricing, concerns were raised in some areas that carbon pricing might lead to
supply shortages.
This report summarises the actual outcomes in the east coast wholesale electricity and gas
markets over the first months of carbon pricing. Caution should be used when extrapolating these
outcomes. The period covered is short for markets in which seasonal influences across quarters
have a major impact. Additionally, there were other major factors occurring just ahead of and
during the introduction of carbon pricing that makes interpretation of the outcomes less
straightforward.
Changes observed in the first three months of carbon pricing:

The increase in NEM spot prices was around $21/MWh. Spot prices increased sharply
with the start of carbon pricing then followed a declining trend until the start of October. The
average spot price in June 2012 was a little under $37/MWh. The average spot price after
1 July 2012 was just over $58/MWh. The increase was due to higher supply offers.

Hydro generation increased and coal-fired generation decreased. Hydro generation
increased its market share by nearly two percentage points after the start of carbon pricing
relative to June 2012, from 8.4% to 10.2%. In comparison, black coal generation lost nearly
two percentage points, from 53.0% to 51.1%, while brown coal generation lost nearly one
percentage point, from 24.1% to 23.3%.

Interconnector flows from Tasmania to Victoria and from Victoria to South Australia
increased. Increased exports from Tasmania were due to higher generation by Hydro
Tasmania. Increased imports to South Australia were largely due to the seasonal shutdown
of Northern Power Station.
Other operational outcomes:

The NEM has remained reliable and secure. Spot prices, generation mix and
interconnector flows were all affected by carbon pricing. However, there was no shortage of
power, and the system remained capable of withstanding unexpected failures to generators
or transmission lines.

Gas-fired generation was relatively static. Gas-fired generation did not significantly
displace coal-fired generation after 1 July 2012, and increased its market share by only one
percentage point relative to June 2012, from 11.0% to 12.0%. The relatively static amount
of energy supplied by gas-fired generation in the NEM may be due to the limited amount of
installed CCGT capacity, and the increased amount of hydro generation.

CO2-e intensity was largely unaffected in the first quarter of carbon pricing. The
average NEM CDEII for 2012 up to the Yallourn flooding was 0.92. The average NEM
CDEII since the Yallourn flooding was 0.85, a drop of 7.6%. The average NEM CDEII since
the start of carbon pricing was also 0.85.

AEMO’s gas markets were largely unaffected. There was no noticeable change in
wholesale gas markets after the start of carbon pricing. Gas-fired generation volumes were
relatively static, and since most gas is subject to carbon pricing when consumed, the
introduction of carbon pricing resulted in little change to wholesale market prices.
8 November 2012
Page 3 of 15
CARBON PRICE - MARKET REVIEW
Other matters occurring around the same time:

Of the various plant closures announced around the start of carbon pricing, only the
seasonal shutdown of Northern Power Station had a discernible effect on the NEM.
The shutdown of Northern contributed to higher spot prices in South Australia, and higher
transfers from Victoria to South Australia.

Flooding at Yallourn had a greater impact on the NEM than planned plant closures.
The flooding at Yallourn open-cut mine at the start of June noticeably affected spot prices,
generation mix, and interconnector flows. It also affected CO2-e intensity in the NEM.
8 November 2012
Page 4 of 15
CARBON PRICE - MARKET REVIEW
2
NEM Pricing
The volume-weighted average filtered NEM spot price for 1 July – 18 October 2012 (the most
recent data available at time of writing) was $58.13/MWh. This was $21.44/MWh higher than the
average price for 1 – 30 June 2012 of $36.69/MWh. The observed increase was close to the pre1 July 2012 forecast of around $20/MWh.
Figure 2-1 Volume-Weighted Average Filtered Daily Spot Prices 1 June – 18 October 2012
Figure 2-1 shows volume-weighted daily average NEM spot prices from 1 June – 18 October 2012,
with spot prices above $300/MWh and below $0/MWh removed.

The volume-weighted average multiplies spot prices by the volumes traded at each price,
sums the products, and divides by the total volume. Volume weighting is needed when
calculating an average price for the NEM. The NEM has five regions, so a simple average
of regional NEM prices would give a 20% weighting to the prices in each region. However,
two of the NEM regions – South Australia and Tasmania – each account for only around
5% of total demand. Giving South Australian and Tasmanian prices an equal weighting with
NSW, Queensland, and Victorian prices would produce an unrepresentative measure of the
typical spot price paid for electricity in the NEM.

High and low prices have been removed to better compare average prices before and after
1 July 2012. Spot prices in the NEM are volatile, and the periods being analysed are short.
Any price spikes could significantly distort the comparison. For example, a single spot price
at the market price cap would add around $10/MWh to the monthly average. Furthermore,
unusually high or low prices are unlikely to be caused by carbon pricing. Prices below
$0/MWh typically arise due to excess generation during periods of low demand, often in
conjunction with network constraints, while prices above $300/MWh typically arise due to
supply shortages, also often in conjunction with network constraints. It is therefore valid to
remove the outlying prices from this analysis.
Figure 2-1 shows a steep increase in average spot prices immediately after the start of carbon
pricing, followed by a declining trend until the start of October. There was also noticeable daily
volatility, even with the outlying prices removed. This level of volatility is normal in the NEM.
8 November 2012
Page 5 of 15
CARBON PRICE - MARKET REVIEW
Figure 2-1 shows greater variation in regional prices after the start of carbon pricing than there was
beforehand. This is because power transfers between some regions were higher after 1 July 2012,
and were restricted by the physical limits of the interconnectors more often. Flows from Tasmania
to Victoria frequently reached the northward limit on Basslink. This was due to higher hydro
generation from Hydro Tasmania, and was reflected in lower prices in Tasmania. Flows from
Victoria to South Australia were also restricted more often than before the start of carbon pricing.
This was due to the seasonal shutdown of Northern Power Station, and is reflected in higher prices
in South Australia.
The effects of flooding at the Yallourn open-cut mine are also visible in Figure 2-1. The flooding
occurred on 6 June 2012 and led to the shutdown of much of Yallourn Power Station. The flooding
caused a price increase of around $10/MWh. The flooding also had a noticeable impact on CO2-e
intensity in the NEM.
8 November 2012
Page 6 of 15
CARBON PRICE - MARKET REVIEW
3
NEM Supply
There was a clear increase in NEM supply costs on 1 July 2012. This was the primary reason for
the higher spot prices after the start of carbon pricing. The carbon price of $23/t CO2-e increased
marginal generating costs for all fossil-fuelled generation: brown coal, black goal and gas. Hydro
generation, which is not subject to carbon pricing, was able to increase its offer prices in response
and still be competitive.
Figure 3-1 shows a combined NEM offer stack for every dispatch interval from 1 June 2012 to
30 September 2012. The offer stack shows the volumes of capacity offered within a range of
colour-coded pricing bands. The upper and lower limits of each band were chosen to best illustrate
the differences before and after the start of carbon pricing. There is a clear rift in the band structure
on 1 July 2012. The changes are discussed below.
Figure 3-1 Combined NEM Offer Stack June – September 2012
The total capacity available in the NEM was relatively stable from June to August, declining slightly
in September. The raggedness in the aggregate profile is due mainly to variability in wind
generation. Volumes in the sub-zero (dark red) and >$100/MWh (pink and light green) bands were
also reasonably stable. The greatest changes occurred in the $0-100/MWh price bands.
The $0-15/MWh (green), $15-25/MWh (purple), and $25-35/MWh (teal) bands all shrank after the
start of carbon pricing. The $0-15/MWh price band more than halved, while the $15-25/MWh price
band effectively disappeared during the first few days of July.
Conversely, the $35-55/MWh (orange) and $55-100/MWh (light blue) price bands both greatly
expanded. These price bands went from being minor contributors to the offer stack in June to
being dominant contributors in the $0-300/MWh marginal-pricing zone from July to September.
Spot prices increased in line with these increases in offer prices.
A number of generator shutdowns were announced around 1 July 2012:

Morwell 3 (Energy Brix), 1 x 75 MW unit in Victoria

Playford B, 4 x 63 MW units in South Australia, which last generated in February 2012

Munmorah, 2 x 310 MW units in NSW, which last generated in August 2010
8 November 2012
Page 7 of 15
CARBON PRICE - MARKET REVIEW

Northern, 2 x 280 MW units in South Australia, which moved to a summer operating pattern
Only the seasonal closure of Northern Power Station had a noticeable impact on the NEM, as
discussed in the sections on pricing and interconnector flows. Northern has since resumed
operation.
On 11 October 2012 Stanwell Corporation announced the upcoming shutdown of two units at
Tarong Power Station (4 x 385 MW units). The units are expected to be withdrawn from service for
at least two years.
On 17 October 2012 EnergyAustralia (formerly TRUenergy) announced that it would reduce output
at Yallourn Power Station (4 x 380 MW units) by operating only three of its four units.
8 November 2012
Page 8 of 15
CARBON PRICE - MARKET REVIEW
4
NEM Demand
Changes to NEM demand were not a significant contributor to higher spot prices after 1 July 2012.
Figure 4-1 Average Monthly NEM Demand January – September 2012
NEM demand in September 2012 was lower than in June, July, and August 2012, as shown in
Figure 4-1. This is a normal seasonal variation, and is not likely to have been caused by higher
spot prices in the preceding two months. The lower September demand may have strengthened
the declining trend in prices during Q3 2012, but by then the pricing trend had already been
established.
NEM demand in Q3 2012 was 3% lower than in Q3 2011. Higher electricity prices, lower
manufacturing output, and increased rooftop solar photovoltaic installation have all contributed to a
decline in overall electricity demand in recent years, as shown in Figure 4-2.
Figure 4-2 Comparison of the 2012 NEFR and 2011 ESOO Annual Energy Forecasts for the NEM
Source: 2012 National Energy Forecasting Report
Declining demand was frequently cited as one reason for the generating plant closures announced
in 2012. The plant closures were specified in the section on supply.
8 November 2012
Page 9 of 15
CARBON PRICE - MARKET REVIEW
5
Generation Mix
The mix of fuels used to generate electricity in the NEM has changed since the start of carbon
pricing, but not always to the extent anticipated before 1 July 2012. Coal-fired generation reduced,
but the majority of change to brown coal generation occurred due to flooding in the Yallourn opencut mine before the introduction of carbon pricing. Hydro generation increased to very high levels.
Gas-fired generation remained relatively static. Possible reasons for this are discussed later in the
section.
Figure 5-1 Daily NEM Generation by Fuel Type 1 April – 18 October 2012
Figure 5-1 shows daily NEM generation by fuel type from 1 April – 18 October 2012. Roughly half
the generation in the NEM comes from black coal, around a quarter from brown coal, and
approximately one-eighth from each of gas and hydro. Wind generation supplies less than 2%.
Daily black coal generation displays a general decline after the start of carbon pricing on
1 July 2012. Some of this decline was due to lower demand with the onset of spring. (Daily black
coal generation showed a general increase in Q2 with the onset of winter.) Black coal generation
averaged 53.0% of market share from 1 – 30 June 2012, and 51.1% of market share from 1 July –
18 October 2012, a fall of just under two percentage points.
Daily brown coal generation shows a sharp fall following the Yallourn flooding on 6 June 2012 and
a slight decline thereafter. Yallourn did not resume normal baseload operation until October 2012.
Consequently it is hard to separate the effects of carbon pricing from the continuing impact of the
Yallourn flooding in this chart. Brown coal generation averaged 24.1% of market share in
June 2012, and 23.3% of market share after 1 July 2012, and fall of just under one percentage
point.
Both gas and hydro generation increased noticeably after the Yallourn flooding, and increased
slightly further after the start of carbon pricing. Daily gas-fired generation then declined over
Q3 2012 before picking up again in October. Gas-fired generation averaged 11.0% of market share
in June 2012, and 12.0% of market share after 1 July 2012, an increase of one percentage point.
On the other hand, daily hydro generation held reasonably steady over Q3 2012 before declining in
October. Hydro generation averaged 8.4% of market share in June 2012, and 10.2% of market
share after 1 July 2012, an increase of nearly two percentage points.
8 November 2012
Page 10 of 15
CARBON PRICE - MARKET REVIEW
Figure 5-2 Monthly Average Percentage Share of NEM Generation by Fuel Type June – September 2012
Figure 5-2 shows the monthly average share of NEM generation supplied by various fuel types
from June – September 2012. The increase in hydro generation in Q3 2012 is visible at the bottom
of the bars. Historically, hydro generation tends to be higher in winter / spring than in summer /
autumn. Furthermore, Snowy Hydro storages increased over 2011, while Hydro Tasmania’s lake
levels increased from a low of 17% in 2008 to over 60% at time of writing. Hydro Tasmania’s
storage levels continued to increase despite higher output after 1 July 2012.
There are questions over why gas-fired generation has not increased further. The high thermal
efficiency of combined-cycle gas turbine (CCGT) plant, coupled with a low CO2-e emissions
intensity, led to expectations that a $23/t CO2-e carbon price would allow gas to displace black and
brown coal as baseload generation. Figure 5-1 indicated that average daily gas-fired generation
was actually lower in September 2012 (post-carbon pricing) than in April 2012 (pre-carbon pricing).
Figure 5-3 Indicative Short-Run Marginal Costs by Fuel Type Pre- and Post-Carbon Pricing
Pre-Carbon Pricing
Post-Carbon Pricing
Combined Cycle GT
Black Coal - NSW
Black Coal - Qld
Brown Coal
$0/MWh
$10/MWh
$20/MWh
$30/MWh
$40/MWh
$50/MWh
$60/MWh
Figure 5-3 shows indicative short-run marginal costs (SRMCs) for fossil-fuel generation before and
after 1 July 2012. The numbers are based on generator offers for Tuesday 5 June 2012 (before the
flooding at Yallourn) and Tuesday 25 September 2012 (after the market turbulence at the start of
carbon pricing had dissipated). Hydro is not included because hydro generators typically price their
energy based on competitors’ offers and the opportunity cost of water, or else provide caps.
Figure 5-3 suggests that the relativities between different fossil fuel SRMCs have changed since
the start of carbon pricing. The SRMC ranges are indicative, there is still appreciable overlap in the
ranges, and the ranges do not indicate the volumes available at each price in the range. However,
8 November 2012
Page 11 of 15
CARBON PRICE - MARKET REVIEW
the relativities imply that CCGT should be able to compete more readily with coal as baseload
generation.
It is therefore possible that the relatively static amount of gas-fired generation observed since the
start of carbon pricing is due to limitations on installed capacity. If the relatively static amount of
gas-fired generation is due to limits on installed CCGT capacity, then the proportion of energy
supplied by gas in the NEM is unlikely to increase appreciably until more CCGT plant is built.
However, it is also possible that growth in gas-fired generation was dampened by the very high
levels of hydro generation in Q3 2012. Daily gas-fired generation started increasing at the
beginning of October, around the same time as hydro generation started falling. At time of writing
there is insufficient data to determine whether these changes were causal or coincidental.
Wind generation was unaffected by the Yallourn flooding or the start of carbon pricing. Wind
generation is either unscheduled or generally offers power at the market floor price. The key
determinant of wind generation – after the wind itself – is the amount of installed generating
capacity, which to date has been driven by renewable energy targets. Carbon pricing may have an
impact on installed wind generation capacity in the longer term.
8 November 2012
Page 12 of 15
CARBON PRICE - MARKET REVIEW
6
Interconnector Flows
Prices, generation mix and interconnector flows are all interrelated. The major changes to
interconnector flows since the start of carbon pricing were increased transfers from Tasmania to
Victoria, and increased transfers from Victoria to South Australia.
In the case of transfers between Tasmania and Victoria, average northward power flows on
Basslink in Q3 2012 were nearly twice those in June 2012. Furthermore, average flows in
June 2012 were already elevated because of the Yallourn flooding. Output from Hydro Tasmania:

Significantly increased northward transfers on Basslink.

Contributed to an increase in hydro generation, discussed in the section on generation mix.

Led to Tasmanian spot prices that were frequently lower than the NEM average, as
discussed in the section on pricing.
Northward flows on Basslink decreased in October, in line with the decrease in hydro generation
observed in the first half of that month.
In the case of transfers between Victoria and South Australia, the key change was the seasonal
closure of Northern Power Station as it moved to an October – March operation. The closure of
Northern around the start of carbon pricing meant its generation needed to be replaced by gasfired generation or imports. Gas-fired generation has been relatively static, and imports from
Victoria increased accordingly. This also led to South Australian spot prices that were frequently
higher than the NEM average, discussed in the section on pricing. Power transfers from Victoria to
South Australia have decreased now that Northern has resumed generation.
8 November 2012
Page 13 of 15
CARBON PRICE - MARKET REVIEW
7
CO2-e Intensity Index
The carbon dioxide equivalent intensity index (CDEII) measures average tonnes of CO2-equivalent
emissions per MWh of generation, and depends on the mix of dispatched generation. The CDEII
essentially gives a volume-weighted average measure of emission factors of all generation plant,
where the weighting is based on generation volumes. As more generation is supplied from lower
emissions plant, the CDEII decreases.
In the NEM, approximately three-quarters of demand is supplied by coal-fired generation, and
hydro generation and other renewables contribute only a relatively small proportion of total energy
to the NEM. Additionally, when demand in the NEM drops, cheaper baseload coal often
contributes a higher share of the supply.
This results in volatility in the CDEII from day to day, as evidenced in Figure 7-1.
The NEM CDEII has been generally lower after the start of carbon pricing than before it. This is
because coal-fired generation has reduced and hydro generation has increased. However, the
largest change in the CDEII occurred prior to the start of carbon pricing following the Yallourn
open-cut mine flooding.
Figure 7-1 Daily Average NEM Carbon Dioxide Equivalent Intensity Index 1 January – 13 October 2012
Figure 7-1 shows the daily average NEM CDEII from 1 January – 13 October 2012 (the most
recent data available at time of writing). There was a noticeable fall in the CDEII after the Yallourn
flooding on 6 June 2012, as the brown coal generation was replaced by other generation. Yallourn
station has not generated at full output in Q3.
The average NEM CDEII for 2012 up to the Yallourn flooding was 0.92. The average NEM CDEII
since the Yallourn flooding was 0.85, a drop of 7.6%. The average NEM CDEII since the start of
carbon pricing was also 0.85.
8 November 2012
Page 14 of 15
CARBON PRICE - MARKET REVIEW
8
Gas Markets
There was no noticeable change in the wholesale gas markets operated by AEMO after the start of
carbon pricing. Gas-fired generation volumes were relatively static, and since most gas is subject
to carbon pricing when consumed, the introduction of carbon pricing resulted in little change to
wholesale market prices.
Most of the combined-cycle generation that could perform a baseload role is located outside the
STTM hubs in Adelaide, Sydney and Brisbane, so changes in operation of this plant would not be
seen in the markets. Most of the gas-fired generation in the Victorian wholesale gas market is
open-cycle peaking plant, and as result, the introduction of carbon pricing has not had an
observable impact on operations.
8 November 2012
Page 15 of 15