1
2
Crawford School of Public Policy
Centre for Climate Economic & Policy
Brown coal exit: a market mechanism for regulated
closure of highly emissions intensive power stations
CCEP Working Paper 1510
November 2015
Frank Jotzo
Crawford School of Public Policy, Australian National University
Salim Mazouz
EcoPerspectives Pty Ltd
Abstract
In this paper we propose a market mechanism for regulated exit of highly emissions
intensive power stations from the electricity grid. The starting point is that there is surplus
capacity in coal fired power generation in Australia. In the absence of a carbon price
signal, black coal generation capacity may leave the market instead of high emitting
brown coal power stations. We lay out options for a mechanism of regulated power
station closure using a market mechanism. Plants bid competitively over the payment
they require for closure, the regulator chooses the most cost effective bid, and payment
for closure is made by the remaining power stations in proportion to their carbon dioxide
emissions. This could overcome adverse incentive effects for plants to stay in operation in
anticipation of payment for closure and solve the political difficulties and problems of
information asymmetry that plague government payments for closure and direct
regulation for exit. We explore the issues theoretically and provide empirical illustrations.
These suggest that closure of a brown coal fired power station in Australia could yield
emissions savings at costs that are lower than the social benefits. The analysis in this
paper is applicable to other countries.
|T H E A U S T R A L I A N N A T I O N A L U N I V E R S I T Y Keywords:
Greenhouse gas emissions, electricity, brown coal, early retirement, regulation, market
mechanism, contract for closure.
JEL Classification:
Q48, Q58
Suggested Citation:
Jotzo, F. and Mazouz, S. (2015), Brown coal exit: a market mechanism for regulated closure of
highly emissions intensive power stations. Economic Analysis and Policy, (Journal of the
Economic Society of Australia (Queensland)), forthcoming.
Address for Correspondence:
Frank Jotzo,
Crawford School of Public Policy,
Australian National University,
Lennox Cr, Canberra ACT 0200, Australia,
[email protected].
The Crawford School of Public Policy is the Australian National University’s public policy school, serving
and influencing Australia, Asia and the Pacific through advanced policy research, graduate and executive
education, and policy impact.
The Centre for Climate Economics & Policy is an organized research unit at the Crawford School of Public
Policy, The Australian National University. The working paper series is intended to facilitate academic and
policy discussion, and the views expressed in working papers are those of the authors. Contact for the
Centre: Dr Frank Jotzo, [email protected]
3
Browncoalexit:amarketmechanismforregulatedclosureofhighlyemissionsintensive
powerstations
FrankJotzo,SalimMazouz
ForthcominginEconomicAnalysisandPolicy
Abstract
Inthispaperweproposeamarketmechanismforregulatedexitofhighlyemissions
intensivepowerstationsfromtheelectricitygrid.Thestartingpointisthatthereissurplus
capacityincoalfiredpowergenerationinAustralia.Intheabsenceofacarbonpricesignal,
blackcoalgenerationcapacitymayleavethemarketinsteadofhighemittingbrowncoal
powerstations.Welayoutoptionsforamechanismofregulatedpowerstationclosure
usingamarketmechanism.Plantsbidcompetitivelyoverthepaymenttheyrequirefor
closure,theregulatorchoosesthemostcosteffectivebid,andpaymentforclosureismade
bytheremainingpowerstationsinproportiontotheircarbondioxideemissions.Thiscould
overcomeadverseincentiveeffectsforplantstostayinoperationinanticipationofpayment
forclosureandsolvethepoliticaldifficultiesandproblemsofinformationasymmetrythat
plaguegovernmentpaymentsforclosureanddirectregulationforexit.Weexplorethe
issuestheoreticallyandprovideempiricalillustrations.Thesesuggestthatclosureofabrown
coalfiredpowerstationinAustraliacouldyieldemissionssavingsatcoststhatarelower
thanthesocialbenefits.Theanalysisinthispaperisapplicabletoothercountries.
Keywords:greenhousegasemissions,electricity,browncoal,earlyretirement,regulation,
marketmechanism,contractforclosure.
Contactdetails:FrankJotzo,CrawfordSchoolofPublicPolicy,AustralianNationalUniversity,
LennoxCr,CanberraACT0200,Australia,[email protected],
EcoPerspectives,[email protected].
Acknowledgements:
The idea laid out in this paper was discussed in outline form with a number of
colleagues and experts. We also received helpful referee comments. Thanks to all.
4
1. Introduction
Manyoftheworld’selectricitygridshaveageingandhighlycarbondioxideemissions
intensivecoal-firedpowerplants.Theshortrunmarginalcostsofthehighlyemissions
intensivebrowncoal(lignite)powerplantsarelowcomparedtoblackcoal,gasandliquid
fuelpowerplant(buthigherthanrenewables).Thisisthecasesincethereoftenisno
alternativeuseforthebrowncoalminedinproximitytothepowerstations.Consequently
browncoalplantsoperateforsignificantperiods,increasingtheemissionsintensityof
electricitysupply.ThisisthecaseforAustralia’sfleetofbrowncoalfiredpowerstations
(Ellistonetal.,2013;Byrnesetal.,2013),andsimilarexamplesexistinothercountries(for
exampleGermany,seeIEA,2011;TraberandKemfert,2011).
Wherethereissufficientavailablecapacityinlower-emissionsplants,theseplantscouldbe
closeddownwithbenefitsintermsoflowercarbondioxideemissions,andlessenedlocalair
pollutionandotherbenefitsforlocalamenity,includingfromceasingassociatedopen-cut
miningactivity.Howeversuchclosuremaynotnecessarilyhappenwithoutpolicy
interventioneveninthefaceofovercapacity.Firstly,browncoalfiredplantstypicallyhave
lowershort-runmarginalcostsofoperationthanthelower-emissionsalternativeofblack
coalandgasplants.Thesemarginalcostsdominateproductiondecisionsbecause
investmentsweremadeinthepastandarenowsunk–inotherwords,onceplantsand
minesareestablished,theoperatingcostsofcoalplantsaremainlyafunctionoffuelcosts.
Secondly,thereisageneralimpedimenttoexit:ifoneplantexitsthemarket,theremaining
oneswillreceivehigherrevenues.Thisactsasadisincentivetoclosureaseveryoperatorhas
anincentivetodeferclosureinthehopethatanotherplantwillclose.Evenifthegainsto
plantsremainingonthegridweretooutweightheforegonegainstotheexitingplant,the
ownersofpowerplantswilltypicallynotbeabletoachievesuchanoutcomewithout
regulation,eitherbecausetheycannoteffectivelyco-ordinateorbecausecompetitionlaw
precludesthemfromsuchcoordinatedaction.
TheAustralianNationalElectricityMarket(NEM,thegridspanningthecountry’sEasternand
Southernstates)hasovercapacity,asestablishedbyAEMO(2015).Inrecentyears,overall
electricitydemandhasreducedwhilerenewableelectricitygeneration–inparticularwind
power–hasbeenaddedtothesystem(Figure1).From2007to2014,averagecapacity
utilisationfactorsforblackcoalplantsfellfrom63%to53%,forbrowncoalfrom79%to
70%,andforgasfiredgenerationfrom31%to26%(datafromAEMOviaNEMSight).
Inthiscontext,theCouncilofAustralianGovernmentsEnergyCouncilconsideredthemerits
ofrevivinga‘paymentforclosure’policypursuedbythepreviousgovernment(COAG2014).
Thispolicyaimedatprovidingfundstoa(browncoal)generatortoretiretheirgeneration
capacitywithaviewtoeasingtheexcesscapacityintheNEMaswellasreducingemissions.1
Avariantofpaymentforclosureofbrowncoalpowerplantsisexpectedtobeimplemented
inGermany,withpaymentsof230millioneurosperyearoverasevenyearperiodfrom
electricityconsumerstoplantoperatorsinreturnfortaking2.7GWofplantcapacityoutof
productionandplacingthestationsinreserve(DeutscheWelle2015).
1
Underthe‘paymentforclosure’scheme,governmentwastomakenegotiatedpaymentstooneor
moreplantsinreturnfortheirclosure.Theschemewasannouncedbutnotimplemented.
Governmentcitedoverlyhighdemandsforpaymentsasthereasonfornotfollowingthrough.
5
Figure1:EnergysentoutintheNEM,Twh,2007and2014
200
Others
180
160
Wind
140
120
Hydro
100
Gas
80
60
BrownCoal
40
20
BlackCoal
0
2007
2014
Data:ThethirdpartysoftwareNEMSightfromCreativeAnalyticswasusedtoextractAEMOdata(Creative
Analytics2015)
Intheircommuniquédated11December2014,theCOAGEnergyCouncilstatedtheirlackof
supportforacontract-for-closurepolicy:
“…Nordoes[thecouncil]supportassistancetogeneratorstoexitthemarket.The
Councilconsidersitisforthemarkettoprovidesignalsforinvestmentanddeinvestmentforgeneration,andopposesthetransferralofthecostsofretiringassets
ontoconsumersortaxpayers.”
TheAustralianEnergyMarketCommission(AEMC2015)alsoarguedagainstinterventionto
facilitateplantexit:
“Theevidencesuggeststhatanybarrierstoexithavenotdeterredgeneratorsfrom
commencingvariousstagesofexitorthefullretirementofplant.Thiswouldsupport
leavingittothemarkettodeterminewhichplantshouldexit”.
Thesestatementsnotwithstanding,theissueofovercapacityandthepossibilityof
governmentinterventiontoachieve‘orderly’exitremainsontheagenda.Forexample,
Nelsonetal.(2015)assessbarrierstoexitandsuggestvariouspossiblepolicyinterventions
toameliorateoutcomescomparedwithleavingmarketparticipantstomakeexitdecisions.
Theyarguethatsomeoperatorsmothballtheirplantsratherthanshuttingthemdown
permanently,andthatthisdetractsfrominvestmentinrenewablegeneratingcapacity.
Nelsonetal.(2015)seesignificantbarrierstoexitandaroleformeasurestofacilitate
closureofpowerplantstoimprovemarketstabilityandinvestmentconditionsinthe
electricitysector.
Suchconsiderationsareprimarilyconcernedwithmarketstabilityandinvestment
conditions,andgenerallydonottakeaccountofclimatechange,orindeedofanyother
externalities.Acaseforgovernmentinterventioncouldbemadeongroundsofgreenhouse
gasemissions.Forinstance,blackcoalinAustraliahasanaverageemissionsfactorofjust
over0.9tCO2perMWhgenerated,whereasbrowncoalbasedgenerationinAustralia
rangesfrom1.2to1.5tCO2perMWh,withanaverageof1.3tCO2perMWh.These
emissionsfactorshavestayedlargelyunchangedthroughtimeforeachtechnology,however
thetotalemissionsintensityintheNEMfellduetothechangesincompositionespeciallythe
increaseinrenewablesgeneration(Figure2).Capacityfactors–theshareofactualpower
outputcomparedtowhatitwouldbeiftheplantsraneveryhouroftheyearatfullcapacity
6
–hasdeclined,forbrowncoalfiredplantsfrom79%to70%from2007to2014,andfrom
63%to53%forblackcoalfiredplants,onaverage(Figure3).
Figure2:EmissionsintensityintheNEM,tCO2/Mwh,2014
1.6
1.4
1.2
1.0
0.8
0.6
0.4
Total(incl
renewables)
Gas,average
BlackCoal,
average
LoyYangB
LoyYangA
Yallourn
0.0
Hazelwood
0.2
Victoria'sbrowncoalplants
Data:ThethirdpartysoftwareNEMSightfromCreativeAnalyticswasusedtoextractAEMOdata(Creative
Analytics2015)
Figure3:CapacityfactorsintheNEM,2007and2014
0.9
0.8
2007
0.7
2014
0.6
0.5
0.4
0.3
0.2
0.1
0.0
BrownCoal
BlackCoal
Gas
Data:ThethirdpartysoftwareNEMSightfromCreativeAnalyticswasusedtoextractAEMOdata(Creative
Analytics2015)
Ifmarketoutcomesledtotheclosureofblackratherthanbrowncoalgenerationcapacity,
emissionscouldbesignificantlyhigherthanifbrowncoalplantsclosed.
Thatsaid,aprimafaciecaseforinterventiondoesnotmeanthatanyinterventionthat
achievesthedesiredprimaryoutcomeiswelfareenhancing.Inthecaseofthepaymentfor
closurescheme,Rieszetal.(2013)questionitsmeritsandconcludethatitshouldnotbe
pursued.Theirmainargumentisthatpaymentsforclosuremaycreateaviciouscyclethat
exacerbatesbarrierstoexit.Theyarguethatpowerplantoperatorswillbelookingtoget
7
paidtoexitoncetheexampleisset,postponingexitbecauseofperceivedchancesoffuture
governmentpayments.
Policyinterventionaimedtofacilitateearlyretirementofpowergenerationplantmustbe
welldesignedandimplemented.Ifnotthereisthedangerofwastingtaxpayers’or
consumers’moneyandintroducingperverseincentives.
Economictheoryholdsthatabsentspecificdistortionsormarketfailures,thefirst-best
policyinterventionisacarbonprice,throughanemissionstradingscheme,carbontaxor
similararrangement,especiallyifitgeneratesrevenuethatcanbeusedtoreduceother
taxes(HelmandPearce1990,Parryetal1999).Acarbonpriceatasufficientlevelcanresult
insocietallyefficientexitofhigh-emissionsplants,astheoperatingcostsofthehighest
emissionsintensiveplantsareincreasedbythegreatestamount.Bycontrast,additionof
renewableenergycapacitymaynotresultinefficientexitoutcomesasitwilltendtoreduce
revenueforallexistinggeneratorsandmaydrivelower-emissionsplanttoclose.
AcarbonpricewasinplaceinAustraliaduring2012-14butwasabolished.Existingpolicies
aimedatreducingemissionsincludetheRenewableEnergyTarget(aportfoliostandardwith
tradablecertificates)andtheEmissionsReductionsFund(agovernmentfundedschemeto
subsidiseagreedactionstoreduceemissions).Neitheroftheseresultsinincentivesfor
emissionsintensivepowerplantstoclose.YetAustraliahasanemissionstargetinplaceofa
26to28%reductioninemissionsfrom2005to2030.Tobeontracktomeetthistarget
throughdomesticreductionswouldrequirecomprehensivechanges,andwouldlikely
includethecessationofusingbrowncoalforelectricitygeneration(Denisetal2014).
Intheabsenceofaneffectivecarbonpricingsignal,closurebyoneormoreplantscouldbe
achievedthroughdirectregulation.Howeverinlightofrecentexperiencewiththepolitical
economyofclimatepolicyinAustraliaitappearsunlikelythatagovernmentwouldchoosea
pureregulatoryapproachthatsinglesoutpowerstationsandimposesthefullcostofearly
closureontheownersofthatstation.Thealternativeofgovernmentpaymentsforclosure
suffersfromthedownsideslaidoutaboveandwouldinvolveundesirableon-budget
transfers.
Inthispaper,weinvestigateoptionsforpolicyapproachesthatovercomethedifficultiesof
directregulationandgovernmentsubsidiesforclosure.Weproposeamarketmechanism
forregulatedclosureofhighlyemissionsintensivepowerstations.Theschemewouldusea
marketmechanismtoidentifythemostcosteffectiveplanttoclosedownandsourcethe
paymentsfromtheremainingpowerstations.Thiswouldbedoneinawaythatwould
providefurtherincentivesforreducingemissionsbytheremainingpowerplantfleet.We
arguethatsucharegulatedmarketmechanismscouldsolvethepoliticaldifficultiesand
problemsofinformationasymmetrythatplaguegovernmentpaymentsforclosureand
directregulationforexitrespectively.Weprovideempiricalillustrationsthatsuggestthat
theclosurecostsarelowerthanthelikelysocietalbenefitsofclosure.
Weintendthispaperasastartingpointforfurtherresearchandtoinformpolicy
considerations.Thepaperalsoprovidesanoverarchingcontributiontotheliteratureon
policymechanismsfortransitionofelectricitygenerationinfrastructure.
Section2establishestherationaleandproposesamarketmechanismforregulatedplant
closuredesignedtoachieveplantexitthattakesintoaccountcarbonemissions.Section3
providestheoreticalconsiderationsandlaysoutvariousaspectsoftheproposed
mechanism.Section4containsempiricalillustrations.Section5concludes.
8
2. Amarketmechanismforregulatedplantclosure
IfthecaseforpolicyinterventiontocloseoneofVictoria’sbrowncoalfiredgeneratorsas
laidoutaboveisaccepted,thenthequestioniswhichpolicymechanismtoapply.Threeinprincipleapproachesexist(Nelsonetal.2015):governmentfunding(orsubsidies)forplant
closures,amarket-basedsolution,ordirectregulation.
Herewedescribeanapproachthatisahybridofdirectregulationandmarketmechanisms.
Theargumentagainstpaymentsforclosure
AsshowninSection3,itisreasonabletoexpectsignificantemissionssavingsintheNEMas
aresultofclosureofoneofVictoria’slargebrowncoalfiredplants.
InprinciplesuchpaymentsforclosurecouldbeaccommodatedundertheEmissions
ReductionsFund(ERF).Howevertherearestrongargumentsagainstpaymentsforclosure,
whetherundertheERForunderaseparatearrangement.
Firstly,asRieszetal.(2013)havepointedout,payments-for-closureschemescanleadto
unhealthyexpectationsoffutureindustrysubsidiesfromgovernmentandthereforea
deferralofplantclosuredecisionswithassociatedemissions.
Secondly,thepoliticsofpayingsignificantsumsoftaxpayers’moneytotheownersofold,
highlyemissionsintensivepowerstationswouldbehighlyproblematic.Italsodoesnotfit
thenarrativeofthepresentEmissionsReductionFund(ERF)mechanisms,whichisoneof
subsidisingbusinessestakingpositiveactionstomovetocleanerproductionprocesses,not
ofcompensationpaymentstosunsetindustries.
Objectivesandconstraintsforamechanismforplantclosure
Giventhepremisethatthereisacaseforpolicyinterventionforplantclosureinorderto
reducegreenhousegasemissions,someobjectivesandconstraintsforapolicymechanism
canbeidentified.
•
•
•
•
Closinghighlyemissionsintensiveplants.
Toachievemaximumsystem-wideemissionssavings,theclosureschemeshould
applytolargehighlyemissionsintensiveplants.InthecaseofAustralia’sNEM,four
browncoalfiredgeneratorsinVictoriaareconsiderablymoreemissionsintensive
thanotherpowerstations,andproducelargeamountsofelectricity.
Minimizingcostofemissionssavings.
Iftheprimaryobjectiveistoachieveemissionsreductions,theplant(s)withthe
lowestforegoneexpectedfutureprofitsperunitofexpectedemissionssavingsfrom
closureshouldshutdown.
Overcominginformationasymmetries.
Theownersofgenerationassetshaveaninformationaladvantageovertheregulator
regardingthecostofoperatingtheirplant,andhenceexpectedfutureprofitsfrom
continuedoperation.Governmentisthereforeatadisadvantageinanynegotiation
withindividualpowerstationowners.Governmentmaynotbeinapositionto
identifythemostcosteffectiveclosureoption.Forexample,theoldestormost
emissionsintensiveplantmaynotalwaysbethebestplanttoclosefirst.A
competitivebiddingsystemasdiscussedheremayovercomethesedifficultiesand
allowanoptimalchoiceofplantforclosure.
Nogovernmentsubsidies.
Aslaidoutabove,therearestrongargumentsagainstgovernmentpaymentsfor
plantclosure.
9
•
•
•
Harnessingrevenuegainstoplantsthatremaininoperation.
Ifalargegeneratingplantcloses,thiscanbeofsomefinancialbenefittotheplants
thatremainonthegrid,becauseatthemarginitwillmeanhighercapacity
utilizationratesandalsomarginallyhigherelectricitypricesinthespotmarket.The
natureandextentofthelikelyeffectswouldneedtobeassessedindetail.
Complicationsincludethat,givenovercapacityinthemarketasitstands,theclosure
ofabrowncoalfiredgeneratormayallowa(blackcoal)generatorthatmay
otherwisehaveexitedtoremaininoperation.Nonetheless,ifthemarginalcostof
operationishigherfortheplantthatwouldotherwisehaveexited,someupliftin
spotmarketpricesduringparticularperiodsoftimecouldoccur.Also,someprice
upliftcanbeexpectedifpaymentsforclosurearecoveredthroughanoutputdependentchargeonoperatingplants,asproposedinthispaper.
Providingincentivestoreduceemissionsonthegrid.
Amechanismforplantclosurealsoprovidestheopportunitytosetincentivestothe
remainingplantstoadjustoperationsinawaythatsavesemissions.
Providingstructuralassistancetoworkersandregions.
Closureofpowerstationsandminesmeansjoblosses,whicharetypically
concentratedinrelativelysmallregionalcommunities.Unmitigated,theselocalized
economicandsocialeffectscanbeasignificantpoliticalhurdletoregulatedclosure.
Closureshouldbeaccompaniedbyprogramstofacilitateretrainingand
resettlementofworkers,andstructuralassistancetoaffectedtowns.Furthermoreit
needstobeassuredthatthesitesofpowerstationsandassociatedminesare
remediatedtomakethelandavailableforotheruses,andtoastandardacceptable
tothecommunity.
Outlineofamarketmechanismforregulatedclosure
Onthebasisoftheobjectivesandconstraintslaidoutabove,weproposeamarket
mechanismforregulatedpowerplantclosure.
Theprincipleoftheproposedmechanismisthatgovernmentofferpowerplantsthe
opportunitytobidfortheclosureofsomeamountofcapacity,leavingittothebidding
processtodeterminewhichplant(s)willcloseandwhatthemagnitudeofthepaymentto
theclosingplantis.Theremainingplantsarethenmandatedbygovernmenttomake
financialtransferstotheplantthatexitsthemarket,inlinewiththeiremissions.
Suchamechanismwould:provideemissionssavingsfromplantclosureatleastcost;relyon
amarketmechanismtoidentifywhichplantshouldcloseandwhatmagnitudepaymentis
required;avoidbudgetarycostsbysourcingthepaymentsforclosurefromtheplants
remaininginproduction;andprovidesomeincentivestoadjustthepowermixtoreduce
emissions.
Identifyingwhichplanttoclosethroughcompetitivebidding
Theclosureofagivenamountofhigh-emissionsgeneratingcapacityinpracticewouldmean
closureofoneormorebrowncoalfiredgeneratorsinthestateofVictoria.Therearefour
mainplants.Theyrangeincapacitybetween1.2GWand2.3GW,andin2014hademissions
factorsofbetween1.21to1.52tCO2/MWh.Bycontrast,averageemissionsintensityover
thesameperiodfortheaverageblackcoalplantintheNEMwas0.91tCO2/MWh(NEMSight
usedtoaccessAEMOdata,CreativeAnalytics2015).(Table1)
10
Table1:ThefourlargebrowncoalgeneratorsinVictoria
Hazelwood
LoyYangA
LoyYangB
Yallourn
GDFSuez
AGL
GDFSuez
EnergyAustralia
Year
commissioneda
1964to1971
1984to1988
1993to1996
1974to1982
Capacity,MWb
1,760
2,295
1,585
1,200
Capacity
utilisationrate,
2014(%)b
70.8
80.0
71.5
77.1
Electricity
dispatched,
2014(GWh)b
9,819
14,630
6,952
9,749
CO2emissions,
2014(kt)b
14,944
17,702
8,606
13,814
Emissions
intensity,2014
(tCO2/MWh
dispatched)b
1.52
1.21
1.24
1.42
Owner(Nov
2015)a
Notes:a)Sourcedfromtherespectivecompanywebsites:Hazelwood-GDFSuez(2015a);LoyYangA–AGL
(2015);LoyYangB–GDFSuez(2015b);Yallourn–EnergyAustralia(2015).b)ThethirdpartysoftwareNEMSight
fromCreativeAnalyticswasusedtoextracttherelevantAEMOdata(CreativeAnalytics2015).
Thedifficultyforaregulatorwouldbehowtoidentifywhichplantshouldcloseinorderto
minimizethecostofachievingemissionsreductions.Andevenhavingidentifieda
prospectiveplant,aregulatorwouldhavedifficultiesestablishinghowmuchtopaybecause
ofalackofinformationaboutcoststructures.
Theinformationasymmetrybetweenbusinessesandgovernmentcanhoweverbeovercome
throughacompetitivebiddingmechanism.Specifically,thepowerplantsinquestion–inour
examplethefourlargeVictorianbrowncoalgenerators–wouldbeinvitedtoeachsubmita
bidfortheamountofmoneytheywouldbewillingtoacceptinreturnforclosure.‘Closure’
wouldbedefinedasceasingoperationonapredetermineddate,remediatingthesitetoa
predeterminedstandard,andpayingforapredeterminedassistancepackagefortheir
workforceandtheregionaltownstheyoperatein.Thebidscouldbeprovidedinasealedbidauction.
Theestimationofemissionssavingswouldrelyonanalysisandmodellingbyapublicagency
-eitherastatutoryauthorityoragovernmentdepartment.Theywouldbeestimatedforthe
closureofeachofthefourplantsseparately,takingintoaccountthelikelysubstitution
effectswithintheNEM(seeSection3),thelikelyperiodforwhichtheplantwouldremain
operationalifitdidnotexitunderthescheme,andotherrelevantfactors.Theresultsfrom
thisanalysiswouldbemadepubliclyavailablebeforethebiddingprocess,sothatcompanies
havefullinformationaboutthebasisforevaluationbytheregulator.
Oncethebidsarereceived,theregulatorcomputesthecostofestimatedemissionssavings
(indollarsofrequestedpaymentforclosuredividedbytonnesofestimatedCO2savings),
andchoosesthemostcost-effectivebid(s).
11
Theregulator’sdecisioncouldalsofactorinotheraspectsofpublicbenefitfromclosure,
suchasreducedlocalairpollution(egparticulatesandheavymetals),andlocalamenity
benefits.Thiswouldbebestdonewithfulltransparencysothatplantownerswouldknow
thebasisforevaluationinadvance.Inthispaperwesetasidenon-carbonbenefits.
Biddingstrategiesandregulatoryresponses
Thebrowncoalgeneratorsbiddingforclosurewouldestimatetheirfutureexpectedprofits
underdifferentscenariosofpowerstationclosures.Theoptimalbasisfortheiranalysis
wouldbetoestimatetheexpectedfutureprofitsofallfourplantsunderthescenariosfor
exitbyeachoneofthem.Eachplantownerwouldthensubmitabidthatleavesitbetteroff
thanestimatedunderthealternativewhereitsownbidisnotaccepted.
Inthisanalysis,eachbusinesswoulduseitsownbestestimateofitsownprofitsandcosts
andthoseofitscompetitors,combinedwiththeinformation(publiclyprovidedbythe
regulator)aboutestimatedimpactsonemissionsinthecaseofclosureofeachofthefour
plants.CompaniestypicallyownanumberofdifferentgeneratorsintheNEM.Asaresult,
thefinancialscenarioanalysis–andhencethebidsforclosure–wouldalsoincludechanges
inrevenueandprofitability(typicallyincreases)andrequiredcontributiontotheclosure
paymentbyothergeneratorsownedbyacompanythatownsbrowncoalgenerators.
Therewouldbeincentivestosubmithighbidstomaximizerevenueincaseofclosure,but
alsocountervailingcompetitivepressuretosubmitlowbidsinordertobeselectedfor
closurepayments.Bydefinition,havingitsbidacceptedandclosingdownwouldleavethe
plantbetteroffthanremaininginoperation.Inflatingthebidincreasesthefinancial
advantageifthebidissuccessful,butatthesametimeitdiminishesthechancesofthebid
beingsuccessful.
Bidscouldbehigherthantheestimatedforegoneprofitsfortworeasons.Firstly,theplant
thatconsidersitselftobethelowestcostoptionforclosure–andwhichwouldthusexpect
tobeabletosubmitthelowestbid–maychoosetosubmitabidthatisbelowtheclosure
costsofitspresumednexthighestbidder,butaboveitsownclosurecosts.Thisisacommon
outcomeinauctions.
Secondly,thesmallnumberofbidders(notingthattwoofthefourplantsareownedbythe
samecompany)couldgiverisetostrategicinteractionsornon-competitivebidding.
Aspectsofstrategicbehaviourwouldrequiredetailedinvestigationbytheregulator,and
mayrequirethedesignoftheauctiontobecustomized.
Theregulatorwouldchoosethebidthatoffersthelowestratioofclosurepaymentto
estimatedemissionssaved(in$/tCO2).Otheraspectsofeachbidcouldalsobefactoredinto
thedecision.
Itwouldalsobepossiblefortheregulatortoreservetherightnottoawardaclosure
contractifitdeemedthemostcosteffectivebidtoohighrelativetothepublicbenefit.
Paymentbytheremaininggeneratorsinlinewithfutureemissions
Theexitinggeneratorwouldreceivethefullamountspecifiedintheirbid,ininstalments
overapre-determinedtimeframe(hereweassumeoveroneyear).Thefinancingforthis
paymentwouldbesharedamongthegeneratorsthatremaininoperation.
Amultitudeofoptionsexistsforapportioningsharesofthepaymenttobemadebythe
remaininggenerators,withdifferenteffectsondistributionandincentives.
GiventhatallremaininggeneratorswouldbenefitfromsomepriceupliftintheNEM,one
optionwouldbeforcontributionstobesharedamongallremaininggenerators,according
12
totheirelectricityoutputduringtheyear(orotherperiod)followingtheclosureofthe
chosenbrowncoalfiredplant.Howeverthiscouldbeseentodisadvantagetherenewables
andgasfiredpowersector,becauseoneormoreblackcoalfiredpowerplants(insteadof
thebrowncoalplant)mighthaveexitedthemarketanyway,withassociatedmarginal
increasesinspotmarketpricesbutnopaymentstobemadebyothergenerators.
Anotheroptionwouldbetosharecontributionsamongallremainingplantsaccordingto
theircarbondioxideemissionsduringtheyear(orshorter/longerperiod)followingthe
closureofthechosenplant.Weconsiderthisoptionaspreferable,pendingfurtheranalysis,
andusethisscenarioforillustrationbelow.
Weidentifythreekeypropertiesofthisscheme.
First,thebenefitstogeneratorsfromstayinginthemarketwouldbeoffsetinproportionto
theiremissionsintensity,counteractinganyincentivestoremaininthemarketinthe
expectationthattheremightbefurtherroundsofpaymentsforclosure(ashighlightedby
Rieszetal.(2013)asamaindisadvantageofapaymentforclosurepolicy).
Second,paymentsinproportiontoemissionsfollowingtheclosureofoneplantprovidean
additionalincentiveforallbrown-coalfiredgeneratorstosubmitlowbidsintheclosure
scheme,asthebenefitsfromstayingoperationalarediminished.
Third,anincentiveeffectwithintheNEMforamarginalshifttowardslower-carbon
generatorswouldbeprovided,astheclosurepaymentwouldeffectivelybefinanced
throughalevyonfuturecarbondioxideemissions.Asindicatedbythenumerical
illustrationsbelow,thiseffectis,however,likelytobeverysmall.
Priceupliftandcostincidence
Theultimatecostincidencewouldlargelybeonelectricityconsumers,throughhigherprices
intheNEMandpotentiallyhigherpricesinnegotiatedelectricitysupplycontracts.The
preciseextentandnatureofcostpass-throughisamatterforfine-grainedempirical
modelling.Factorsthatwouldaffectspotmarketprices,withalikelyupliftofpricesinnet
terms,includethefollowing:
•
•
•
•
Changestomarginalcoststructureinthebidstackgivenretirementofalower
marginalcostgenerator(browncoal)insteadofexitbyahighercostone(likelyblack
coal),giventhelackofacarbonpricesignalundercurrentpolicysettings.
Changestomarginaloperatingcostsassociatedwithpaymentonthebasisof
emissionsbyremainingplantsmayleadtohigherspotmarketpricesduringsome
periods.
Effectsoffulldecommissioningofplantratherthanmothballing(seeNelsonetal.
(2015)oninvestmentinnewplantsespeciallyrenewables,andassociatedimpacts
onwholesaleprices.
Anytimediscrepancyofretirementassociatedwiththepolicy.Ifthepolicyinduces
abrowncoalplantclosureaheadofwhenitmighthavehappenedtoablackcoal
plantwithoutintervention,therewouldbeaperiodofhigherpriceupliftassociated
withreducedcapacityoverthatperiod.Conversely,ifthepolicytakeslongertotake
effectthanitwouldhavetakenforablackcoalplantclosuretotakeplace,thenthe
additionalcapacityforthattimeperiodwoulddepresspricesforlonger.This
highlightstheimportanceofmovingquicklyfromannouncementtoimplementation
ofanysuchpolicy.
13
Inprinciplethegainstogeneratorsinhigherprofits(givenuplift)couldbehigherorlower
thantherequiredpaymentforexittoachievetheclosureofoneofthelargebrowncoal
plants.Onlydetailedmodellingwillprovideareliablenetestimateoftheeffectsatplay,
especiallyinrelationtoanydisplacementofcapacitythatwouldhavebeenretiredinthe
counterfactualcase.Whatisclearisthatthenegativeeffectongeneratorprofitswillbe
(weakly)relatedtotheiremissions,providinglittleifanyincentiveforgeneratorstoholdout
forfurtherroundsofthispolicytoreceivepaymentforclosure,especiallygiventhe
additionalcostsassociatedwithanyexemplaryexitconditions.
The(small)electricitypriceimpact,especiallyonlow-incomehouseholds,couldinprinciple
beoffsetbytargetedtransfers,changesinelectricitytariffsorbysupportinginvestmentsin
energyefficiency.HoweverasillustratedinSection3,thecostimpactswouldlikelybevery
small,andcompensatorymeasuresmaynotbeconsiderednecessary.Theelectricityprice
increasewouldalsoaffectbusiness,thoughagainthemagnitudeswouldlikelybeverysmall.
Structuraladjustmentandsiteremediation
Theregulatorwouldsetoutindetailtherequirementsforanassistancepackageforaffected
workersandlocalcommunities,aswellasforsiteremediation.Plantownerswouldtakethis
intoaccountintheirbids.Ineffectthecostofassistanceandsiteremediationwould
becomeacomponentoftheoverallbid,andthusacomponentofthepaymentmadetothe
successfulbidder.Theoverallcostofthepackagewouldvarybetweentheplants,depending
onsizeandcircumstances.
Dynamicaspects
Afteraninitialroundofregulatedclosuretherecouldbefurtherroundsinthefuture.The
prospectoftheseoccurringwouldaffecttheestimationofallplants’futurerevenue,and
thusthebidsinthefirstround.However,ifcontributionsaresharedonthebasisof
emissionsintensity,thiswillreducetheeffectofexpectedfutureroundsonthebrowncoal
plants.
Plantswillconsequentlyfactortheirownexpectationsaboutfutureregulatedclosureinto
theirbids.Giventheadverseeffectthatpolicyuncertaintyhasonenergysectorinvestors
(Jotzoetal.2013),itwouldbedesirablefortheregulatortoannouncethefullintended
scheduleoffutureroundsofregulatedclosureattheoutset.
Finally,itmustberecognizedthatagovernment’sannouncementofintenttoimplementa
closurepolicycouldprovideincentivesforplantstoremaininoperationthatmight
otherwisehavecloseddownwithoutintervention.2Thereforegovernmentsshouldmove
swiftlyfromconsultationtoannouncementtoimplementation.
2
Forexample,theNorthernandPlayfordpowerstationsinSouthAustraliaareexpectedtoclosein
2016(AlintaEnergy2015)withoutpaymentsforclosureorotherpolicyintervention,whileitis
understoodthattheywerepartofdiscussionsintheearlierabortedfederalgovernment‘paymentfor
closure’scheme.
14
3. Empiricalillustrations
Hereweprovidesomeempiricalillustrationsofthepossibleeffectsoftheclosureofoneof
Victoria’slargebrowncoalfiredpowerstations,inthecontextofthemechanismproposed
inSection2.
Estimatingemissionssavingsfromplantclosure
Onekeydeterminantoftheemissionssavingstobeexpectedistheextenttowhichclosing
downabrowncoalgeneratordisplacestheclosureofotherplants.Indeed,assumingthat
theanalysisbyAEMO(2015)thatthereisovercapacityiscorrect,andtheassessmentbythe
AEMC(2015)andothers(egRieszetal2013)thatplantexitisoccurringinresponsetosuch
overcapacityisalsocorrect,thenregulatedclosureofabrowncoalplantwillessentially
displacetheclosureofotherplants.
Thisdoesnotnegatethebenefitstointerventionsoughthere,namelytoachieveexit
outcomesthatareconsistentwiththepublicinterestgiventhelackofcarbonpricesignalsin
theNEMatpresent.Indeed,theintentionoftheschemeistoaddresstheproblemthatthe
relativeprofitabilityofemissionsintensiveplantsisinflatedcomparedtoloweremissions
plants,givenlackofcarbonpricesignals.Withoutintervention,loweremissionsplant(black
coal)mightberetiredwhilehigheremissionsplants(browncoal)remaininthemarket,with
adverseeffectsontheemissionsintensityofoverallpowersupply.Withacarbonpricein
place,thereversecanbetruedependingonthepricelevel.
Tohaveconfidenceincalculatedemissionssavingsfromclosingaspecificpowerplant,a
comprehensivemodelingexercisewouldneedtobeundertaken,takingintoaccountthe
complexityoftheelectricitymarketincludingelectricitysupply,bidsandpricesatshorttime
intervals,andcomparingthepolicyscenarioswithcounterfactuals.
Hereweprovidesomeboundingcalculations,whichcanbeusedtoillustratethemagnitude
ofemissionssavingsavailable.
Assumingthattheexitofabrowncoalgeneratorsimplyoffsetstheretirementofablack
coalgenerator,emissionssavingswouldbeafunctionofthedifferencebetweenblackand
browncoalemissionsperMWhgeneratedandanychangestothegenerationmix.
Asanillustrativeexample,ifoneofthehigheremissionsbrowncoalplants(Hazelwoodor
Yallourn)weretoexit,andusinggenerationfiguresfor2014,avoidedgenerationwould
amounttoabout9.7GWhperyearwithassociatedemissionsofabout14MtCO2.Equivalent
blackcoalgeneration,ontheblackcoalfleetaverageemissionscoefficient,wouldgiverise
toabout7.6MtCO2peryear.Thusthefirst-roundemissionssavingfromclosinghigh
emissionsbrowncoalratherthantheblackcoalplant(s)wouldbeabout6to7MtCO2per
year.
Thereareanumberofsecond-ordereffectstoconsiderhere.
Mostimportantly,therecouldbeincreasesingenerationbyotherbrowncoalplants.
However,initialanalysissuggeststhatsuch‘leakage’isnotlikelytobelarge,becausebrown
coalplantsgenerallyoperateatfairlyhighutilizationrates.Indeed,ifweassumethe
remainingthreebrowncoalplantsincreasetheirgenerationtothehighestannualaverage
observedoverthepastdecade(83.5%forHazelwood,88.3%forLoyYangA,86.5forLoy
YangBand88.6%forYallourn),thiswouldsoakupamaximumofabout5GWhorabouthalf
ofthereducedoutputfromtheexitingplant.Emissionssavingswouldstillamountto3to
3.5MtCO2peryearunderthisextremescenario.
Othersecond-ordereffectswouldtendtodecreasetheemissionsintensityofoverall
electricitygenerationfurther.Firstly,inprinciplesomeofthedisplacedbrowncoal
15
generationcouldbemadeupforbygas-generatedpower,thoughthismaynotbethecase
inpracticetoanysignificantextentinAustraliabecausegasisrelativelyexpensiveandin
shortsupply(SimshauserandNelson2015).Inaddition,onecouldexpectsomerenewable
energyinvestmenttobebroughtforward.Further,anyincreasesinelectricitypricescould
resultinreductionsinenduse,althoughtheseeffectsarelikelytobesmallindeed.
Table2belowillustratespotentialemissionssavingsfromtheclosureofeachofthefour
largebrowncoalplants,assumingamoremoderate(andpendingdetailedmodeling
perhapsmorerealistic)leakagerateof30%totheremainingbrowncoalplants.
Table2:Scenariosforemissionssavingsfromplantclosure
Additional
blackcoalif
Withdrawn
allgenmade
browncoal
upbyblack
coal
Additional
browncoalif
remaining
browncoal
plantssoakup
30%
RetireLoyYangB
Generation(GWhsentout)
Additionalblack
coalifremaining
70%madeupby
blackcoal
-6,952
6,952
2,085
4,866
Emissionsfactor(tCO2/MWh)
1.24
0.92
1.36
0.92
Emissions(MtCO2)
-8.61
6.40
2.83
4.48
Emissionssavings(MtCO2)
RetireYallourn
Generation(GWhsentout)
2,925
6,824
1.42
0.92
1.31
0.92
-13.84
7.65
3.84
7.65
Emissions(MtCO2)
2,946
6,873
1.52
0.92
1.28
0.92
-14.94
7.65
3.77
7.65
Emissionssavings(MtCO2)
-7.29
-3.52
-14,630
14,630
4,389
10,241
1.21
0.92
1.41
0.92
-17.70
7.65
6.18
7.65
Emissionsfactor(tCO2/MWh)
Emissions(MtCO2)
9,819
Emissionssavings(MtCO2)
Generation(GWhsentout)
-2.35
-9,819
Emissionsfactor(tCO2/MWh)
RetireLoyYangA
-6.19
Generation(GWhsentout)
9,749
Emissionssavings(MtCO2)
RetireHazelwood
-1.30
-9,749
Emissionsfactor(tCO2/MWh)
Emissions(MtCO2)
-2.21
-10.05
-3.87
16
Illustrativevaluationsandcosts
Valuationofcarbondioxideemissionsreductions
Theaboveindicativecalculationssuggestemissionssavingsfortheclosureofoneofthe
moreemissionsintensiveofVictoria’sbrowncoalfiredpowerplantsofaround2to7million
tonnesofcarbondioxideperyear.Acomprehensive,modellingbasedanalysismaygive
differentresults.
Differentvaluationscanbeappliedtothisestimate.Abenchmarkforthegovernment’s
willingnesstopayforemissionsreductionsarethepricespaidbygovernmentforcontracts
foremissionsreductionsunderAustralia’sfirstauctionoftheEmissionsReductionsFund
(ERF).TheaveragepriceunderthefirsttwoERFauctionswas$13.12/tCO2-equivalent(Clean
EnergyRegulator2015).Thepricelevelmaychangeinsubsequentrounds.Further,there
arealsothecostsofraisingpublicrevenuethroughthetaxsystemtoconsider.Estimatesfor
themarginalexcessburdenoftaxationvary(seeCaoet.al.2015),butasanillustrationwe
use30%.Thisimpliesaneffectiveaveragecosttotaxpayersofaround$17/tCO2-equivalent
undertheERF.3
Analternativebasisforvaluationisthesocialcostofcarbon,whichisameasureofthe
discountedvalueofexpectedfutureglobaldamagesfromadditionalGHGemissions–the
globalvalueofreducingemissions.ThereisalargeliteratureonestimatesoftheSCC,
showingaverywiderangeofestimates(Tol2011).Asetofestimatesexiststhathasbeen
widelyusedinpublicpolicyanalysis,developedbytheUSInteragencyGroup(2010,2013)as
abasisforregulatoryanalysisintheUnitedStates(seealsoGreenstoneetal.,2011and
Johnsonetal.,2012).TheseestimateshavetheSCCatA$88,A$57andA$17respectivelyfor
discountratesof2.5%pa,3%paand5%pa,andatA$166forascenarioofhighclimate
changedamages.4Onthebasisoftheliteratureondiscountingforclimatechangeanalysis
(Edenhoferetal.,2014),a5%discountrateisconsideredoutsideoftheapplicablerange.
Thus,anillustrativerangefortheevaluationofthecarbonbenefitsfromplantclosureis$17
to$88pertonneofcarbondioxide.Benefitsfromreductionsinnon-CO2airpollutionwould
alsolikelyaccrue(ATSE,2009;WardandPower,2015)butaresetasideinthisexample.
Theillustrativerangeofpotentialemissionssavingsfromtheclosureofthetwoolderbrown
coalplantsprovidedaboveis2to7MtCO2peryear.Assumingtheannualsavingsare
maintainedforbetween5to15years(onthebasisthatthisistheperioduntilclosureofthe
browncoalfiredplantwouldhappenanyway),thisyieldsarangeof10to105MtCO2in
total.Evaluatedat$17/tCO2and$88/tCO2,thisyieldsarangeof$170millionto$9billionin
totalmonetizedbenefitsforcarbondioxidesavings.
Itappearslikelythatthattheemissionsbenefitsfrombrowncoalplantclosureasevaluated
herearelarger,andpossiblymuchlarger,thanthelikelyadditionalpowersystemcostsand
bidsunderamarketmechanismforregulatedclosure.
3
Onthe(quitepossiblyoptimistic)assumptionthatcontractedemissionsreductionsare‘additional’-
thatistheywouldnothavehappenedotherwise-andignoringlikelyfutureincreasesinaverageERF
contractprices.
4
Forassessmentofemissionsin2015,usinganexchangerateofA$0.74/US$,withinflation
adjustmentfromthe2014baseontheestimates.
17
Closurecosts
Wedonothaveinformationavailableaboutthepaymentsthatwouldberequiredto
facilitateclosureoftherelevantpowerplants,inparticularofthemagnitudeofforegone
profitsasaresultofearlyclosureofbrowncoalfiredpowerplants.
Siteremediationcostsarethoughttobeintheorderof$100to$300million(Nelsonetal.,
2015,p26).Thecostofastructuralassistancepackageisunknown,howeverasan
indication,theHazelwoodstationemploys540workersdirectlyandaround300contractors,
andmoreduringperiodsofmaintenance.Anillustrativepackageof$150millionwouldthen
provideover$100,000perworker/contractor,andanother$50milliontothecommunity.
Itisimportanttonotethatremediationandretrenchmentscostswouldhavetobeborneby
theplantownersinanycaseatapointinthefuturewhenclosurewillinevitablyoccur.
Additionalcostsfromaregulatedclosureschemewouldconsistonlyofanyadditional
impositionsonthebusinessoverandabovetheirexistingcommitments,forexample
paymentsforcommunityassistance,workerre-trainingoverandaboveretrenchment
packages,orsiterehabilitationtoahigherstandardthanwouldotherwiseoccur.
Costratios
Toillustratethefinancialeffectsontheindustry,weassumeaone-offpaymentforclosure
ofbetween$400millionto$1billion,sharedbetweentheremainingpowergenerators.
TotalCO2emissionsfromelectricitygenerationduring2014were153Mt(NEMSight2015).
Underaschemewhereclosurepaymentsarecoveredbygeneratorsinproportiontotheir
CO2emissions,a$400millionor$1billiontotalpaymentimpliesaCO2levyof$3/tCO2to
$7/tCO2ifthefullpaymentwerecoveredoverthespaceofoneyear.Thisisonlyamarginal
impactonrelativecostsbasedonemissionsintensity,howeveratcertaintimesitwould
changethemeritorderintheNEM,andconsequentlyitwouldleadtomarginalreadjustmentsinthefuelandplantmix,andloweroverallCO2emissions.
Basedonthe2014generationmixintheNEMandCO2emissionsbytechnology,54%ofthe
totalpaymentwouldbecoveredbyblackcoalplants,38%bybrowncoalplants,and8%by
gasfiredplants.Theseshareswouldbeadjustedforthereductioninbrowncoalfired
generation.
TotalelectricitysentoutintheNEMduring2014was182Twh(NEMSight2015).Sothe
illustrativepaymentswouldamounttoaround$2/Mwhto$5/Mwh.Thiscomparesto
typicalNEMwholesalepricesoverlongertermperiodsofaround$40/Mwh.Assumingthat
theclosurepaymentwouldbefullyreflectedinhigherwholesalepricesasanupperbound,
thiswouldamounttoanincreaseof5%to14%inwholesalepricesoverthecourseofone
year(andpricesdroppingagainafterwards).Thecorrespondingincreaseinretailprices
wouldonlybeintheorderof1%to2%,overoneyear(assumingretailpricesof25c/kwh
andfullcostpass-throughfromwholesaletoretailprices).
4. Conclusions
Australiahasovercapacityinelectricitygenerationthatincludesanumberofhighly
emissionsintensivebrowncoalfiredplants,arenewableenergytargetmechanismwhich
bringsnewcapacityintothegrid,butnocarbonpricesignal.Inthissituation,itispossible
thatblackcoalgeneratorswillbecloseddownaheadofmorepollutingbrowncoal
generators,becauserunningcostsofbrowncoalplantsarelower.
Thiswouldmeanmissingoutonopportunitiestoreduceemissions,andrealisingother
societalbenefitsfromclosingoldbrowncoalfiredplants.Thelikelyemissionsbenefitsfrom
18
browncoalplantclosurecouldbeofmuchhighersocialvaluethantheadditionalpower
systemcosts.Ourempiricalillustrationssuggestthatsystem-wideemissionsreductionsfrom
closureofoneofAustralia’sfourlargestbrowncoalfiredpowerstationscouldbebetween
1.3and10MtCO2peryear,dependingonassumptionsaboutwhichplantisclosedand
whichgeneratorswouldmakeupfortheiroutput.
Valuingthesereductionseitheratthepricepaidforcontractedemissionsreductionsunder
Australia’sEmissionsReductionsfundoratthesocialcostofcarbonsuggestthatthevalue
tosocietymaywellexceedthepaymentsrequiredforclosure,evenbeforeconsideringnoncarbonbenefits.
GiventhatAustraliahasatargettoreducenationalemissionsandgovernmentisnot
planningtore-introduceacomprehensivecarbonprice,thiswouldsuggestthatspecific
governmentinterventiontoclosebrowncoalcapacityiswarrantedinprinciple.However,
thepolicymechanismsusuallysuggestedtoinducesuchplantexithavesubstantial
drawbacks.Directregulationsuffersfromgovernmentnothavingsufficientinformation
aboutbusinesscoststructures,andthereforeitwouldbedifficultfortheregulatorto
identifywhichplantwouldbethemostcost-effectivetocloseandhowmuchtoofferin
compensationifsuchcompensationwasoffered.Moreover,aschemeofgovernment
paymentsforclosuresuffersfromlackofpoliticalacceptability.
Inthispaperwehaveproposedamarketmechanismforregulatedpowerplantclosurethat
wouldovercomethesedifficulties.Itcouldachieveaclosureoftheplant(s)thatwould
reduceemissionsmostcosteffectively,andmeetanumberofconstraints.
Theprincipleoftheproposedmechanismisthatgovernmentmandatestheclosureofsome
amountofcapacitybywayofregulation,butleavesittoacompetitivebiddingprocessto
determinewhichplant(s)willcloseandwhatthemagnitudeofthepaymenttotheclosing
plantis.Theplantsremaininginoperationthenmakefinancialtransferstotheplantthat
exits,inlinewiththeiremissions.
Suchamechanismcanprovideemissionssavingsfromplantclosureatleastcost,avoid
budgetarycostsbysourcingthepaymentsforclosurefromtheplantsremainingin
production,andprovidesomeincentivestoadjustthepowermixtoreduceemissions.In
addition,paymentbyremaininggeneratorsonthebasisofemissionshelpsovercome
adverseincentiveeffectsthatmightotherwisebepresentforplantstostayinoperationin
anticipationofpaymentforclosure.
Whileanyadditionalcostscomparedtoascenariowhereblackcoalplantsexitwould
ultimatelybebornebyelectricityconsumers,theimpostwouldbesmallandtemporary.
Withthispaperwehopetore-kindleadiscussioninAustraliaaboutgovernmentfacilitating
efficientexitofhighlypollutingpowerstations,anoutcomethatmayotherwisenotbe
achievedintheabsenceofcarbonpricing.Theproposedmechanismmayalsobeapplicable
inothercountries,inparticulardevelopedcountrieswithover-capacityinoldercoalfired
powerplants.
Manyaspectsofpowerstationexitandthespecificmechanismproposedwillrequire
furtheranalysis.Amongthemarestrategicbehaviourinamarketwithaverysmallnumber
ofcandidateplantsandcross-ownershipofplantsandeffectsonthebidsthatwouldbe
madeunderaclosurescheme.Alsoneededwillbedetailedmodellingoflikelyemissions
savingsfrombrowncoalemissionsplants,takingintoaccountmeritorderandplant
availabilityatatemporallyandspatiallydisaggregatedlevel,thatistakingintoaccountload
curvesandinterconnectorcapacitiesbetweenStategrids.Modellingoftheeffectsofbrown
coalplantclosureonspotmarketprices,especiallywhetherandtowhatextenttherewould
bepriceupliftandassociatedrevenueinwholesaleelectricitymarketswillalsoberequired.
19
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