Kyoto power costs pass to consumers

By Brian Fallow

One of the biggest impacts of the emissions trading scheme on the economy will be through the electricity sector, which will have to pay for its carbon emissions from 2010.

That is despite the fact that electricity is responsible for only about 10 per cent of the country's emissions, as two-thirds of the power generated is from renewable sources such as hydro, geothermal steam and wind.

The reason is the way the wholesale electricity market works.

In any given half-hour period it is the most expensive block of electricity offered into the market which is needed to ensure demand is satisfied that sets the wholesale price all the generators called on in that periodget.

Mostly it is a thermal generator, burning either natural gas, or in the case of Genesis Energy's old Huntly plant, coal, which sets the marginal price.

When that price includes the cost of carbon emission units, renewable generators such as Meridian Energy will get higher prices without a corresponding increase in their costs.

This leaves the Government, as the owner of three of the five main generator companies, with what investors would call a natural hedge: higher carbon costs for Genesis, which it owns, mean higher windfall profits for Meridian, which it also owns.

From 2010, thermal generators will need to buy units to cover emissions from the fuel they consume, either from the international market orfrom local owners of "Kyoto" forests.

The scheme's design assumes the thermal generators will be able to pass on the cost of those emissions units to their customers. If they can't, they are under no legal obligation to generate at a loss, even if that means the lights go out.

Officials have estimated that if "carbon" (emission units) costs $25 a tonne, that would raise the wholesale price of electricity by 19 per cent, while $50 carbon would increase it by 39 per cent.

For retail consumers the impact is diluted by the fact that about half of their power bill reflects the cost of getting the electricity to them, which should be unaffected by the scheme. At the retail level, the increase would be 10 per cent at a carbon price of $25 a tonne, 20 per cent at $50 and so on.

These are only estimates, however.

How carbon prices flow through to the end consumer will depend in part on how the mix of generation plant changes over time.

When, for example, will the big 1000MW coal-fired plant at Huntly move from the starting XV to the subs' bench, that is, from a baseload to a reserve generation role?

It is current Government policy to lift the proportion of generation from renewables to 90 per cent by 2025.

Another uncertainty is how the Government will treat the "windfall" profits state-owned Meridian and Mighty River Power will make from their renewable assets.

Will they be required to pay bigger dividends to the Government, which has a $1 billion programme for insulating homes to fund? Or will they be free to spend it all on investment in new geothermal plant and wind farms, in line with the overall intent of the scheme?

Will they be willing, and allowed, to use those windfall gains to undercut their thermal competitors at the retail end of the market? If so, it would undermine one of the objects of the exercise, which is to give consumers a price signal to reduce their electricity consumption.

JUST ONE MORE STEP TO GO

Only one last debating storm stands in the way of the Government's emissions trading scheme (ETS) passing into law, after it emerged from its committee stage yesterday.

The Climate Change (Emissions Trading and Renewable Preference) Bill ended its tortured clause-by-clause debate and should pass today.

Only a third reading - final debate - is required for the passing of legislation National said the Government was rushing through with reckless irresponsibility.

The bill has implications for every household and the potential to change the make-up of the labour force as environmental factors gain increasing importance in business.

National has said it will change the legislation if it wins the election.

Most business organisations agree, and there have been numerous appeals for the legislation to be delayed.

Act has said climate change and global warming was a hoax, while United Future leader Peter Dunne said the bill was rammed through Parliament to satisfy the Government's agenda.

The ETS will bring all sectors of the economy under a regime which will set limits on the amount of greenhouse gas they can emit. Those breaching their limit will have to buy credits from those below their cap. Electricity comes under it in 2010, transport in 2011 and agriculture in 2013.

The Government reached deals with the Greens and NZ First to give it a safe majority to get the bill passed before the election.

- NZPA

- NZ Herald

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