Conclusions from Future Grid Forum Media Brief

Dec 06, 2013 - 10:25am

The Future Grid Forum, a group of 120 stakeholders across the electricity sector convened by CSIRO to investigate the future of electricity in Australia, today released its findings in a report titled Change and Choice.

The report explores how issues like the clean technology revolution, consumer control of electricity use, electric vehicles, and climate change could shape Australia’s electricity sector over the decades to 2050. The full report and press release by the Forum can be found here.

The Climate Institute, as one of the stakeholders, strongly supports the report’s attention to climate change-related issues, and highlights the following points:

  • The electricity sector is calling for a 40-year carbon reduction plan.
  • A long-term price signal drives substantial decarbonisation.
  • Carbon policy uncertainty adds 17 per cent to electricity costs because of investment in cheaper but less efficient power plant.
  • Climate change increases electricity costs. The effect of rising temperatures on peak demand alone could push up annual household electricity costs by $180.
  • Cutting carbon from electricity is central to achieving Australia’s climate goals. 

The electricity sector is calling for a 40-year carbon reduction plan

The Forum concludes that reducing greenhouse gas emissions from electricity is a key performance indicator for the sector. It warns that unless politicians agree on a climate policy framework that is stable and long-term, customers will face higher costs. This is because investors will build cheaper but less efficient power generation, and once these investments are made their costs are effectively locked into the economy and passed on to consumers.

Change and Choice calls for “bipartisan agreement on the long-term (2050) greenhouse gas emission target and implementation mechanism for Australia.” It is worth noting that attention to Australia’s longer-term emission reduction plans is also growing internationally, with recent multilateral agreements calling on Australia to outline its post-2020 emission reduction target within the next 16 months.

Recognising the need for substantial decline in electricity emissions, the Future Grid Forum included a carbon price incentive in all its core scenarios, of which one (“Renewables Thrive”) also includes a 100 per cent Renewable Energy Target (RET). The Forum also explored carbon price sensitivity scenarios, with one of the scenario looking at the impact of climate change itself on electricity use.

Note that in the modelling a carbon price is used to represent the impact of action to reduce emissions. In the real world such a carbon price incentive can be applied through a number of regulatory or subsidy approaches. The OECD, the Productivity Commission and others have demonstrated that direct carbon pricing is the most cost effective way to achieve this outcome.

A long-term price signal drives substantial decarbonisation

The four core scenarios assume a carbon price incentive derived from Treasury’s modelling of a “moderate” global action to reduce emissions. Because of this, emissions are reduced across all four scenarios, achieving cuts of 55-89 per cent below 2000 levels by 2050.

The Forum also considered the impact of a high carbon price incentive, based on Treasury’s modelling of a cost to carbon pollution consistent with global action to limit global temperature rise to 2°C or less; a “zero carbon price”, which assumes that Australia will never have carbon policy apart from the current RET, which peaks in 2020; and an uncertain carbon price incentive, where investors can never be certain that a carbon policy will or will not be applied in the future – an extension of the current lack of bipartisan support for climate policy.

Figure 1 shows the emission reductions associated with these and a couple of other scenarios. It shows that emissions stop falling under “zero carbon price” in 2020. In contrast, the high carbon price incentive achieves emissions reductions greater even than the 100 per cent RET.

However, the uncertain carbon price incentive also achieves fairly substantial emissions reduction, not much less than the core scenario (“set and forget”, which includes the moderate carbon price incentive) on which it is based. This is because under carbon policy uncertainty investors hedge against the risk of future carbon policies by investing in generation that remains competitive under different carbon policy environments.

Figure 1. Emissions reductions under the different scenarios.

Climate policy uncertainty adds 17 per cent to electricity costs

The uncertain carbon price incentive is 17 per cent more expensive than the core “set and forget” scenario.

Compared with the high carbon price incentive, the uncertain carbon price achieves far less emission reduction (about 50 per cent below 2000 levels compared with 89 per cent) but is not much cheaper ($145 per megawatt hour compared with $160).

Figure 2. System costs and emissions of all scenarios.

 

This is because under carbon policy uncertainty investors choose power plant that is cheaper to build but less efficient to run. This generation mix is also only moderately less emissions intensive. For example, generation under the moderate carbon price includes combined-cycle gas, but this technology is not taken up under the uncertain carbon price scenario.

The “renewables thrive” scenario also lowers emissions 89 per cent below 2000 levels, but at a higher cost than the high carbon price scenario. Again, this is because the diversity of generation options is constrained by policy settings: the high carbon price enables combined-cycle gas and carbon capture and storage, but both of these technologies are closed out under the 100 per cent RET.

“Zero carbon price” assumes other sectors or countries are willing to do Australian electricity’s share of emissions reduction. That scenario drives a renewed role for coal generation from 2020.

This scenario appears to be the cheapest in terms of pure electricity costs, because it pushes the costs of carbon reduction on to others. It implies that other sectors do the heavy lifting to reduce Australia’s emissions, or that Australia maintains its current emission-intensive economy, relying entirely on other countries’ willingness to cover Australia’s share of the task.

Australia will come under increasing international pressure on this front over the next few years. International climate negotiations are focusing not only on strengthening countries’ pre-2020 emission reduction targets, but also on their post-2020 carbon cuts. After the Warsaw climate talks last month Australia has around 12 months to resolve targets for both timeframes, including defining our 2025/30 emission reduction offer.

Climate change increases electricity costs

Climate change holds significant risks for the electricity sector, particularly distribution networks, or poles and wires. Groups ranging from the Australian Energy Networks Association to the US Department of Energy are investigating climate risks to electricity, but the costs of climate impacts on electricity pricing have barely begun to be explored.

Modelling for the Forum included an examination of just one climate impact: the role of increasing temperatures in driving up peaks in consumption (ie. for cooling purposes). This single impact drives up investment in distribution networks by 2.8c/kWh. In today’s terms that translates into an extra $182/year for an average household using 6500 kWh annually.

Figure 3. Costs of investing to meet climate-driven peak demand compared with core distribution costs (Scenario 1 and Scenario 1 sensitivity: climate impact adaptation).

 

Cutting carbon from electricity is central to achieving Australia’s goals

Electricity is Australia’s largest single source of emissions, due to our heavy reliance on coal-fired power. Last year, emissions from electricity totalled 191 million tonnes – just over one-third of all Australian emissions or the equivalent of 51 million cars. At their peak in 2008, annual electricity emissions reached 208 million tonnes.

Australia has committed to reducing its emissions by 5-25 per cent below 2000 levels, or at a minimum limit its total emissions to 4.6 billion tonnes, by 2020.

As noted above, international efforts are directed at increasing countries’ pledges, and Australia will be under pressure to submit more ambitious and longer-term targets in the near future.  Australia has also committed to contribute to global efforts to limit warming to less than 2°C above pre-industrial levels. To do its fair share in achieving this goal Australia needs to achieve zero net emissions by around 2040.

Encouragingly, there are many opportunities to reduce emissions from electricity. Improving the energy efficiency of buildings, appliances, industrial processes cuts electricity use (and bills), while investment in clean sources such as wind, solar, bioenergy, and carbon capture and storage reduces emissions from the electricity supply. Many of these opportunities come at a low or even negative cost.

If these opportunities are not taken up, finding equivalent carbon reductions elsewhere in the economy would be so expensive and difficult it would be effectively impossible for Australia to make a fair contribution to addressing climate change. In the absence of international emissions trading, even the largest reductions modelled by CSIRO would not be sufficient for Australia to meet its fair share of keeping global warming to less than 2°C.

For more information
Erwin Jackson | Deputy CEO, The Climate Institute | 02 8239 6299
Kristina Stefanova | Communications Director, The Climate Institute | 02 8239 6299 — 
  

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