Impact of the Carbon Price on Australia's Electricity Demand, Supply and Emissions

Abstract

Australia’s carbon price has been in operation for two years. The electricity sector accounts for the majority of emissions covered under the scheme. This paper examines the impact of the carbon price on the electricity sector between 1 July 2012 and 30 June 2014, focusing on the National Electricity Market (NEM). Over this period, electricity demand in the NEM declined by 3.8 per cent, the emissions intensity of electricity supply by 4.6 per cent, and overall emissions by 8.2 per cent, compared to the two-year period before the carbon price. We detail observable changes in power demand and supply mix, and estimate the quantitative effect of the effect of the carbon price. We estimate that the carbon price led to an average 10 per cent increase in nominal retail household electricity prices, an average 15 per cent increase in industrial electricity prices and a 59 per cent increase in wholesale (spot) electricity prices. It is likely that in response, households, businesses and the industrial sector reduced their electricity use. We estimate the demand reduction attributable to the carbon price at 2.5 to 4.2 TWh per year, about 1.3 to 2.3 per cent of total electricity demand in the NEM. The carbon price markedly changed relative costs between different types of power plants. Emissions-intensive brown coal and black coal generators reduced output and 4GW of emissions-intensive generation capacity was taken offline. We estimate that these shifts in the supply mix resulted in a 16 to 28kg CO2/MWh reduction in the emissions intensity of power supply in the NEM, a reduction between 1.8 and 3.3 per cent. The combined impact attributable to the carbon price is estimated as a reduction of between 5 and 8 million tonnes of CO2emissions (3.2 to 5 per cent) in 2012/13 and between 6 and 9 million tonnes (3.5 to 5.6 per cent) in 2013/14, and between 11 and 17 million tonnes cumulatively. There are fundamental difficulties in attributing observed changes in demand and supply to specific causes, especially over the short term, and in this light we use conservative parameters in the estimation of the effect of the carbon price. We conclude that the carbon price has worked as expected in terms of its short-term impacts. However, its effect on investment in power generation assets has probably been limited, because of policy uncertainty about the continuation of the carbon pricing mechanism. For emissions pricing to have its full effect, a stable, long-term policy framework is needed.

Keywords: Emissions pricing; Australia; electricity supply and demand; ex-post evaluation

JEL Classification: Q58, Q48, Q41, Q28