The study provided forecasts for the impact of the Australian carbon pricing mechanism on the shape of Australia’s National Electricity Market (NEM) through to 2020, examining the question of which energy sources are likely to benefit most in the move away from coal-fired generation.
According to RepuTex Executive Director Hugh Grossman, the future of gas generation in Australia will largely be determined by the outcomes for both the gas price and the carbon price beyond 2015.
“While gas seems to be the logical replacement, the winner under carbon pricing may not be so clear-cut. We anticipate gas generation will increase from 11 per cent of our total fuel mix, however, the extent of that win could be muted by the growth of export markets from 2014 and the expected increase in gas price levels.
“Any upturn in gas prices would see the operating costs of gas generators spike with it, making them less competitive relative to coal. Any gas price rise may therefore offset the effects of the carbon price, which would otherwise be favourable to the sector,” says Mr Grossman.Article continues below…
In its report on the study, RepuTex models three gas and carbon price scenarios to show the likely effect on the fuel mix of Australia’s NEM. The first scenario, under a static gas price and high carbon price, is the only one to predict a surge in gas generation, showing it rising rapidly from today’s 11 per cent to around 31 per cent by 2020.
The other two scenarios, which both forecast higher gas pricing, paint a more mixed picture – with scenario two showing black coal continuing its dominance, while a drop in brown coal generation is covered by gas. Scenario three shows gas generation growing, but at a much slower rate.
Renewables racing gas
Under each scenario, RepuTex forecasts that generation from renewable sources may fall short of the Federal Government’s mandatory Renewable Energy Target (RET) of 20 per cent by 2020. RepuTex modeling suggests that market share from renewables’ generation could range from 14 per cent to 17 per cent depending on market pricing.
“Judging by the current small size of the renewables pipeline, meeting the 2020 target could be a stretch. Weak wholesale prices and the surplus of renewable energy certificates have affected investments in renewables. Installed wind capacity would have to increase by between 4,750 megawatts (MW) to 5,000 MW to reach the 2020 target,” says Mr Grossman. RET penalties may spur investment in renewable generation, however, according to RepuTex, if wholesale prices remain weak, it may be cheaper to pay the market penalty.
“If wholesale electricity prices remain low, we may see the market simply pay the RET market penalty and absorb some uplift in average cost of supply. In that context the price of carbon would need to rise significantly to change the relative operating costs of coal, gas and renewables,” Mr Grossman notes.
“Overall, the prospects of gas as a transition fuel are not clear-cut. In the near-term, we expect the gas price to increase and offset the impact of the carbon price. Meeting carbon emission targets would hinge on renewables – and more specifically the potential improvement of renewable technology as a means to generate base load power. Should this occur, we may see renewable generation leapfrog gas altogether.”