Carbon Tax Substantiation

Please click here to view Community Electricity's Carbon Tax Removal Substatiation Statementpdf 1.3MB

Introduction

  1. The Carbon Tax was repealed in July 2014 and electricity retailers are required to lodge documentation to support the impact of the repeal on their operations and their pass-through to customers of the savings.
  2. This document establishes the factual setting within which retailers operate and seeks to demonstrate that:
  1. retailers that are supplied from Western Australia’s Wholesale Electricity Market (WEM) do not receive express notification of the carbon charges that they pay (this is not necessarily the case for retailers that contract directly with generators);
  2. WEM-supplied retailers have no reliable way of estimating the charges that they pay;
  3. the information necessary for estimating carbon charges is commercially confidential and has not been assembled;
  4. a carbon charge in respect of the WEM has been published by the State Government;
  5. retailers can make qualitative and intuitive assessments of the published energy prices for evidence of the carbon charge that they pay;
  6. the published carbon charge is not-inconsistent with such qualitative assessments;
  7. the best that a retailer can do in respect of passing through carbon charges is to adopt the published figure (being $21.53/MWh + GST in FY 13-14).

Business model

  1. Community Electricity is an electricity retailer in Western Australia.
  2. Community Electricity sells electricity to Large Use (>160MWh per year) Commercial & Industrial (C&I) customers based on the pass-through of all charges plus a management service fee.
  3. Community Electricity does not supply electricity to Mass Market Customers (known in Western Australia as Small Use Customers).
  4. Community Electricity supplies only well-informed C&I customers on the basis of individually negotiated contracts.
  5. Community Electricity sources all its electricity from the WEM administered by the Independent Market Operator (IMO). Specifically, Community Electricity buys energy exclusively from the WEM’s Balancing Market and not from the Short Term Energy Market (STEM) or under bilateral contract.
  6. Community Electricity’s cost of supplying electricity to customers is documented via invoices issued by the IMO (indicative 60% of the cost of supply), the network operator Western Power (indicative 30%) and Large & Small Green Energy Certificates (indicative 10%).

Carbon component of the cost of supply

  1. None of the cost of supply invoices includes a component detailing any aspect of carbon, either as a quantity or as a price or charge.
  2. It is understood that there is no carbon component in the network charges or cost of Green Energy Certificates.
  3. There is a carbon component contained in the charges for energy, ancillary services, and constraint payments in respect of out-of-merit generation, with all these charges being contained indirectly in the IMO (Non-STEM) invoice.
  4. The IMO invoice does not have provision for, or anywhere make reference to, carbon either as a quantity or as a price or charge.
  5. Retailers that source their electricity from the WEM do not have a statement of the carbon component of their input costs or any means of identifying such a component.
  6. The carbon component of the charges in respect of energy, ancillary services and out of merit payments occurs as a result of the pass-through by generators of the carbon component of their fuel costs.
  7. The carbon cost of a generator varies in real time according to a diverse range of variables including generator technology, fuel type, fuel quality, generator efficiency (heat rate), ambient temperature, etc.
  8. The proportion of the IMO invoice attributable to energy is considerably higher (indicative $50+ per MWh) than for ancillary services (indicative $3/MWh) and out-of-merit payments (indicative $1/MWh).
  9. Estimation of the carbon component of Ancillary Services and out of merit payments are doubly complex and can only be practicably conducted by the IMO conditional on it first being provided with confidential market information.

The cost of energy – Balancing Market

  1. The IMO invoices electricity retailers (Market Customers) for their purchases from the Balancing Market (recently renamed the Real-time Energy Market) by means of its Non-STEM invoice which contains as a separate line item “Balancing Demand Amount” which states a quantity consumed over the period (MWh) and a total charge ($).
  2. The Balancing Demand Amount charge is a summation over every 30 minute period of the product of the loss factor adjusted quantity for that period and the Balancing Price for that Period.
  3. The Balancing Market sets the price for electricity on the basis of a generator auction held every 30 minutes; the Balancing Price (clearing price) is the price at which the offer curve intersects the demand curve.
  4. Generator offers to the auction are inclusive of all inputs costs, including carbon where applicable.
  5. Generator price offers also reflect strategic and operational issues and are often unrelated to the variable costs of operation. For example, coal-fuelled units are known to bid negative prices during periods of low demand as an alternative to switching off for a short time. Equally, a generator returning to service is likely to bid below its SRMC in order to be guaranteed a stable operating context.
  6. Figure 1 shows the Balancing Price for the month of March 2013 during which an excess of baseload and wind generation overnight caused prices to fall as low as -$200/MWh; that is, customers were paid to consume.

    Balancing Prices during March 2013
    Figure 1. Source: Community Electricity Pty Ltd interpretation of IMO data

Pass-through of carbon savings by generators to retailers

  1. The Balancing Price is subject to adjustments made by the IMO and System Management after real time and is finalised within a further 3 days.
  2. Once the Balancing Price is finalised, it is fixed and not reviewable.
  3. Prior to the repeal of the Carbon Tax on 17 July 2014, insofar as the Balancing Price contained a component due to carbon, the Balancing Price is not capable of being adjusted retrospectively so as to unbundle the carbon; in addition, the Balancing Price is fixed after 3 days and in any case, the Wholesale Market Rules do not provide a mechanism for retrospectively adjusting the price to remove the carbon component.
  4. The Wholesale Market Rules do not provide a mechanism for discovering the carbon component of the Balancing Price.
  5. In 2012, the IMO canvassed Market Participants for their views on the desirability of developing an Emissions Intensity for the power system as a whole and this was originally included in the IMO’s Market Evolution Program at a relatively low priority. When the Commonwealth Government announced its intention to repeal the carbon tax, development of the Emissions Intensity was removed from the Evolution Program.
  6. On 13 August 2014, the IMO’s Market Advisory Committee discussed the practicality of generators passing through to retailers (Market Customers) savings arising from the carbon repeal. While minutes have not yet been issued, it is understood that it was agreed that at present there is no mechanism for generators to do so and the IMO has agreed to consider the practicality of making available the data in order to facilitate it.

Published Emissions Intensities and carbon charges

  1. The State-owned retailer (Synergy) controls the majority of generation in the WEM either directly or through contract.
  2. Synergy has published that its average emissions intensity (buy and sell) is 0.7435 t CO2 per MWh in Q4 2014. At a carbon cost of $24.15 $/tonne (13-14), this equates to $17.96/MWh. This increases to 0.7556 t CO2 per MWh in Q1 2015 ($18.25/MWh at the previous carbon price).
    Reference: http://wholesale.synergy.net.au/SitePages/Standard%20Products.aspx
  3. The Energy Operators (Electricity Generation and Retail Corporation) (Charges) By-laws 2006 states the Carbon Charge contained in Synergy’s regulated tariffs is 2.153c/kWh (21.53 $/MWh) delivered. At the published system loss factor of 1.097, this equates to 19.6 $/MWh at the price reference (Muja node). This is an average value across the year.
    Reference: http://www.slp.wa.gov.au/pco/prod/FileStore.nsf/Documents/MRDocument:24935P/$FILE/... pdf 300KB
  4. The IMO has published a consultant report that contained as an appendix a table to the effect that the indicative sent out carbon cost in 2013 was around $21/MWh for a typical Western Australian coal fired station and $10/MWh for a gas fired combined cycle station. An open cycle gas station has a cost of around $15/MWh. The highest price for a non-liquid fuelled generator is $27/MWh (coal).
    Reference: http://www.imowa.com.au/docs/default-source/rules/imo-wem-procedures-and-other-documents... pdf 1.1MB
  5. An indicative comparison of the carbon inclusive and exclusive merit order of the sent out SRMC is shown in Figure 2.

    Generator Fleet SRMC with and without carbon
    Figure 2. Source: Community Electricity Pty Ltd interpretation of IMO data

Qualitative assessment of the introduction of the carbon charge

  1. Information on the holistic impact of the cost of carbon at the introduction of the scheme on 1 July 2012 can in principle be inferred by observing the step change that occurred in the Balancing Price at that time.
  2. The cost of carbon affected the Balancing Price holistically via a combination of:
  1. the Carbon Tax as it applied to the marginal generator, plus
  2. the impact of the Carbon Tax on the Merit Order (Short Run Marginal Price stack) of the generation fleet via their respective fuel types, generator technologies, fuel costs and emissions factors.
  1. The assessment of the introduction of the carbon tax is complicated by the fact that the WEM was subjected to two simultaneously material price adjustments on 1 July 2012; the carbon tax and the introduction of the Balancing Market.
  2. The object of the Balancing Market is to improve the efficiency of Balancing Prices by removing the partial monopoly then enjoyed by the former State-owned generator (Verve Energy, now Synergy) and providing for pricing and dispatch decisions to be made closer to real time. It was also designed to provide more equitable dispatch decisions during periods of generation excess (particularly overnight).
  3. On its commencement, the Balancing Market initially exhibited price volatility, which is understood to have been caused by forecasting errors which were remedied a few months later when System Management improved its systems.
  4. Figure 3 shows the Balancing Price as a function of time 2 weeks before and 2 weeks after the introduction of both the carbon tax and the Balancing Market. A price dislocation on 1 July is clearly discernible.

    Balancing Prices from mid June to mid July 2012
    Figure 3. Source: Community Electricity Pty Ltd interpretation of IMO data

  5. Figure 4 shows the median Balancing Price for every 30 minute interval of weekdays throughout June 2012 (pre- Carbon Tax) and July 2012 (post- Carbon Tax). It also shows the difference between the two, where the excess differences occurring around the morning peak are considered to be principally due to the forecasting issue and otherwise are not credibly due to the carbon tax.

    Comparison of weekday median Balancing Prices during June and July 2012
    Figure 4. Source: Community Electricity Pty Ltd interpretation of IMO data

  6. Figure 5 shows the same data for the weekend intervals, where the system load was generally lower.

    Comparison of weekend median Balancing Prices during June and July 2012
    Figure 5. Source: Community Electricity Pty Ltd interpretation of IMO data

  7. It should be noted that the contribution of the new Balancing Market is unknown and it is not practicable to assess the impact of generator maintenance (which would change the merit order) and changed bidding strategies (due to private generators entering the market).
  8. Interpretation of the data is subjective, but it may suggest that the carbon charge is “as expected” overnight. The day-time differences is generally less than the overnight differences, but is more likely to be impacted by both generator maintenance and the new Balancing Market.
  9. It should also be noted that these figures are a “first month snapshot” of a scheme that was in operation for two years.

Qualitative assessment of the repeal of the carbon charge

  1. The carbon tax was repealed on 17 July 2014 and applied retrospectively from 1 July.
  2. Assessment of the impact of the repeal is complicated by the uncertainty over when generators ceased to include carbon in their Balancing Market offers. While it is likely that offers up to 17 July included carbon, this may not be the case. Equally, while it is likely offers after 18 July will have excluded carbon, there may have been a delay in implementing this.
  3. The assessment is further complicated by the short time, and the limited data set that can be drawn on, in making the assessment.
  4. The Balancing Price from 15 June to 10 August is shown in Figure 6.

    Balancing Prices from mid June to mid August 2014
    Figure 6. Source: Community Electricity Pty Ltd interpretation of IMO data

  5. No price dislocation is discernible at 1 July (the retrospective effective date), but a change is discernible at 18 July (the day after the passing of the legislation, which also corresponds to the return to service of a large quantity of coal generation).
  6. Figure 7 shows a comparison of the median values for the month of July 2014, pre- and post- 17 July (with no separation of weekdays and weekends).

    Comparison of median Balancing Prices during July 2014, before and after the Carbon Tax repeal
    Figure 7. Source: Community Electricity Pty Ltd interpretation of IMO data

  7. The chart indicates a reduction in overnight prices or around the expected amount and nominally no reduction during the day.
  8. The assessment is facilitated by the fact that, in contrast to the introduction of the carbon tax, the Balancing Market remained stable during the change.
  9. The assessment was complicated by a very large quantity of generator outages. Figure 8 shows the indicative quantity of baseload units on outage during June and July. Of particular relevance, around 400MW of baseload returned to service around the time of the passing of the repeal. [NOTE: outage data became available only a few months ago and so is not available for the introduction of the tax.]

    Indicative baseload outages in 2014
    Figure 8. Source: Community Electricity Pty Ltd interpretation of IMO data

  10. The chart indicates a reduction in overnight prices or around the expected amount and nominally no reduction during the day.
  11. It should be noted that this is a brief snapshot of insufficient data.
  12. All that can be safely said is that there is no evidence to challenge the use of the published values.

Conclusion

Acting as a Reasonable and Prudent Person, Community Electricity has:

  1. adopted the State Government’s published cost of carbon ($21.53/MWh-delivered) as the best estimate of the carbon charge that it pays; and
  2. assessed Balancing Price data for any evidence to challenge the validity of this approach, with no such evidence being found.