Can Electricity Markets Be Transformed? Walter Gerardi
Outline � What is required? � Current cost comparisons Key trends � � What do we need to do get there? � Policy framework
What is required?
Emissions, Mt CO2e 100 150 200 250 300 350 50 Emissions without carbon policy 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Projected emissions 2021 2022 2023 2024 2025 2026 2027 2028 2029 Proposed target 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050
2050 2049 2048 2047 How much low emission plant/energy 2046 2045 2044 2043 2042 2041 2040 2039 2038 2037 2036 2035 2034 2033 2032 2031 2030 efficiency required? 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 450 400 350 300 250 200 150 100 50 0 GWh equivalents
Situation could be even more challenging � Electricity generation “share” of target could be greater � Uptake of electric vehicles – Could add up to 10% to 20% to electricity use � Switch to electricity in other stationary energy activities – Already happening to a limited extent � Also could have comparative advantage in low emission energy
Current cost comparisons
Key cost drivers � Capital costs of new plant – Scale – Phase of development – Technology learning rates – WACC Fuel Prices � – Coal – Natural gas – Biomass � Carbon prices � Technology support – RET – CEFC
Geothermal Solar Thermal with Storage Solar Thermal Solar PV (Flat Plate) Wind Tier 2 Levelised costs: mean values Wind Tier 1 IGGC with CCS IGCC Utrasupercritical CFB Fluidised Bed Coal Fired Boiler Supercritical CFB Subcritical CFB CCGT ‐ Western Victoria CCGT ‐ Latrobe Valley 300 250 200 150 100 50 0 $/MWh
Geothermal Solar Thermal with Storage Solar Thermal But not so simple: risk premium Solar PV (Flat Plate) Wind Tier 2 Wind Tier 1 Risk adjusted values IGGC with CCS IGCC Mean values Utrasupercritical CFB Fluidised Bed Coal Fired Boiler Supercritical CFB Subcritical CFB CCGT ‐ Western Victoria CCGT ‐ Latrobe Valley 300 250 200 150 100 50 0 $/MWh
But not so simple: grid parity LRMC, 2.0 kW system Retail tariff 35 30 25 20 c/kWh 15 10 5 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Year of installation
Policy Trends: Clean Energy Future � Carbon Pricing – Fixed price (first 3 years) starting at $23/t CO 2 e from 1 July 2012 – Fixed cap with minimum of 5% below 2000 levels in 2020 – Cap to be set by Parliament with advice from Climate Change Authority Minimum and maximum price caps to 2020 � – Minimum: $15/t CO 2 e – Maximum: $20/t CO 2 e above forecast price � Not all sectors covered: – Greater than 25 kt per facility – Agriculture, forestry, land use change, private road transport and legacy waste excluded – Excluded sectors may be a source of offsets International permits (limited to 50% of total allowable � emissions
Policy Trends: Support Measures � Assistance measures: – Free permits for EITEs for at least 6 years – $5.5 billion worth of permits to generators with emission intensity greater than 1 t/MWh – Pay for set retirement: 2000 MW of capacity with emission intensity greater than 1.2 t/MWh – $1.8 billion to hep other manufacturers/SMEs to adjust, plus $1.2 billion for coal industry to adjust Carbon Farming Initiative � – Source of offsets from land use change and legacy waste – Biodiversity funding � Energy efficiency measures – Expansion of MEPS and EEO programs – Energy Savings Initiative Renewable Energy Support: � – Clean Energy Finance Corporation ($10 billion) – ARENA
Carbon price outlook 2011 A$/t CO 2 -e 2011 A$/t CO 2 -e 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 2013 2018 2023 2028 2033 2038 2043 2048 High price scenario Core policy scenario
Competitive trends: capital costs � Capital costs of new plant – Expected to fall gradually from recent highs as commodity cycles reverse • Cyclical downturn also evident due to slowing economic growth – Accelerated R&D on new technologies – Lowering of WACC – Separation of cost trends • “Manufactured” generation equipment – E.g. PV modules and wind turbines • Civil/structural component
Capital cost trends
Fuel price trends � Coal prices – Expected to fall from record highs in short to medium term – Rise gradually in the long term – Carbon mitigation policies will also put downward pressure on prices Gas prices � – Eastern seaboard gas prices rising to world benchmark levels (LNG net back pricing) • Dual market • Expectation of oil price linkage in Asia – But can shale gas happen there? – Carbon mitigation will have ambiguous impacts on world prices
Average NEM gas prices $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 High Medium $3.00 Low $2.00
Export coal prices SC Research ABARE IEA 1 IEA 2 IEA 3 160 140 120 100 A$/tonne, f.o.b. 80 60 40 20 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
What do we need to do to get there?
Issues Cost trends point to rising costs of high emission � technologies (coal, gas) and falling costs for low emission technologies But support for renewable energy will still be � required in the short to medium term to bridge the gap – R&D – Demonstration – Technology deployment support – Market facilitation – Overcoming technology lock-in Will need the development and deployment of less � mature low emission technologies
Average Price versus Renewable Energy LRMC High Low Mean RE LRMC 160 140 120 100 $/MWh 80 60 40 20 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
GWh 100,000 150,000 200,000 250,000 300,000 350,000 400,000 50,000 new technologies Generation mix: core policy: need for 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Coal 2024 2025 Gas 2026 2027 Wind/hydro 2028 2029 2030 2031 Other low emission 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050
Technology cost reductions required CCGT CCGT with CC OCGT Supercritical coal (dry ‐ cooling) Ultrasupercritical coal IGCC IGCC with CC Ultrasupercritical with CC and oxyfiring Solar PV Solar Thermal Solar Thermal with Storage Geothermal Wind 120 100 80 Index 60 40 20 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Reduce risks: risk matrix IGCC CCS Natural Gas Wind Geothermal Solar GGCT Thermal Technological risk Low Risk of technological failure High Low Low High Moderate Performance risk High Moderate Moderate High Moderate Construction Delay Moderate Low Low Moderate None Carbon price risk Moderate Moderate None None None Fuel price risk Moderate High None None None Fuel supply risk Low High None None Regulation risk Government Policy a. More/less stringent None caps over time Moderate High None None b. Favour other Moderate technologies Moderate Moderate Moderate Moderate c. Complementary Moderate policies Moderate Moderate Moderate Moderate Market regulations Modera te a. Dispatch rules Moderate Moderate Moderate Moderate b. Network pricing and High access rules Low Low Moderate High c. Ancillary service High requirements Low Low High Low
Reduce risks: risk matrix IGCC CCS Natural Gas Wind Geothermal Solar GGCT Thermal Other regulations Low a. Local planning rules Moderate Low High Low Low b. Environmental rules High Low High Low c. Rules governing None storage and seepage High None None None Market risks High Price trends and volatility High High High High Competitor cost trends after entry Moderate (volume risk) High low Low Moderate Moderate Ramp up risk Moderate Moderate Low Low Moderate Large Load Leaves High High Low Low Breakthrough technologies down Moderate the track High High Moderate Moderate Moderate Transmission constraints Moderate Moderate Low Low High MLF Adjustments Moderate Low High High None Carbon Transport Cost Moderate None None None None Storage Cost High None None None
Support policies � Key attributes: – Targeted: one policy per market barrier – Need to demonstrate: • Overcomes market barrier • Benefits exceed costs • Effective in achieving goal • Fair • Institutional fit – No perfect policy response • Good design that appreciates the risks and uncertainties required � Mix of programs required – R&D – Demonstration programs – Commercialisation – Early stage deployment
Questions: Walter Gerardi Principal Consultant SKM MMA 03 8668 3081 0417 508 778
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