Emissions and coal generation rising, says report

Consultancy company pitt&sherry has released the latest edition of its Carbon Emissions Index (Cedex). The report found that annual NEM generation for the year ending February 2014 continued to fall - but for the first time in two years, associated emissions slightly increased.

The reasons for this change may be a result of changes in the dynamics of electricity generation. Hydro generation decreased by 1.4% and gas generation showed a smaller decrease; while brown coal generation increased slightly, black coal generation stayed almost constant and wind generation increased slightly compared with the year ending January 2014.

According to Dr Hugh Saddler, principal consultant, energy strategies at pitt&sherry, “Two aspects of these changes suggest that they could be an indication of the next stage in the evolution of NEM generation.”

The fall in hydro output was caused by a dramatic reduction of Snowy Hydro output, which in February recorded its lowest monthly output for almost three years. February also saw combined average market prices in the NSW and Victorian regions fall to their lowest level since the introduction of the carbon price and Snowy storage levels fall to their lowest levels since 2011.

“By reducing output at this time, Snowy Hydro will be able to increase generation in June and July - months when average wholesale prices are consistently higher and also quite possibly the last months before removal of the carbon price,” said Dr Saddler.

By contrast, Hydro Tasmania continued to generate at high levels. Hydro electricity was exported to Victoria for some hours at maximum Basslink capacity on most days during February. Total energy stored at the beginning of March stood at 37% of maximum capacity - below the maximum of 61%, reached in October 2012, but also above the lowest level of 19% reached at the end of the drought in May 2008. In the absence of significantly above average rainfall in SE Australia, a trend of easing hydro output seems likely.

The stagnation of gas generation levels is believed to be the precursor of an imminent decline. The impact of higher wholesale gas prices, caused by demand from the three LNG plants under construction in Queensland, has been widely reported. Specific manifestations include the decision of the Queensland government-owned Stanwell Corporation to suspend operation of its Swanbank E combined cycle plant and sell its contracted gas to a third party; and the decision of Origin Energy to operate its Darling Downs combined cycle plant in open cycle peaking mode only. Less widely reported has been the impact of the government’s termination of the mandatory gas generation scheme, which was introduced in mid-2005.

Over the life of the scheme, annual gas generation in Queensland increased from 7% of total state electricity supply in 2005-06 to 19% in 2013, when Queensland was the source of over 42% of gas generation in the NEM. The Darling Downs and Condamine combined cycle plants were commissioned, as well as several open cycle peaking plants. The combined cycle plants, owned by Origin Energy and British Gas, are now at risk of becoming stranded assets, offset by the fact that both companies have major stakes in the new LNG plants. The main beneficiaries will be the two state government-owned, coal-fired generation businesses.

According to Dr Saddler, “The overall trend for the immediate future will of course also depend on demand … Later this year, the closure of the Point Henry aluminium smelter will remove roughly 3 TWh of annual demand from Victoria, meaning that total demand in Victoria will follow the trend seen in NSW during 2012 and 2013.”

The outlook for the immediate future is for less hydro and gas, and a higher share for coal-fired generation in the total supply mix. Wind generation will also increase for a while as there is 786 MW of new wind generation capacity committed to be built in the NEM (mostly at an advanced stage of construction) to add to the 2743 MW already operating.

Assuming an average capacity factor of 35%, this new generation will supply about 2.4 TWh annually. The Point Henry closure and new wind generation will thus reduce annual demand for all other generation by 5-6 TWh. Total generation by Swanbank E, Darling Downs and Condamine power stations in 2013 was 5.2 TWh.

“Putting all these numbers together, it’s possible that the decline in coal-fired generation, and consequently greenhouse gas emissions from electricity generation, may slow or even begin to reverse over the next year, though that will be very dependent on whether demand from residential and other business electricity consumers continues to fall,” said Dr Saddler.

“In the slightly longer term, the outlook for coal-fired generation, and hence emissions, will depend heavily on what changes, if any, are made to the RET legislation, following the current review. If the RET is cut back, coal will benefit.”

For more information, visit http://www.pittsh.com.au/cedex/.