Dramatic fall in NEM demand sees emissions continue slide

Total emissions continued to fall and, for the year ended June 2013, were 1.3 million tonnes CO2-e lower than they were in the year ended June 2012 and over 9 million tonnes lower than in the year June 2010 to 2011 (Figures 1 and 2).

The established pattern of the last three years continued, with falling electricity generation emissions more than offsetting growth in emissions from petroleum fuels, while emissions from non-electricity natural gas use fell slightly. June 2013 was the fourteenth successive month in which annualised emissions reported by CEDEX fell.

However, the net drop in emissions was slight with a smaller fall for the month in NEM electricity emissions, while growth in petroleum emissions continued unabated. Our judgement, based on limited and lagged data on emissions from electricity generation and gas consumption in WA, is that Australia’s total energy combustion emissions may not be falling.

This highlights that, if Australia is to reduce its emissions by 2020, it will be important to establish policies which address the continuous growth in emissions from petroleum fuels as effectively as current policies have been in driving down electricity emissions.

Petroleum

Ever since CEDEX started it has been recording steady growth in consumption of petroleum fuels, and associated emissions, interrupted only by a shallow and short lived slowdown in the first half of 2009. This trend continues, apparently unabated (Figure 3). As described in the last full CEDEX report, this growth is concentrated in Queensland and WA, and that pattern continues.

It might be assumed that this growth has been driven by mining, especially coal and iron ore respectively, and that is consistent with Australian Energy Statistics for 2011-12, recently published by the Bureau of Resource and Energy Economics. However, the Bureau’s most recent Resources and Energy Quarterly shows production of both coal and iron ore falling in the March 2013 quarter. A more complete understanding of how and where diesel is being used would obviously be valuable.

In the last CEDEX it was also mentioned that part of the increase in sales of aviation fuels can be explained by the movement of fly-in fly-out workers. This explanation continues to be relevant, with the labour intensive construction phase of the minerals industry still going strong in both states, especially for LNG. When these projects shift to the more energy intensive (and less labour intensive) production phase, growth in aviation fuel use may slow, while consumption of other fuels, especially natural gas, will increase strongly.

Changes in sales of light vehicle fuels (defined, in CEDEX, as all sales of petrol, automotive LPG and sales of diesel through retail outlets, and noting that some of this consumption will also be in heavy road freight vehicles) have consistently shown a strong shift towards diesel, which continues (Figure 5). It is important to appreciate, however, that petrol remains the dominant road transport fuel (Figure 6).

Natural gas

Data on the direct use of natural gas (as opposed to use for electricity generation) have only been available since mid 2008, meaning that currently there are just on four years of annual data. Annualised consumption continued to fall, and reached its lowest level since data became available in May 2013. The prospect of higher gas prices in eastern Australia suggests that this trend may well continue. Unfortunately, relevant comprehensive data are not available for the very large gas consumption in WA.

National Electricity Market update to May 2013

In the year to August, total NEM demand fell dramatically, by 1.4 TWh (equivalent to 0.8%), with falls in every state except Tasmania. It is likely that the mild winter weather across much of eastern Australia was a contributing factor. Unusually, in the NEM the reduced demand was matched by roughly proportional reductions in supply from all generation types except wind, so that the generation mix in August was not greatly changed from the previous month (Figure 9), as was total emissions intensity.

In WA total demand for the year to June 2013 was unchanged, but 2.3% less than in the year to June 2012, similar to the 2.4% fall in NEM demand for the same period (Figures 7 and 8). Over the year in the NEM, wind supplied just over 4.1% of generation, but in the month of August it supplied 6.5%. This made August 2013 by a wide margin the biggest month to date for wind generation in the NEM. Detailed data published recently by AEMO, as part of its annual forecast reporting process, shows that major industrial loads, such as the Kurri Kurri aluminium smelter, have accounted for just over a third of the total fall in NEM demand.

The remainder has come from small industrial, commercial and residential consumers. This large category of demand accounts for nearly 80% of total demand and the overwhelming majority of individual consumers. When this demand is expressed per head of population in the NEM states, i.e. off-setting the effect of population increase, it is found that demand fell by nearly 7% between 2008-09 and 2012-13.

The competition between generators, heightened by this falling demand which CEDEX has been charting for several years, has resulted not only in reduced coal fired output and lower emissions, but also much lower average spot prices in the NEM wholesale market. These two key factors have caused a fall in total generation costs:

• reduced annual consumption means a reduced annual cost, even if prices remain unchanged; however

• wholesale prices have actually fallen under the influence of more intense competition caused by reduced demand and the RET’s support of new, renewable, generation.

It is interesting to look at the impact of the carbon price in the context of wholesale prices over the longer term. We have calculated the carbon cost component of wholesale prices in each NEM state in 2012-13, based on the emission intensity of electricity supplied in the state, i.e. assuming 100% carbon cost pass-through.

We have then calculated the volume weighted annual average spot wholesale price in each state over the past five years, net of the carbon price. Each of these prices is then multiplied by per capita electricity consumption (excluding large industrial consumption) in the relevant year, to give total annual per capita wholesale costs of electricity.

The per capita carbon cost in 2012-13 varied between $43 in Tasmania and $179 in Victoria, with its much more emissions intensive electricity. However, over the preceding few years, total non-carbon wholesale costs fell by almost as much (or sometimes more) because of the combination of lower wholesale prices and reduced consumption.

The detailed results are as follows:

In SA, even with the carbon price, the average person paid generators less for the electricity he or she consumed in 2012-13 than they did in 2009-10. In NSW they paid exactly the same amount, and in Victoria they paid only $55 more (compared with 2008-09). Queensland and Tasmania experienced significant wholesale cost increases due to exceptional factors, not directly related to the carbon price. In Queensland, where wholesale prices were the lowest in Australia for some years prior to 2012-13, a series of disruptive market events (high temperatures, unexpected generator failures, transmission congestion), resulted in very high market prices over quite extended periods in January and again in March and June.

Had prices, net of carbon, been the same as in 2011-12, the net carbon price increase over 2009-10 would have been only $11. In Tasmania, for entirely logical and predictable economic reasons, electricity flows through BassLink allow wholesale prices in Tasmania to be strongly affected by prices prevailing in the much larger adjoining Victorian market, meaning that Tasmanian prices went up by much more than just the pass-through of the local carbon cost. However, Tasmanian electricity consumers have the consolation of knowing that most of this income windfall flowed to state government owned generators and hence, presumably, to state government revenue.

Finally of course, this analysis deals only with wholesale costs. Total costs paid by electricity consumers, notwithstanding their significant demand reductions, have gone up by far more than any of the amounts described here, because of very large increases in the costs of transmission and distribution.