Tuesday, October 25, 2011

A cheaper path to 100% renewables

The Climate Spectator has an article from UNSW’s Mark Diesendorf looking at an alternative to the Zero Carbon Australia plan to switch Australia to 100% renewable energy - A cheaper path to 100% renewables.
Australia has enormous renewable energy resources in the form of sunshine, wind, biomass (organic) residues, hot rocks and waves. But is a transition to 100 per cent renewable energy technologically and economically feasible here?

Last year, a ground-breaking study, "Zero Carbon Australia Stationary Energy Plan," claimed that 100 per cent renewable energy is technically possible and would cost about $370 billion.

The core of the ZCA study was an hour-by-hour computer simulation, by Jack Actuarial Consulting, of Australian electricity demand in 2008 and 2009, supplied mostly by concentrated solar thermal power (CST) with thermal storage, and by wind power.

As is inevitable in a first-of-a-kind study of a revolutionary new energy system, some simplifying assumptions were made:

– Western Australia was connected ... to the eastern states with new transmission lines;
– Second-generation CST power stations … were chosen as the principal energy source. These solar stations were given thermal storage equivalent to 17 hours of full power output and so can, in theory, run through the night;
– A daily average was taken for solar energy inputs, although hourly data are much more accurate;
– To compensate for the reduction in sunshine in winter, a vast excess of CST generating capacity was introduced;
– Also for winter, biomass residues were shipped out to the solar power stations to be burned under the thermal storages when necessary.

At the University of New South Wales, PhD candidate Ben Elliston, Associate Professor Iain MacGill and I initiated an independent research project based around some different assumptions, to remove the above assumptions of the ZCA study.

We performed a series of hour-by-hour computer simulations of the 2010 electricity demand in the five Australian states covered by the National Electricity Market. We chose a broader energy mix than ZCA: first-generation CST with thermal storage, wind, solar PV, gas turbines and existing hydro – all commercially available technologies. Gas turbines, which are like jet engines, are highly flexible generating plants ideally suited to supporting fluctuating renewable generation. Some are already being deployed in Australia. They could initially be fuelled on natural gas, however this could be replaced with liquid biofuels produced sustainably from the residues of existing crops.

We found that it is, indeed, technically feasible to supply current electricity demand by 100 per cent renewable energy with the same reliability as the existing fossil fuelled system.
The key challenge is meeting demand on winter evenings. At sunset on overcast days, the thermal energy storages are not full and sometimes wind speeds are low. In our initial simulations, to be presented in a peer-reviewed paper at the forthcoming Australian Solar Energy Society’s annual conference, we used biofuelled gas turbines to fill the gap. This is likely to be lower cost than ZCA’s solution of choosing a vast excess of CST power stations, which would not be used in summer.

However, the UNSW study proposes an even cheaper solution than lots of gas turbines or CST: namely a revitalised energy efficiency program to reduce electricity demand on winter evenings. Furthermore, in a ‘smart’ electricity system it will be easier to reduce demand quickly during periods of low supply.

Both the ZCA and UNSW studies refute the claims by renewable energy sceptics that renewable energy cannot replace baseload (24-hour) coal-fired power. ZCA interprets its results by concluding that CST with thermal storage is baseload.

We interpret the simulation results differently, concluding that although CST can perform in a similar manner to baseload in summer, it does not in winter. However, we maintain that it doesn’t matter. The important result is that our renewable energy mix gives the same reliability of the whole generating system in meeting demand as the existing polluting system.

Although the UNSW study has not yet performed an economic analysis, our scenarios have the potential economic advantage over ZCA’s that they don’t require transmission links between WA and the eastern states and they have a smaller percentage contribution from CST, currently the most expensive component of the energy mix.

It should be emphasised that neither the modelling of ZCA nor UNSW establishes a timescale for the transition to 100 per cent renewable electricity. However, the ZCA study claims that the transition could be made in a decade. That claim is an assumption based on the observations that Australia could supply the raw materials for manufacturing the systems and that solar and wind technologies are suitable for rapid manufacture.

Friday, October 21, 2011

NZ ETS 120% Pure Subsidy Part 2

Robin Johnson's Economics Web Page cross posts about the very generous free allocation of emissions units under the NZ emissions trading scheme to Rio Tinto Alcan NZ's Tiwai Point aluminium smelter.

Over on Gareth's Hot-Topic blog I had a go at estimating how free emissions units had been allocated for free to New Zealand's only aluminum smelter under the New Zealand Emissions Trading Scheme.

Tiwai Point Aluminium Smelter

A brief recap, Tiwai Point Aluminum Smelter is located near the town of Bluff, out on the edge of Foveaux Strait near the southern-most city of Invercargill The smelter is operated by NZ Aluminium Smelters Limited, which in turn is owned by Rio Tinto Alcan NZ Limited, a subsidiary of Canadian multinational Rio Tinto Alcan. Tiwai Point Smelter processes bauxite from Queensland into high-quality aluminium.

In response to my post, Simon Terry of the NZ Sustainability Council points out that we shouldn't be surprised at the high level of free allocation of units to big emitters. He documented this in June 2008, in the report Corporate Welfare Under the ETS, which looked at free allocation of units to eight energy intensive companies under the proposed NZ ETS.

In particular, he reminds us that in the NZ ETS the free allocation of units includes a factor to compensate for NZ ETS-related electricity price increases. As the NZ ETS will make some power generation more expensive to the extent that it uses fossil fuels (Huntly Power Station for example). This explains why the 'allocative baseline' factor for aluminium smelting is 2.645 units per tonne aluminium when the emissions factor for NZ's Ministry for the Environment's Greenhouse Gas Inventory is 1.67 tonnes CO2-e per tonne aluminium.

This feature of using free allocation of units to compensate emitters for electricity price increases is explicit in the 1999 - 2008 NZ Labour Government's original NZ ETS proposal Framework for a New Zealand Emissions Trading Scheme, released in September 2007. As indicated by this quote under the heading "Allocation of emission units"
"indirect emissions associated with the consumption of electricity, as well as direct emissions from ... industrial processes will be included in the concept of emissions from industrial producers...The basis for allocation for electricity consumption will be one that compensates firms for the cost impact".
Another regular commenter, Password1, says my analysis is totally incorrect because I have left out the indirect emissions from using electricity, that I am not comparing the same sets of data, and that I need to redo my calculations based on what is in the legislation. Further, my assertion that there has been an "overallocation" of units "is wrong, wrong, wrong".

Password1 concludes that
"The smelter is not getting a ‘refund’ – they are facing a proportion of the full cost of emissions both at the point of aluminium production and from being passed down from the electricity generator."
Okay maybe I will redo my calculations. So off I will go down the rabbit-hole and look into this electricity factor. So what is the proportion of the 'allocative baseline' factor for aluminium smelting, 2.645 units per tonne of aluminium, is to compensate for NZ ETS-related electricity price increases?

This idea of fossil-fuel-thermal power costs (increased by the NZ ETS) affecting a smelter that only exists because of hydroelectric dams on Lakes Manapouri and Te Anau seems a bit bizarre. Especially since the smelter's supply contract is with Meridian Energy, the 100% renewable power company.

However, the NZ wholesale electricity market works by preferentially using the lowest priced generation offer in any one half-hour trading period. This means that wholesale price is set by the most expensive block of electricity offered into the market which is needed to ensure demand is satisfied and that block may be from a coal or gas thermal generation.

When demand is high and hydro lakes are low, thermal power sets the wholesale price. As was the case through much of 2008. When demand is low and hydro lakes are full, then the coal-powered Huntly Power Plant may be on the substitutes bench and the NZ ETS costs won't flow through to NZ's wholesale electricity price.

So it does seem that there is some level of carbon price from the NZ ETS reflected through the wholesale price that ends up in the electricity price paid by the smelter. However, it is quite hard to quantify this price.

This issue was discussed in June 2010 in this Cabinet paper. Paragraph 37 tells us that the electricity allocation factor is 0.52 tCO2-e/MWh. Paragraph 40 tells us that an analysis of the smelter's electricity contract with Meridian Energy indicates that the use of this factor would result in over-allocation of units as the actual extra electricity costs are less than 0.52 tCO2-e/MWh.

Unfortunately the actual extra electricity costs, the degree of over-allocation and the fiscal cost of allocation to the smelter, have all been blanked out from the cabinet paper, apparently as 'the information is commercially sensitive'. I appear to be at the end of that rabbit-hole.

The next rabbit-hole is to check the emissions factor that gives emissions of CO2-e from tonnes of aluminium produced.

In terms of emissions reported and units surrendered, Regulation 35 of Climate Change (Stationary Energy and Industrial Processes) Regulations gives a 10-variable formula for the calculating the smelter's emissions from production. I am missing about 4 of these variables. So that's also a dead end for duplicating the emissions and the units to be surrendered.

But why don't I just use actual numbers? This Ministry of Economic Development report shows that the NZ aluminium manufacturing sector has only one NZ ETS 'participant' and that the sector, and therefore the one participant, the aluminium smelter, reported emissions of 615,814 tonnes CO2-e for the 2010 year and 312,294 tonnes CO2-e for the six months from 1 July to 31 December 2010.

So 312,294 tonnes were emitted in the six month period of obligation to surrender matching units. So we divide by 2 for the two-for-one unit deal, and that results in 156,147 units to surrender.

210,421 units were allocated to the smelter for the six months according to the NZ Ministry for the Environment.

That's 54,274 more units allocated than surrendered or alternatively the units allocated to the smelter exceeded the units surrendered by the smelter by 135%.

This result is pretty much a mid-point between my estimates which were from 147% to 122%, as summarised in this table.

Table 1 Low actual and high estimate of units to surrender
Units to surrender143,342156,147172,526
Units allocated210,421210,421210,421
Excess allocation (units)67,07954,24737,896
Excess allocation (per cent)147%135%122%

Summing up

  1. The Tiwai Point smelter was allocated 210,421 emission units in the six-month NZ ETS compliance period in 2010. Without any reasonable doubt, this represents 54,274 more emission units than it surrendered to match emissions.

  2. At today's NZ unit price of $NZ14, the value of the units allocated is $NZ2,945,894. The value of the excess of units allocated above units surrendered is $NZ759,836. That is the value of the taxpayer's gift to the smelter.

  3. An unknown (or undisclosed) proportion of the free units are intended to compensate the smelter for NZ ETS-related electricity price increases in a year characterised by highest level ever of renewable generation.

  4. I can't prove that the amount of free units allocated is more than the sum of the units to be surrendered for emissions plus some units as compensation for electricity price increases. But I think it is highly likely.

  5. In any case, it hardly matters whether the volume of free allocation is either just under 100% of costs or whether its 135%. Both options pretty much effectively negate the carbon price on the smelter and mean no real incentive to reduce emissions.

The bottomline for me is that if the smelter were not in the NZ ETS, they would at least be paying the some carbon price as a 'downstream' electricity user where some costs of fossil-thermal power generation are factored into the wholesale electricity price when fossil-thermal power is not priced out by cheaper hydro-generation.

Because of the allocation of units for power price increases, the smelter faces a lower carbon price than if it was exempt from the NZ emissions trading scheme and just paid its power bills.

There was an argument that the NZ ETS might be weak but at least it was better than nothing. In the case of the smelter, we can know discard that argument.

Thursday, October 13, 2011

Trans-Tasman Emissions Trading Scheme Challenge Part Two

Robin Johnson's Economics Web Page cross posts on a trans-tasman emissions trading test.

Yesterday the Australian Parliament adopted legislation for its greenhouse gas emissions trading scheme.

So I thought I would write another post on the theme of the "Trans-Tasman Emissions Trading Scheme test series", this time looking at the key differences between the New Zealand Emissions Trading Scheme and the Australian Emissions Trading Scheme. The number one key difference between the two emissions trading schemes is in how clearly each scheme sets the carbon price.

Unequivocal carbon price vs volatile carbon price.

Unlike the NZ ETS, the Australian ETS will set an absolutely clear and unequivocal price on greenhouse gas emissions.

The price will be $AU23 per tonne from 1 July 2012, then $AU24.15 in 2013-14 and $AU25.40 2014-15 (Securing a Clean Energy Future, The Australian Government's Climate Change Plan, p 26). From 1 July 2015, the carbon price will float within and upper and lower ceiling with the Government setting an overall 'Cap' or limit on GHGs (Securing a Clean Energy Future p 27).

The price for "New Zealand Units" under the NZ ETS is being set at a discount to the price of international Kyoto units in the volatile international carbon. So the NZ price is ...well...it's yeah whatever. As in this chart for 2010. Note that the Australian minimum carbon price of 23.00 Australian Dollars converts to 29.50 New Zealand Dollars? The price of 29.50 NZ dollars is off the vertical scale of this chart!

NZU & CER price

And as in this updated chart for September, showing the fall in the international price driven by the Euro-Zone debt crisis is further pushing the NZ unit price down.
Sept Oct NZU prices

This direct importing of the international price into the NZ unit price is because of two intrinsic design features of the NZ ETS.

The NZ ETS has no cap on domestic GHG emissions and no cap on free allocation of units to emitters. The NZ ETS is highly linked to international markets. It allows almost all international Kyoto units to be imported and surrendered by emitters.

So an emitter would say to a seller of NZ units "Why should I buy your NZ units instead of international units, which I could sell in a much wider market, unless the NZ units are at a discount?"

Of course, the Australians, influenced by Ross Garnaut and Bob Brown of the Green Party, are not having a bar of this price volatility. In terms of the economics literature, this is absolutely the right way to go.

A clear and consistent carbon price out for several years will clearly signal to emitters which emission reduction technologies to adopt - ones that will break even at the set carbon price! The same goes for developers of windfarms and producers of biofuels. A clear carbon price into the future will give investors confidence that they will not lose their shirts putting capital into windfarms and biofuel plants. Carbon price volatility, like in New Zealand, just makes investment in either mitigation or substitution of fossil fuels a bad bet.

So why on earth would a big industrial emitter want to have an emission trading scheme like New Zealand's where they have an unpredictable and volatile liability to pay a carbon price instead of an unequivocal and consistent-over-time carbon price as set out in Australia's scheme?

The only answer I can give is that if like Rio Tinto NZ Alcan Limited, you are given more emissions units than you need for your actual emissions then it just doesn't matter what the price is.

Thursday, October 6, 2011

From brown coal to solar thermal

The Climate Spectator has a report on some positive thinking in South Australia, where Alinta is considering converting an old coal fired power station to a solar thermal power generator - From brown coal to solar thermal.
The owners of Australia’s most polluting coal-fired power station, the Playford plant in South Australia, are considering converting it to a solar thermal facility if it is closed as part of the government’s proposed buyout of brown-coal generators.

Jeff Dimery, the head of the now privately owned Alinta, said solar thermal technology was one of two options being considered after the closure of the 240MW Playford, and may be an easier option than trying to source gas for a gas-fired peaking generator, as there is no gas pipeline to Port Augusta.

“We’re exploring the idea of building a renewable facility and integrate that with baseload (from the remaining northern station) and solar thermal would be ideal, as there a good sun resource in the region,” Dimery told Climate Spectator in an interview. “The technology requires funding, and it’s a case of needing to convince government that it is one of better projects. We intend to explore it.”

Playford is one of four brown coal generators eligible to make a tender for the government’s proposed buyout, which intends to remove 2000MW of brown coal generation from the grid by 2020 in order to reduce emissions, and create room for gas-fired generation or renewables to be built in their place.

The solar thermal idea will not form part of Playford’s submission – apparently it matters not what the owners of the retiring generation plant intend to do with the funds (and some may be expected to expatriate those funds overseas), but Dimery is confident that Playford would be an attractive option in any case. For a start, it’s the most polluting, at 1.7t of Co2e/MWh, the early closure of 240MW would have little impact on the National Energy Market, and the workforce could be absorbed at the neighbouring 520MW Northern Power Station without any forced redundancies. That could save on government funds.

The other attraction of solar thermal is that it could be integrated into the Northern Power Station, pre-heating boilers in the same way that a solar booster plant will be designed to do at the Kogan Creek power station in Queensland, and/or putting electricity directly into the grid.

Monday, October 3, 2011

When should agriculture enter the New Zealand Emissions Trading Scheme

An agricultural commenter has hit back at the NZ Emissions Trading Scheme Review 2011 and the New Zealand Herald editorial Farmers must share burden on emissions' for saying that there should be no further delay of the 2015 date when agricultural emissions will enter the New Zealand Emissions Trading Scheme (NZ ETS).

The Herald editorial had the temerity to comment on the government's "extraordinary generosity to farmers" in changing the "modest impositions" of the NZ ETS on agriculture so that it "will become truly timorous".

David Anderson, who is described as a former editor of Rural News and a communications consultant in "teh" (sic) agribusiness sector, has just had an opinion piece in the NZ Herald (27 September) arguing for a further delay in agriculture's entry into the NZ ETS.

Just as a brief re-cap, in the Clark-Cullen Labour Government's original version of the
NZ ETS, agriculture was 'last in', with unit surrender obligations starting on 1 January 2013; i.e. after the end of the 2008-2012 Kyoto Protocol first commitment period. In November 2009, Nick Smith and National changed the start or entry date to 1 January 2015 and confirmed that it would be processors and not individual farmers who would have the obligation to report emissions and surrender units. That was done in the Climate Change Response (Moderated Emissions Trading) Amendment Act 2009

As we know, Federated Farmers can be a bit emotive about the NZ ETS, with past President (and now ACT Candidate) Don Nicholson) describing the NZ ETS in 2009 as the road to hell paved with good intentions.

So lets have a look at David Anderson's arguments. The first argument is;
Why would we want to unfairly penalise New Zealand's agriculture sector - and one of the few sectors with the ability to help the country out of the current economic hole - by imposing taxes when our international competitors are not doing the same?

Because agricultural GHG emissions are the New Zealand's largest source of emissions! It's not that hard to understand.

In 2009, agricultural GHG emissions were 32.8 million tonnes (mt) of CO2-e out of a total of 70.6 million tonnes or 46.5 per cent of New Zealand’s total greenhouse gas emissions. The energy sector emitted 31.4 mt (44.4%). Industrial processes emitted 4.3 mt (6.2%). Waste emitted 2.0 mt (2.9%). Solvents and other products emitted 0.03 mt (0.04%) according to the Ministry for the Environment Greenhouse Gas Inventory 2011.

Other developed countries who have signed up for the Kyoto Protocol obligations just don't have agriculture dominating their GHG emissions like New Zealand. For example, here's a chart comparing New Zealand and Australian agricultural GHG emissions.

Lawyer Toni Moyes points out in a 2008 paper in the Ecology Law Quarterly, 35:4, pp. 911–966; Greenhouse Gas Emissions Trading in New Zealand: Trailblazing Comprehensive Cap and Trade that New Zealand is "fundamentally different" from European countries where carbon dioxide from the energy sector emits 80% of GHG emissions. Moyes concludes "Thus, if non-CO2 gases were excluded, the NZ ETS would ignore over half of the problem. Likewise, sectors typically excluded from ETS must be included in the NZ ETS in order to address the majority of emissions. The NZ ETS would be far less effective if agriculture, the single biggest emitter, was ignored." I could not put that better. It is not "unfair" to include agriculture in the NZ ETS, it is essential.

Also, I have to point out that Anderson completely omits to mention the fact that agriculture, once it does enter the NZ ETS, will have (arguably) the most generous free allocation of emissions units of any sector of the economy. Under an ETS, emissions units must somehow get into a trading market. They may be either auctioned to emitters (obviously most wealth-enhancing for the tax payer) or "grandfathered", allocated for free to existing emitters. New Zealand has chosen to 'gift', or allocate for free, all domestic NZ units.

According the Ministry for the Environment, free allocation of units to agriculture will be 90 per cent of the emissions baseline and will phase out at 1.3 per cent per annum from 2016. The baseline will be the industry average emissions per unit of output. The allocation will be uncapped, meaning that there is no set limit on the number of units that may be allocated. Further, there are NO eligibility tests or thresholds for agricultural allocation, meaning that all agriculture participants will be eligible for an allocation.

So the entry of agriculture to the NZ ETS in 2015 will be cushioned by 90%. Or the GHG price signal will be reduced by 90% (compared to other sectors) down to 10% via free allocation. The free allocation percent will be based on "average output", which will be gazetted in regulations. Any processor who does 'better than average' will be in for a windfall gain. Again this is hardly the imposition of an unfair tax.

Number two argument is:
I don't see how handicapping our main economic driver will reduce international greenhouse gases. Surely all that will do is shift the production of these agricultural greenhouse gases from New Zealand to another country?

This is the carbon leakage argument. That businesses and their emissions will relocate to other jurisdictions to escape a carbon price.

Dr Jan Wright, the Parliamentary Commissioner for the Environment, pretty much shot to pieces the agricultural carbon leakage argument in her submission on the 2009 amendments to the NZ ETS.

Dr Wright noted that National was proposing to base allocation of units to agriculture on the industrial allocation model in the Australian Carbon Pollution Reduction Scheme (which was in 2009 only a proposal and which was withdrawn in 2010).

"There is no justification for treating allocation to the agricultural sector the same as industrial processes, either here or in Australia. The impact of the ETS on agriculture is very different to that of industrial process sectors. Productive agricultural land can not be shipped offshore...Carbon credits should not be allocated to prevent an unlikely event."

The nail in the coffin is from Suzi Kerr, an economist who has specialised in permit trading. She had this to say in her submission to the NZ Emissions Trading Scheme Review 2011:
."A small, but crucial, point on agricultural emissions is that all available empirical evidence suggests that leakage of land and production out of the agricultural sector in response to greenhouse gas costs would be small. This evidence is summarised in Kerr and Zhang (2009).

Number three argument is;
It has always argued that it's crazy for New Zealand farmers to be hit with the costs of an ETS when they had no way of mitigating these

This is the 'Agriculture can't mitigate' argument. As blogger Idiot/Savant said in his blog No Right Turn, this is simply untrue. The Sustainability Council wrote a report A Convenient Untruth in 2007 that argues that there are significant mitigation options for agriculture.

Anyway, Anderson almost immediately contradicts this statement in the next paragraph when he states

"There is already evidence - which is also noted by Caygill's Review Panel - that the agriculture sector is reducing its greenhouse gases (my emphasis). Emissions per unit of product from agriculture have fallen by about 1.3 per cent a year over the past 20 years - due to improved management, animal genetics, pasture and crop genetics and technological changes. Opportunities for further reductions included the use of forestry on marginal or erosion-prone land, nitrification inhibitors, and "good practice" management techniques that increase productivity."

Its great that agriculture is reducing emissions! Those responsible deserve all credit for it. However, the advocates of agriculture such as Anderson need to be reminded that reducing emissions is the same as mitigating them!

Anderson's fourth argument is that
"critics and environmental doomsayers" are "making claims about farmers being subsidised".
And that it is unfair and selective to say farmers are getting a free ride.

Look, as far as I'm concerned, we all have an obligation to do something about climate change. New Zealand's climate change policy reflects that. NZ has emissions reduction targets and climate change policies and commitments under the Kyoto Protocol and the UNFCCC. All of us share the responsibility of making NZ's emissions reductions policies work. If we leave out agriculture, the sector of the economy that is the biggest emitter of GHGs, then that is unfair to everyone else.