Sanity prevails on Hazelwood

The Victorian Coalition government confirmed this week that it had terminated talks on the previous government’s proposals to shut down two units at the Hazelwood power station in the Latrobe Valley.

The focus on Hazelwood is because it’s the most greenhouse emission intensive plant in the country. This is as result of its age (latest technology in the 1960s is far less efficient than modern plant) and its fuel (brown coal being above 60% moisture). All up, Hazelwood emits around 1.6t CO2 for every MWh produced. This can be compared with about 0.4 for modern gas fired power and 0.8-0.9 for modern coal-fired power. So clearly there are questions about its future in a carbon constrained world. It’s interesting to note that the SECV had planned to shut down Hazelwood by 2005. In private hands it has continued, in a fashion akin to grandfather’s axe, to generate a steady full quarter of Victoria’s energy supply. Of course, the green groups that point out the SECV’s plans to shut it down don’t mention also that the SECV planned to replace it with a larger, more modern and efficient, brown coal fired power station.

The termination of talks has set the environmental NGOs grumbling, but it is sensible policy making for a variety of reasons.

Firstly, it would have been an unprecedented intervention into the energy market. Since the late 1990’s the NEM has seen the bringing on of new plant and the retirement of old, all directed by market forces. Having Victorian Government taxpayers spending money to withdraw plant would have a broad range of distortional impacts. Not least among these is the higher wholesale electricity prices that would result from the removal of 400MW of capacity; this would be especially felt during peak demand periods (summer and winter peaks). Therefore it would cause a scramble among new entrant proponents to replace this plant, increasing costs in this scramble, as opposed to a sensible market based implementation of new capacity. But in the absence of a carbon price and the associated uncertainty of what plant to build to replace it, there is no guarantee that any plant would be built, leading to sustained higher and volatile electricity pricing.

Secondly, closing down greenhouse emission intensive plant is the job of the carbon price, not taxpayer funds. After adding a cost of carbon into the cost of production, Hazelwood will pay the highest cost of carbon per unit of production. Here’s how it works:

For a carbon price of, say, $20/t CO2e, its cost go up by $20/t * 1.6t/MWh = $32/MWh.

Meanwhile, average wholesale energy prices (which Hazelwood earns) increase by the average pool price intensity: $20/t * 1t/MWh = $20/MWh.

So for every $20/t in carbon price, Hazelwood earnings decrease by $12/MWh.

In addition, it may suffer a loss in annual production due to its higher position in the merit order.

The higher the carbon price, the lower the available earnings to cover fixed costs. When there’s insufficient margin to cover fixed costs, then retirement looks like a good option.

There are a range of estimations of the price at which it would be economic for Hazelwood to remove capacity but it starts about $30-50/tCO2e. Once some capacity is removed, CO2 prices may come off (as there is less demand) and power prices go up (as there is less supply), and the margin for the plant remaining in service is improved.

So if retirement is something that would happen anyway under a carbon price, and consumers will be paying the higher costs of energy resulting from the carbon price, why should they ALSO fork out for this intervention?

Thirdly, it’s not clear on what basis it was determined in the first place that a shut down of the units is the lowest cost form of abatement for Hazelwood. There are a range of other options to reduce emissions at these plants, including intermediate operation (as it did prior to interconnection with other states under the National Electricity Market) what I call “seasonal baseloading” (operating at full capacity during summer and winter periods, and then doing maintenance in low demand periods) and co-firing with gas. I imagine there would be other options the owners/operators of the plant will be considering. With a carbon price, the variety of options to plant owners can be assessed by their economic merit and actioned accordingly. It is not a case of governments, or the groups that lobby and pressure them, deciding what the right answer is in advance and then using taxpayer funds to force the outcome.

Ironically, government intervention is the kind of policy described by the Federal Coalition’s Direct Action agenda, that is, government (ie taxpayer) funded purchase of abatement. The central problem with this policy is trying to decide what the “baseline” is against which to award a “credit”. Does it assume that Hazelwood would continue for ever (which is what the owners would suggest) or is there a more realistic projection for its future (which would then result in lower abatement). These kinds of negotiations (involving much bureaucracy and diversion of corporate activity) are avoided when there is a carbon price in place.

So, for now, our taxpayer dollars are saved and the lights stay on. In a carbon constrained world, however, it is likely that Hazelwood will see an early retirement, making room for modern, efficient and low greenhouse-intensive plant.

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  1. Hazelwood and Morwell (even older) need to be closed down for genuine pollution reasons as they don’t have filters to scrub out heavy metals and sulfur.
    They should be replaced modern coal plant which capture Capture CO2 and use it for for the production of algal biodiesel.
    CO2 should be viewed as a resource as it is the basis of all life on planet earth.

    • Rob JM & CEC,

      Would you propose replacing Hazelwood’s capacity with another coal fire plant and what would be the life-span of this plant?
      And how long should we wait for proven geo sequestration technologies?

      Surely the time at which a significant portion of Victoria’s peak demand can be met by baseload gas is the other major factor in Hazelwood’s viability.

      • Carbon E Coyote

        If you look at the economics of new plant, if you thought there would never be a carbon price you would probably build another brown coal fired power station, however, if you thought there will be a carbon price in place you’re most likely to build CCGT gas-fired plant. Note that Origin Energy is currently building 550MW of new gas-fired plant at Mortlake.

        Also, in Victoria there’s existing gas-fired plant totaling capacity around that of Hazelwood. With zero carbon price, it doesn’t get to run very much. With a carbon price, it improves its position in the merit order relative to the brown coal fleet, so gets to run a lot more.

        So in summary, gas-fired power is ready to take up the slack.

        In regards to Carbon Capture and Storage (CCS), this needs a carbon price well above $50/t to be economic, and as far as I’m aware has not currently been commercially demonstrated at scale. Hazelwood has hosted some pilot projects.

        • The irony being they closed the portland gas power station when they nationalised the grid because it was to expensive.

      • Carbon capture and storage is not cost effective because in takes a huge amount of power to condense CO2 into a liquid form suitable for geo sequestration.
        Recycling CO2 into algal biodiesel generation does not have this energy cost and produces an extremely valuable bi-product that the world is rather short on.

        • Carbon E Coyote

          Actually, the tricky and expensive bit of CCS is actually the capture, because flue gas is dilute in CO2 and at high temp (which is not good for algae). The compression to supercritical CO2 requires some energy, but it’s not the costly bit.

          Anyway, at a high level, I agree that CO2 to algae to biofuel is a great idea, and there are a lot of players out there trying to prove it up at the moment.

          • Gas has a tiny heat capacity unless there is a high steam content and is easily cooled with evaporative cooling. latent heat is the killer.
            evaporating 1kg of water will cool 2.8tonnes of CO2 gas by one degree C.

          • Good points, thanks for info.

            It makes you think what the likes of Origin and International Power forecast the price of carbon to be in 5,10 and 20 years ( if there is one).

            CEC- would you agree that the Vic Gov’s massive subsidies to Alcoa have been an intervention as well? Take those away, pay every worker 200K and down goes the State’s power bill and carbon footprint (in a big way).

            Also throw in 1-2 car manufactures while we’re at it. This is in our second term of course.

  2. Global Warming is a much bigger con than the Australia housing market and all the other ponzi schemes in the world. I remember reading about Mount Kilimanjaro’s snow would be gone. Read this and look at the picks.

    Wow there is snow on the Mountain in 2008 and apparently it is still growing in 2011.

    The Gillard govt needs the carbon tax to make up for the lost revenue from the housing bust……

    • By discounting Global demand for energy

      It seems..a simple cost that
      When the earth is cooling ,it costs more
      to heat your house..and when the earths
      heating it costs more to cool it…
      Hence continued rises in energy costs..

      cheers JR

    • LBS, since Australia became a member nation of the UN this government (and any other for that matter) is obligated to establish a carbon credit system as mandated in Agenda 21 of the UN charter. I outlined this in an earlier blog.

      For eye-opening information about our constitution and Australia’s legal standing in world affairs, this is a worthwhile read. I’ve had sections of this site confirmed by a QC.

      It also wouldn’t surprise me if Gillard is vying for a position in the UN and wants to be the first Australian Prime Minister to ram this tax down our throats.

  3. Come on LBS. Climate systems are complex and very large. A few cool years proves nothing. As any decent economic nutter knows it’s the trend that matters.

    • H and H,

      I believe we have had a few discussions on this blog.

      “Climate systems are complex and very large. A few cool years proves nothing. As any decent economic nutter knows it’s the trend that matters.”

      A few years of warm doesnt prove its global warming. The earth went through a long period of cooling last century as well. Everyone hoarded around the world is going to freeze.

      I agree but seriously look back through the years if it aint global warming its global cooling. Its all a crock of shit. The World climate goes through cycles. The World has been a hell of lot warmer than it was. Now I am not at saying lets keep pumping crap in the air or water and if there is a more cleaner way then do it. But realize that its a cycle not this Global warming crap that is dieing a slow death which is GREAT.

  4. How does a a 3rd or 4th Gen Nuke compare re emmissions and efficency. Either way what i can see is the owners giving less output so the price of power goes up and their amount of carbon tax goes down because they are polluting less, and because they are generating less, they can probably reduce costs.Interesting side issue is that these things are owned by Long Yang and there was talk of about a 6 billion loss in the event that these were closed.

    • Carbon E. Coyote

      My understanding is that nuke is about $3.5m/MW which translates to about $80-90/MWh but very few greenhouse emissions. Again, needs a $40-60/t carbon price to become economic.

      Hazelwood is actually owned by International Power, which also owns Loy Yang B (1000MW) and a few other plants around the country. Loy Yang A (2000MW) is owned by a consortium including AGL and TEPCO.

      Haven’t heard of “Long Yang”.

  5. “For a carbon price of, say, $20/t CO2e, its cost go up by $20/t * 1.6t/MWh = $32/MWh.

    Meanwhile, average wholesale energy prices (which Hazelwood earns) increase by the average pool price intensity: $20/t * 1t/MWh = $20/MWh.”

    NO! The average wholesale price will only increase by the marginal intensity times the carbon price.

    The nature of the merit order dispatch in the NEM means that only the last unit dispatched has any impact on price. In the case of Victoria the marginal unit may be a gas fired plant @ 0.4 tonne/MWh, a NSW black coal plant @ 1.0 tonne/MWh, or Snowy or Tasmanian hydro @ 0.0 tonne/MWh. Depending on time of day, day of week and time of year.

    The increase in wholesale price will likely be somewhat less than you calculate. It is also particularly difficult to determine in advance.

    • Carbon E. Coyote

      Yes, in each half hour, the price increases by the carbon price * the marginal intensity. So 0.4 when gas is running at the margin (during the peak), and 1.6 when Hazewlood is running at the margin (overnight). But when you work this out over the year, the average pass through ends up being at the average pool intensity of about 1t/MWh, perhaps a bit lower (0.9).

      • Fair enough, interesting that it averages out at about the average pool intensity though.