A carbon price on green energy?

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I read with interest this piece in the Sydney Morning Herald about green consumers of ActewAGL who appear to be charged for the carbon tax on their bills despite being told that their electricity emissions were zero. The reason for the confusion is that green energy has never been about actually purchasing green energy. Instead, when you sign up for that you are paying extra for the retailer to do things that promote zero emissions energy — this could range from investing in solar or wind power to purchasing offsets. In principle, you net emissions are zero but your electricity emissions continue to be positive. Hence, the carbon tax.

This is one of the sticky issues associated with climate policy. If the government had been willing to charge consumers directly for the carbon tax, or, more to the point, had a properly operating cap and trade system where you could get credit of activities that offset emissions, then a consumer purchasing green power could avoid having to pay a carbon price. Instead, largely for political reasons, the government chose to charge suppliers. That means that an electricity retailer pays a carbon tax and passes it on to all consumers. That is what we are seeing here. To be sure, green consumers reduce the electricity retailer’s carbon bill but that benefits everyone. So they are, in effect, giving a donation to non-green energy consumers. That is something I am pretty sure they didn’t have in mind.

Of course, it might be easy to blame government climate policy for this but, in reality, it is likely a consequence of poor electricity price regulation. Specifically, it is too low for electricity retailers to really want to manage their carbon bills. The best way to do that would be to offer green energy consumers a price reflecting true costs of green energy and to offer non-green energy consumers a price that incorporated the carbon tax fully. I suspect that the reason that does not occur is, in fact, that green energy consumers were a great way of being able to charge consumers, “above cap” pricing and to rebalance would require them to raise prices on non-green energy consumers that are already at the cap. So they can’t actually do this or, more to the point, have no profit incentive to engage rebalance properly.

This is going to force regulator’s hands to finally deal with green energy in electricity retail pricing. But it will also require some thoughts about climate policy. Specifically, while wholesale electricity pricing is a pool, there is no scope for entry by green energy specialised generator-retailers because they too would be subject to a carbon tax. The fact that electricity markets exist and can be designed is an opportunity for sensible climate change policy. But from the looks of it, lots of people have dropped the ball.

6 Responses to "A carbon price on green energy?"
  1. Isn’t the mechanism for lower GreenPower prices that the cost of the associated ‘renewable’ activities should fall? With a carbon tax and higher wholesale electricity prices, wind farms (for example) should require less of a subsidy in the form of selling RECs or whatever other premium from retailers to enter the market.

  2. Although I agree with your conclusion that green energy customers paying the carbon tax are effectively subsidising the rest of the customer base, I’m not certain that the first paragraph is accurate in this case. ActewAGL’s website states that their Greenchoices customers are directly purchasing green energy to be fed into the grid.

    From their website: “[…] a small additional cost on top of your regular electricity bill allows ActewAGL to purchase electricity from renewable sources, like wind power, biomass, mini-hydro and solar. This green energy is then fed straight back into the electricity grid, replacing electricity that would have otherwise been generated by fossil fuels – and that means reduced greenhouse gas emissions.”

    Of course, it’s possible that ActewAGL is misleading their customers in their marketing material, which would make the whole situation even more of a shambles…

  3. “Instead, largely for political reasons, the government chose to charge suppliers. That means that an electricity retailer pays a carbon tax and passes it on to all consumers.”

    The retailer doesn’t pay the carbon price, the producer pays the carbon price. The retailer buys electricity from a wholesaler, then it’s up to the wholesaler to do the accounting about which units of electricity have a carbon price and which don’t.

    Adding a carbon price to electricity produced using fossil fuels is intended to make “green” electricity economically competitive. That the accounting is not being done is just an indication that the wholesalers and retailers are being lazy and pocketing the extra money from Greenchoice.

    Of course the wholesalers will sell you a line about how it’s impossible to separate renewable electrons from fossil fuel electrons, but they can still charge you for off peak electricity somehow. It’s just a matter of having their accounting set up correctly.

  4. I think you misunderstand how the NEM works Alex.

    “The retailer buys electricity from a wholesaler, then it’s up to the wholesaler to do the accounting about which units of electricity have a carbon price and which don’t.”

    They buy it on the wholesale market, but there is no ‘wholesaler’, unless you’re talking about AEMO, the market operator.

    “Of course the wholesalers will sell you a line about how it’s impossible to separate renewable electrons from fossil fuel electrons, but they can still charge you for off peak electricity somehow. It’s just a matter of having their accounting set up correctly.”

    In some houses there are meters that separately measure consumption at off-peak times. No such meter could tell whether the electrons originated at a coal or wind generator, unless we build a completely separate electricity network. You need a side market in ‘renewable energy certificates’ that get cheaper as a result of the carbon price. But that will take time, as you need new renewable energy generators to enter the market and drive down the price. If they don’t expect the price to stay – that won’t happen.

  5. This here seems to clarify that retailers have to buy a particular kind of renewable energy generation certification (LGCs) to match their customers’ GreenPower purchases (http://www.greenpower.gov.au/Homes/Common-Questions/). In the long run the cost of these LGCs should fall in response to a carbon tax (or higher wholesale electricity prices in general). But it won’t fall immediately, and the effect will be based on expectations about the future carbon price.

  6. This article misunderstands various aspects of the energy system.

    As Rob points out, (perhaps more eloquently than I), there are two types of power – Black power and Green Power. Black power is sold in one pool. Obviously, using the network, all electrons are mixed. All power generation creates revenue for sale of the electricity. RE generation creates revenue for generators by the sale of LGCs (this is the Green Power revenue stream). LGCs are required to be surrendered by retailers, each year, in increasing amounts.

    Greenpower schemes use your money to purchase LGCs on the open market, reducing the supply of LGCs to the retailers, increasing their value, and therefore providing more of an incentive for investment in RE projects. Having seen the proprietary analysis of the LGC market, I can assure you that voluntary schemes account for a small but not insignificant proportion of demand.

    Of course, the retailer passes on the carbon tax for the electrons that you are actually using to power your home. They are mostly produced by polluting generators.

    Trust me, this “issue” is not going to force the regulators hand in dealing with green energy pricing. There are far bigger fish to fry – for example, capital returns and investments in the network (which are too large), the right of new renewable generation to connect with the grid, and who pays for necessary network upgrades, and fair pricing for distributed generation assets given that they offset the aforementioned need for capital investment in the network.

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