Transitional assistance or windfall profits? The financial impact of the carbon price and compensation payments on Victoria's brown coal generators

Power resources Emissions trading Australia Victoria

This report presents analysis of the impact of the carbon price package legislated in Australia’s Clean Energy Act 2011 on the profitability of Victoria’s brown coal generators.

This analysis takes account of actual carbon market and electricity market outcomes since the commencement of the carbon price on 1 July 2012 until 31 December 2012.

The context to this report is our client’s interest in obtaining a deeper understanding of the extent to which carbon price ‘compensation’ payments through the Energy Security Fund may deliver “windfall” profits to the Victorian generators that are eligible to receive payments from this fund.

The Clean Energy Act 2011 legislated a package of carbon pricing reforms negotiated by the Multi-Party Committee on Climate Change (MPCCC) in 2011. The package adopted by the Government included significant assistance for industry to adapt to a price on carbon including, controversially, a fund to assist the most emissions-intensive generators adapt to a price on carbon, as well as to pay for the closure of 2,000 MW of Australia’s most emissions intensive power stations via a process named Contracts for Closure. The fund established for these two purposes was called the Energy Security Fund.

Energy Security Fund assistance for the most “strongly affected generators” was estimated at $5.5 billion, with most of this accruing to the high emission brown coal generators in Victoria. The Government’s decision to make these payments reflected advice from the Australian Energy Market Commission that without these payments energy security would be at risk. Professor Garnaut disputed this advice. He suggested that the security risks were quite small, and hence that transitional assistance payments were unnecessary. Likewise the Australian Energy Regulator was skeptical that the emission reduction scheme presented a risk to energy security.

We have analysed the change in operating profit to Victoria’s brown coal generators attributable to the carbon price, using half-hourly data on actual outcomes in the “spot” National Electricity Market (NEM) for the first two quarters since the implementation of the carbon price package.

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