The impact of carbon prices on Australia's National Electricity Market

Abstract

There has been significant debate about how supply-side policy initiatives might potentially affect key participants within the National Electricity Market (NEM) in attempts to curb growth in carbon emissions. Most debate and analysis within this sector has focused on assessing the impact that a 'cap-and-trade' carbon trading scheme, and more recently, a carbon tax scheme, may have on promoting fuel-switching strategies and impacts on existing electricity generating assets each having a defined set of carbon emission intensity factors. The introduction of a carbon price signal achieves this by changing marginal cost relativities in order to promote increased dispatch and investment in less carbon-emission-intensive types of generation technologies, including gas-fired generation and renewable generation technologies. As Australia transitions towards a carbon-constrained economy, alternative policy settings create signals throughout the national electricity industry. To evaluate policy outcomes a model containing many of the salient features of the national wholesale electricity market is required. These features include intra-regional and inter-state trade, realistic transmission network pathways, and competitive dispatch of all generation technologies with price determination based upon variable cost and branch congestion characteristics.