Sunday, April 3, 2011

Carbon pricing and the cost of electricity

"The electricity sector will respond strongly to reduce emissions with carbon pricing"
Prof Ross Garnaut has been releasing a series of updates to his 2008 review. The latest is an investigation in the electricity sector and how it will be affected by carbon pricing. You can read a summary or the whole update here.

In summary:
The good news, as quoted above, is that carbon pricing will be effective in reducing emissions from the electricity sector. Old electricity plants need to be replaced with new ones all the time and because a carbon price will make polluting plants more costly, less polluting/ clean energy plants will be built instead. This is how carbon pricing will reduce emissions by changing investment decisions, even if the users of electricity were to make no behavioural changes themselves.
"The introduction of a carbon price is highly unlikely to threaten physical energy security"
ie: the light will stay on. Also good news.

"While electricity prices will rise in coming years, the increase associated with a carbon price is in fact smaller than recent increases"
Electricity prices have been rising in recent years mainly because, (as Garnaut points out), of the increased costs of electricity distribution and transmission, not generation. Carbon pricing will increase generation costs but this will actually be quite modest compared to the cost rises currently being experienced. Also it is these increased generation costs that households will be compensated for. Furthermore, Garnaut reports that poor and inefficient regulation of the electricity sector has exacerbated recent rises in electricity prices and that better regulation could greatly decrease future cost increases. If this turns out to be the case then we have the opportunity to clean up the electricity sector and keep price rises to a minimum.

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