Australia-in_Australia__Cogeneration

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					COGENERATION




 Prospects for cogeneration      in Australia
                           Suthida Warr and Julie Harman
                                        x
                                          Cogeneration
                                          Cogeneration is the production of electric-
                                          ity and heat from the same primary fuel
                                          source. Unlike other types of power gener-
                                          ation, cogeneration recovers and utilises the
                                          process heat (Naughten and Dlugosz 1996).
                                          Power from cogeneration is usually gener-
                                          ated close to the end user. The electricity can
                                          be used on site or sold into the electricity
                                          grid. The heat produced from cogeneration
                                          is typically converted into steam and used
                                          in local industrial and commercial processes.
                                             A wide range of fuels can be used in
                                          cogeneration plants, including fossil fuels
  Although energy market reforms          and renewables such as bagasse (sugar cane
                                          residue) and landfill gas.
    in Australia have assisted in
                                             The use of cogeneration in the energy
    the growth in cogeneration,           market offers a number of potential benefits,
     to date there has not been a         including environmental benefits.
        significant increase in              Electricity generation is a major contrib-
                                          utor to Australia’s total greenhouse gas
   cogeneration’s market share.           emissions. The long term reduction in these
                 x                        emissions has been a key factor in many
                                          recent government energy policy initiatives.
      In the longer term, increased       The objectives of these initiatives include an
   electricity prices associated with     acceleration in the uptake of less emission
                                          intensive electricity generating technologies,
 declining excess capacity (assuming      including renewable cogeneration. A key
       continued strong growth in         policy initiative that could assist in the
 electricity demand), refinements of      growth of renewable cogeneration is the
 existing energy regulation, together     implementation of the ‘2 per cent’ renewable
                                          mandated target.
 with the introduction of initiatives        The objective in this article is to assess the
   encouraging the use of renewable       implications of energy market developments
 cogeneration, are likely to enhance      and policy initiatives for the prospects of
                                          cogeneration in Australia.
  the position of cogeneration in the
    electricity generation sector in
                Australia.                Cogeneration in Australia
                                          Since 1979-80, the average rate of growth of
                 x                        cogeneration electricity in Australia has been
                                          around 4.6 per cent a year (faster than the
                                          Project: 1667 Contact: Julie Harman +61 2 6272 2266

660                                           Australian Commodities, vol. 7, no. 4, December quarter 2000
                                                                                                       COGENERATION

                                                                      can be attributed to a number of factors,
    A       Cogeneration capacity, by fuel
                           at December 1999
                                                                      including the dominance of coal fired gener-
                                                                      ation, lower demand for heating in Aus-
                                                                      tralia’s temperate climate and less agglom-
                          Digester                                    eration of industrial sites (Naughten and
                           gas 1%                                     Dlugosz 1996).
   Waste gas 7%
                     Oil 5%      Others 0.5%                             In Australia, cogeneration plants range in
                                                       Natural        size from less than 1 megawatt (for exam-
     Coal
     16%
                                                       gas            ple, hospitals) to over 300 megawatts (for
                                                       56%            example, industrial sites). Natural gas is the
                                                                      most commonly used fuel for cogeneration
                                                                      (around 56 per cent of current capacity) —
                                                                      figure A (ACA 2000a). Of potential new
       Bagasse 15%                                                    cogeneration capacity currently under eval-
                                                                      uation, natural gas accounts for around 90
                                                                      per cent (3300 megawatts). The majority of
                                                                      these potential projects are located in east-
                                                                      ern Australia (ACA 1997, 2000a).
3.9 per cent growth rate for total electricity                           In December 1999, there were 133 cogen-
generation).                                                          eration sites operating in Australia, with a
   The current electricity market share of                            total installed generation capacity of around
cogeneration is around 5 per cent (compared                           2200 megawatts (ACA 2000a). Among
with 3.5 per cent a decade ago), with about                           industries, alumina has the highest installed
40 per cent of cogeneration electricity sold                          cogeneration capacity (around 500 mega-
into the grid (ACA 1999; Bush et al. 1999).                           watts in 1998-99). Total Australian electric-
In line with ABARE projections (Bush et al.                           ity cogeneration in 1998-99 was 9522 GWh,
1999), under a ‘business as usual’ scenario                           with around 40 per cent of this total
(which excludes the effect of the mandated                            exported to the grid (ACA 1999, 2000a).
renewable target), the electricity market                                Western Australia contributes around 40
share of cogeneration in 2010 is projected to                         per cent of Australia’s total electricity cogen-
be around 7 per cent.                                                 eration (figure B). However, New South
   Australia has a lower market penetration                           Wales and Victoria account for more than 50
for cogeneration than a number of industri-                           per cent of total cogeneration electricity ex-
alised countries and most cogeneration in                             ported to the grid (ACA 1999).
Australia is designed to supply small to                                 The key statistics of the cogeneration
medium sized niche markets. This feature                              industry in 1998-99 are shown in table 1.



    B                 Installed capacity and electricity production, by state

      750                                                                                                    5000

      600             Installed capacity at 31 Dec 1999                                                      4000
                      Electricity production, 1998-99
      450                                                                                                    3000

      300                                                                                                    2000

      150                                                                                                    1000

     MW                                                                                                      MWh
                  New     Queensland          South            Victoria   Western     Tasmania   Northern
               South Wales                   Australia                    Australia              Territory


Australian Commodities, vol. 7, no. 4, December quarter 2000                                                        661
COGENERATION

                                                           in long distance, high voltage transmission
1   The cogeneration industry in
    Australia, 1998
                                                           networks. In contrast, cogeneration plants
                                                           are typically located close to end users and
                                                           have lower transmission costs (and losses),
Operating sites a                              120 sites   a characteristic that reduces the require-
Total installed capacity a                   2 168 MW      ments for network upgrades.
Total operating capacity b                   2 015 MW
Electricity generation c           34.2 PJ (9522 GWh)      Environmental factors
Electricity exports to grid c      13.3 PJ (3718 GWh)      Over the period 1990–98, total emissions
Total thermal production c                       171 PJ    from electricity generation in Australia,
Fuel consumption c                               328 PJ    increased by around 30 per cent (Australian
Thermal efficiency c                             62.7 %    Greenhouse Office 2000), compared with a
– in process heat d                              52.3 %    24 per cent increase in electricity generation
– in electricity generation                      10.4 %    (Bush et al. 1999). The increase in emissions
                                                           can be primarily attributed to the continued
a As at December 1998. The number of sites increased to
133 with installed capacity of 2203 MW at December 1999.
                                                           dominance of coal fired generation and a
b As at December 1998. c 1998-99. d Part of the process    higher capacity utilisation of brown coal
heat energy in the form of steam is captured for use in    plants (lower thermal efficiencies). This
mechanical drives (mainly in sugar mills).
Source: ACA (1999, 2000a).                                 trend is in contrast to many other industri-
                                                           alised countries, where there has been a
                                                           substitution of gas for coal fired generation,
                                                           and which have (over a similar timeframe)
Features of cogeneration                                   either reduced or significantly constrained
                                                           increases in total emissions from electricity
Generation factors                                         generation (Unander 2000).
The relative advantages of cogeneration                       Government policies to reduce green-
depend on the costs (capital, operating and                house gas emissions include the encourage-
transmission) of cogeneration electricity                  ment of lower emission electricity gen-
production compared with other electricity                 erating technologies (includes gas fired and
generation technologies and on the derived                 renewable generation). Reduction of trans-
benefits from using the heat produced.                     mission losses (and associated greenhouse
   In a conventional thermal or gas turbine                gas emissions) is also considered to be a
generator, 50–70 per cent of primary energy                significant way of limiting emissions
in the electricity generation process is lost in           (Department of Industry, Science and
the form of waste heat. In cogeneration                    Resources 1999).
plants both the electricity and the surplus
process heat are used; consequently the
energy efficiency of cogeneration plants is
significantly higher than that of combined
                                                           2    Thermal efficiency and carbon
                                                                dioxide emissions
gas cycle plants or coal generation plants
                                                                                           Thermal               CO2
(table 2).                                                                                efficiency        emissions
   Cogeneration offers advantages in local-
ised markets, where the plant configuration                                                         %          t/MWh
can be efficiently matched to end users’ heat              Cogeneration
and electricity requirements. Cogeneration                 – gas                                   77              0.26
plants are less capital intensive and offer                – renewables                         60–85               nil
shorter installation lead times (as they can               Combined cycle – natural gas             48             0.39
be built in smaller capacity units) than coal              Thermal – natural gas                    38             0.49
fired generators. These features enhance the               Thermal – black coal                     35             0.93
potential use of cogeneration for new peak-                Thermal – brown coal                     29             1.23
ing capacity.
                                                           Note: CO2 emissions for cogeneration reflect unit of output
   Typically, coal fired generators are located            (includes heat and electricity production).
at some distance from major demand                         Source: ACA (1999).
centres, a feature that requires investment
662                                                           Australian Commodities, vol. 7, no. 4, December quarter 2000
                                                                                             COGENERATION

   Depending on its location and fuel source,                  access by third parties. Retail competition is
cogeneration typically offers a number of                      being progressively introduced into the elec-
environmental benefits. Cogeneration typi-                     tricity and gas markets.
cally produces less carbon dioxide emissions                      In many industrialised countries, energy
per unit of usable energy generated (elec-                     market liberalisation has resulted in a signif-
tricity and usable process heat) than conven-                  icant increase in the market share of gas fired
tional coal and gas fired generation (table 2).                generation and cogeneration (Unander
   Cogeneration electricity generation typi-                   2000). Energy market reforms in Australia
cally results in lower transmission losses, a                  were also expected to have resulted in a
feature that also reduces associated green-                    significant increase in the use of gas and
house gas emissions. Cogeneration plants                       cogeneration for electricity generation
may also use agricultural waste or landfill                    (Department of Industry, Science and
gas as fuel sources, a feature that can                        Resources 1999). To date this outcome has
contribute to effective recycling of waste                     not largely been realised.
products.                                                         There are a number of energy market
                                                               features that may influence the development
Factors affecting the                                          of cogeneration. The major factors are:
development of cogeneration                                    Electricity prices
Australian energy markets have been under-                     • Increased coal and gas fired generation
going significant reform since the early                         capacity and enhanced interstate grid
1990s, with both electricity and gas markets                     interconnections are likely to constrain
being fundamentally restructured to en-                          increases in electricity prices. This out-
hance opportunities for private sector in-                       come is likely to restrict investment in
volvement. Since cogeneration operates in                        new cogeneration capacity.
both markets, energy market reforms and                        • Refinements to the network pricing
their impacts on electricity and gas prices                      regime may enhance the ability of the
have significant implications for the pros-                      regime to reflect the comparative advan-
pects for cogeneration.                                          tages of cogeneration and hence increase
    The Australian electricity industry has                      the competitiveness of cogeneration.
historically been dominated by a single ver-
tically integrated state owned authority                       Gas prices
responsible for the generation, transmission                   • Limited competition in gas supply, along
and distribution of electricity. The gas indus-                  with existing long term supply and trans-
try historically had a single joint venture                      portation contracts, may impede access
(private) producer and a single (government                      to lower priced gas supplies, restricting
owned) transporter/retailer. Limited compe-                      increases in gas fired cogeneration. Over
tition from alternative suppliers and limited                    the long term, however, access to new gas
trade between states restricted incentives to                    supplies could lower prices and increase
minimise the nationwide cost of providing                        the viability of gas fired cogeneration.
electricity (and gas) services (Dickson and
Warr 2000).                                                    Competition in electricity generation
    Since the early 1990s, electricity and gas                 techniques
industry reforms have occurred across                          • Coal and gas fired generation technolo-
Australia, albeit with differing time frames.                    gies have comparative cost advantages
In most states, the potentially competitive                      over cogeneration. Hence, under prevail-
generation (electricity) and retail (electricity                 ing electricity prices, cogeneration and
and gas) functions were separated from the                       particularly renewable cogeneration will
‘natural monopoly’ elements of the trans-                        be viable mainly just for peak load gener-
mission and distribution sectors. The gener-                     ation.
ation sector was horizontally separated into
a number of competing businesses, while                        Policy initiatives
the transmission and distribution sectors                      • Government initiatives aimed at the long
were regulated to ensure nondiscriminatory                       term reduction of greenhouse gas emis-
Australian Commodities, vol. 7, no. 4, December quarter 2000                                             663
COGENERATION

  sions should enhance the prospects for                In 1998, electricity prices began to in-
  cogeneration. In particular, the 2 per cent        crease. The average wholesale price in 1999-
  renewable mandated target is expected to           2000 in New South Wales and Victoria was
  significantly increase the use of bagasse          around $28/MWh (figure C).
  cogeneration.                                         Reflecting a closer balance between capac-
                                                     ity and demand and limited interstate inter-
Electricity prices                                   connections, electricity prices in Queensland
                                                     and South Australia have typically been
Impacts of increased generation                      higher than in New South Wales and
competition and excess capacity                      Victoria.
The national electricity market (which cur-             Capacity constraints in Queensland and
rently excludes Tasmania, Western Australia          South Australia will be eased by recent and
and the Northern Territory) is a market for          expected interstate interconnections (for
the supply and purchase of electricity that          example, between Queensland and New
includes both wholesale and retail markets.          South Wales; and between South Australia
The wholesale market commenced in late               and New South Wales). A number of coal
1998 and provides for generator competition          and gas fired power generation projects
in electricity supply. Tasmania is expected          have also been committed or are proposed
to join the wholesale market in 2003 with the        in these states. In the medium term, this
completion of the Basslink interconnector.           increase in generation capacity is likely to
   Lower electricity prices in recent years          continue to restrict investment in new
have tended to discourage investment in              cogeneration capacity, where project viabil-
new cogeneration capacity.                           ity depends on despatched electricity pro-
   There was a significant fall in wholesale         duction.
electricity prices following the introduction
of the spot market. At the commencement              Impacts of network regulation
of the Victorian (1994) and New South Wales          The majority of new cogeneration projects
(1996) spot markets, wholesale prices in             are likely to be installed in eastern Australia
these states were around $43/MWh and                 (where the majority of new gas fired projects
$27/MWh respectively (ESAA 2000). In                 currently under evaluation and potential
1997-98, the average price in both markets           renewable cogeneration projects are located)
had fallen to around $15/MWh. This price             (ACA 1997, 2000a). Given that a significant
was below the entry price of new generation          percentage of these projects would be
capacity. Increased competition among                connected to the electricity grid, network
generators and excess generation capacity            regulation will have an increasing impact on
contributed to the lower electricity prices.         the cogeneration industry.



  C                       Average wholesale electricity prices
                                               Quarterly
                                                                                                      South
                                                                                                     Australia
   80
                                                           Queensland
   60
                         Victoria
   40

   20
                                                                                  New South
                                                                                    Wales
 $/MWh
             D      J       D         J    D         J         D         J         D         J         D        J
                  1995              1996           1997                1998                1999               2000

664                                                        Australian Commodities, vol. 7, no. 4, December quarter 2000
                                                                                             COGENERATION

   The characteristics of gas fired cogenera-                  ator dispatch and calculating spot prices,
tion (for example, high loading and peak                       and through the cost reflective component
factors, contracted and interruptible supply)                  of network charges. A theoretically ideal
require flexible pricing arrangements.                         network pricing system would incorporate
Reforms that could enhance the competi-                        marginal and dynamic transmission and
tiveness of cogeneration include refinements                   distribution losses (which may change over
of network pricing regimes to better reflect                   a day according to the degree of network
the benefits of cogeneration (for example,                     congestion).
lower transmission costs).                                        Cogenerators (typically located closer to
   The current National Electricity Code                       the load than standard generators) generally
Administrator review of electricity network                    have lower transmission and distribution
pricing (NECA 2000) is addressing whether                      losses — hence, a system where variable
amendments to the current pricing system                       network charges fully reflected marginal
could deliver more efficient market out-                       losses would be more favorable for cogen-
comes, both in terms of location and in the                    erators. However, the relative benefits of a
use of transmission augmentation, new local                    network pricing system that incorporates
generation or demand side management.                          marginal and dynamic losses will depend
   Issues that may affect the use of cogener-                  on the system costs involved in calculating
ation are:                                                     those losses.
                                                                  The current regime delivers muted loca-
• Network service charges                                      tional signals, given the use of average
The electricity code requires that network                     marginal losses at the transmission level and
service providers allow nondiscriminatory                      average losses at the distribution level. This
access to the network; and provides guide-                     regime may provide a poor representation
lines for setting network charges (for exam-                   of actual despatch (and losses) and may not
ple, transmission and distribution use of                      adequately reflect the benefits of cogenera-
system charges). System use fees are gener-                    tion. Locational signals could be strength-
ally based on a cost allocation that includes                  ened by a more comprehensive application
a cost reflective component and an average                     of marginal loss factors (including the appli-
‘postage stamp’ (delivery) charge.                             cation of separate peak and offpeak loss
   The use of cogeneration when there is a                     factors).
relative reduction in network load may                            The current NECA (2000) review has
result in the network service provider incur-                  made a number of recommendations aimed
ring lower system costs (for example,                          at improving the locational signals of the
through deferred grid augmentation). Al-                       current regime. These include incorporating
though the current regime allows for the                       a forward looking treatment of constraints
negotiated passing on of these ‘avoided’                       and losses for transmission, and using loca-
costs to the relevant generator, calculating                   tion specific average distribution loss factors
these costs presents practical and technical                   for large embedded generators (including
difficulties and involves an element of aver-                  some cogenerators).
aging, which reduces the effectiveness of the                     At the retail level, end users’ electricity
cost reflective component of the charges                       prices should be reflective of retailers’
(NECA 1999).                                                   wholesale prices. However, legislation in
   In addition, the competitive elements                       some states (for example, South Australia
between network service providers and                          and Queensland) currently limits the ability
embedded generators (including small co-                       of retailers to expose customers to locational
generators) may provide network owners                         price variations (National Retailers Forum
with incentives to discriminate against these                  2000).
generators (for example, through excessive
connection and/or standby charges).                            Implications of electricity pricing for
                                                               cogeneration
• Locational pricing signals                                   Refinements to the network pricing regime
Locational signals are provided through the                    may enhance the ability of network pricing
use of loss factors when determining gener-                    to reflect the comparative advantages of
Australian Commodities, vol. 7, no. 4, December quarter 2000                                             665
COGENERATION

cogeneration and increase the competitive-        flexibility than the electricity code to vary
ness of cogeneration.                             asset valuations. Constraints on an appro-
   In the medium term, increased generation       priate downward revision of asset valua-
capacity in the national electricity market       tions may result in comparatively higher gas
and enhanced interstate connections are           tariffs.
likely to discourage investment in new co-
generation capacity.                              • Variations in asset valuations
   If strong growth in electricity demand         Such variations can affect the consistency of
continues in the longer term, excess gen-         regulatory outcomes within and between
eration capacity should fall and average          the gas and electricity markets — for exam-
electricity prices rise, providing greater        ple, while most decisions have employed a
incentives for new generators (including          full depreciated optimised replacement cost
cogenerators) to enter the market.                value, others have incorporated a dis-
                                                  counted value (associated with relatively
Gas prices                                        lower tariffs).
As gas is likely to continue to be the most          In addition, customer contributions may
commonly used fuel in cogeneration, gas           be included or excluded from the capital
market competition and its ability to deliver     base of the network operator. If included,
lower gas prices will have a significant          the outcome may be relatively higher aver-
impact on the prospects for cogeneration.         age tariffs (reflecting the capital contribu-
The key factors that will have an impact on       tion). Customers (for example, cogeneration
gas prices are supply competition and             plants that contribute to new gas pipeline
network regulation.                               investment) cannot easily determine
                                                  whether their capital contribution is re-
Impacts of supply competition                     flected in an appropriately discounted trans-
Gas is the major fuel used for cogeneration       portation tariff.
and the cost of gas represents in excess of 60
per cent of the total generated cost of gas       Implications of gas market competition
fired electricity generation (ACA 1997).          for cogeneration
Lower gas prices (assuming coal prices do         Potential new gas supplies (for example,
not change) could therefore make gas fired        from Papua New Guinea and the Timor Sea)
power generation and gas cogeneration             and pipeline interconnections will facilitate
more cost competitive.                            interregional flows and should enhance the
   However, limited competition in supply         development of competitive secondary trad-
along with existing long term supply and          ing in the eastern Australian gas market
transportation contracts may impede access        (Harman 2000). These developments are
to lower priced gas supplies for new gas          expected to place downward pressure on
fired cogeneration.                               delivered gas prices.
                                                     To date, there have been some reduc-
Impacts of network regulation                     tions in average gas transportation tariffs,
Asset valuations (generally depreciated opti-     although this outcome varies between
mised replacement cost) and rates of return       market segments. Lower delivered gas
are used to set capped transmission and           prices would also require lower well-head
distribution tariffs. These tariffs form a        prices.
significant portion of the delivered price of        The relative absence of upstream compe-
gas and affect the competitiveness of gas         tition and the presence of long term fixed
fired cogeneration. Key issues are:               price supply contracts (often signed by
                                                  previous state owned utilities) mean that it
• Flexibility to vary the initial                 is unlikely that the average supply price of
  determined asset valuations                     gas will fall in the medium term. This
The initial valuations will have an impact on     outcome would restrict any decreases in the
the asset value (and associated tariffs) deter-   delivered price of gas and constrain the
mined in subsequent regulatory periods —          increased use of gas fired cogeneration.
overall, the gas code appears to offer less
666                                                  Australian Commodities, vol. 7, no. 4, December quarter 2000
                                                                                                COGENERATION

                                                                 ation capacity can also be designed to more
Competition in electricity                                       efficiently match peak and variable demand
generation techniques                                            loads.
                                                                    Combined cycle gas turbine (CCGT)
Coal fired generation                                            plants have the highest efficiency of any
Coal is the major fuel used in electricity                       fossil fuel power plant. However, the
generation, reflecting its abundance and low                     economic viability of CCGT and other gas
cost in Australia, and the low operating costs                   plants is highly dependent on delivered gas
of coal fired plants. In addition, since the                     prices. Delivered gas prices in major
cost of supplying electricity from refur-                        Australian markets are typically at least
bished existing coal fired stations is typically                 $3/GJ, a price that equates to ex generator
lower than from any new capacity, it is likely                   prices of around $35/MWh.
that the operational life of many existing                          The comparative costs of alternative elec-
coal fired plants will be extended.                              tricity generating technologies are illustrated
   Technological innovations have reduced                        in table 3.
the operation and maintenance costs of coal
fired generation plants and present oppor-                       Implications for cogeneration
tunities for improvements in thermal effi-                       Reflecting comparative generation costs and
ciency and emissions control. Given that                         prevailing electricity prices, coal fired gener-
advanced coal technologies have higher                           ation dominates base load generation, with
capital costs, these technologies are less                       gas fired generation (including cogenera-
attractive in eastern Australia where there                      tion) primarily used for peak load genera-
is a relative abundance of low cost coal                         tion.
(Naughten 2000).                                                    Gas fired generation and cogeneration
                                                                 may become more viable for base load
Gas fired power generation                                       generation after 2005, as a result of an
Compared with coal, gas fired generators                         expected decline in excess generation capac-
have lower capital and operating costs,                          ity (assuming continued strong growth in
shorter construction periods and can be built                    electricity demand) and an associated
with smaller capacity units. Gas fired gener-                    increase in the electricity to gas price ratio.



 3    Costs of generation technologies


                                                 Fixed operation and
                             Fuel cost             maintenance costs        Capital charge       Total unit cost a
                                  $/GJ                         $m/GW             $m/MW                 $/MWh
 Gas
 CCGT                           2.5–3.5                         10–11              0.4–8.0                35–50
 Coal b
 Brown                          1.0–1.5                         17–22              1.5–2.0                25–39
 Black                          1.5–3.0                         15–20              1.2–1.5                30–36
 Cogeneration
 Gas                            2.5–3.5                          4–11              0.9–1.3                35–60
 Bagasse                        5.0–7.0                            20              1.2–1.5                40–80
 Hydro (storage)                      0                          6–20              2.0–5.0               40–100
 Solar (thermal)                      0                            10              2.7–3.5              170–220
 Wind                                 0                          5–10                  2.0               80–120

 a Dependent on average capacity utilisation and energy efficiency. b Includes new and refurbished capacity.
 Note: Costs are indicative only and are derived from the sources listed below.
 Sources: ABARE MARKAL database (2000); Redding Energy Management (1999); Department of Industry, Science and
 Resources (1999).


Australian Commodities, vol. 7, no. 4, December quarter 2000                                                    667
COGENERATION

   With the comparative cost advantage of        cogeneration. Given implementation of the
fossil fueled electricity generation, exported   mandated target, it would be expected
renewable cogeneration electricity also tends    (based on cost advantages relative to other
to be more competitive for peak load gener-      renewables and feedstock abundance) that
ation. In the longer term, it is expected        a significant percentage of electricity from
(given relative technological advances) that     new renewable sources would come from
more efficient renewable cogeneration will       bagasse cogeneration in Queensland and
erode the existing comparative economic          northern New South Wales.
advantages of fossil fueled generators.             The mandated target applies not only to
                                                 a mandated target for 2010, but also includes
Policy initiatives                               incremental targets for the ‘phasing in’
                                                 period 2001–10. To illustrate the potential
Greenhouse gas abatement and                     impact of the renewable target on the cogen-
renewable energy initiatives                     eration industry, ABARE’s Australian
Growing international concerns about             version of the energy system model
greenhouse gas emissions have provided a         MARKAL has been used to compare the
motive for the promotion of gas fired and        least cost outcome for meeting the mandated
renewable resources in electricity genera-       target with a ‘business as usual’ scenario.
tion. The dominant use of coal in Australian        Assuming the mandated target is met, the
electricity generation results in that form of   model results indicate that bagasse cogen-
generation having a higher contribution to       eration would increase its expected market
total national carbon dioxide emissions than     share of total renewable electricity genera-
is the case in many other industrialised         tion in 2010 by around 9 percentage points
countries (Unander 2000).                        compared with the ‘business as usual’
   In response to Australia’s commitment to      scenario. With this estimated increase in
limit greenhouse gas emissions, the Com-         bagasse cogeneration (and assuming this
monwealth and state governments have             increase does not affect the expected growth
announced initiatives (for example, the          of fossil fueled cogeneration), the electricity
Renewable Energy Initiative and the Green-       market share of cogeneration in 2010 under
house Gas Abatement program) to promote          the mandated target would be approxi-
the use of renewable and low emission            mately 60 per cent higher than its current
energy sources.                                  market share.
   One of the key government initiatives has
been the setting of a mandatory target for
electricity retailers and large buyers to        Conclusion
source an additional 2 per cent of their elec-   Although energy market reforms have the
tricity (to a total of around 12.5 per cent in   potential to increase the market share of
2010) from renewable or specified waste          cogeneration, to date large gains have not
product energy sources (Australian Green-        been realised. Given that gas should
house Office 1999). The legislation associ-      continue to be the major fuel used for cogen-
ated with mandating this target was passed       eration, investment in new gas fired cogen-
by the Senate in early December. Achieving       eration capacity will be related to lower
the mandated target would require the            delivered gas prices, an outcome that is
construction of at least 1750 megawatts of       more likely in the medium–longer term as
renewable energy generation (ACA 2000b;          competition (upstream to retail) increases in
Redding Energy Management 1999).                 the gas market.
                                                    If electricity demand remains strong, lead-
Implications for cogeneration                    ing to a progressive reduction in excess
The implementation of government policies        generation capacity and associated increases
aimed at the long term reduction of green-       in electricity prices, the prospects for new
house gas emissions should lead to in-           cogeneration capacity improve in the
creased accountability of the environmental      medium term. Refinements to current net-
benefits of cogeneration and enhance the         work charging policies may also enhance the
prospects of both gas fired and renewable        viability of cogeneration.
668                                                 Australian Commodities, vol. 7, no. 4, December quarter 2000
                                                                                            COGENERATION

   The implementation of government                             by the Allen Consulting Group and
policy initiatives aimed at reducing green-                     McLeanne         Megasanik      Associates,
house gas emissions should also enhance the                     Melbourne.
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mandated target for renewables is likely to                     Australia) 2000, Electricity Prices in
provide an impetus for new investment in                        Australia 1999/2000, Sydney.
renewable cogeneration. Total cogeneration                     Harman J. 2000, Gas market developments
capacity could then be expected to increase                     and regional gas flows in eastern Aus-
significantly in the medium term, with a                        tralia, ABARE conference paper 2000.12
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increased use of renewables.                                    national Conference, International Asso-
                                                                ciation of Energy Economics, Sydney, 7–10
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Australian Commodities, vol. 7, no. 4, December quarter 2000                                           669

				
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