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Influence of renewable electricity generation on energy

sector in Australia
Aleksandra Awtuszewska
Bachelors Thesis

Department of Business Administration


Supervisor: Per Johnsen Smidt
Characters excl. blanks: 102 948

May 2015
School of Business and Social Sciences,
Aarhus University
Fuglsangs All 4, 8210 Aarhus V, Denmark

Australia is one of the countries that contribute a lot of emissions to the global warming and the
environmental degradation. Most of the CO2 emissions come from the energy sector- from the
electricity generation and the energy export. Australian government is working towards reducing the
pollutions via different legislation and policies. Most of them are aiming to promote renewable energy
generation and substituting conventional energy sources with renewables. Use of the green electricity
instead of grey has virtually no tangible effect on customers, the source of energy matters only for their
conscious and attitudes. The main big questions that this report will try to answer are: the influence of
the green electricity on energy sector and the willingness to pay premium for green energy by
customers. Australia will act as a good example because it has experienced an increase in renewable
generation in recent years, has a scheme that has been operating for years now that is based on
voluntary contribution, and they have potential for renewable generation of more than 11,5% of total
demand that is nowadays. It is interesting topic, because by analysing this scheme we are looking also
at the motivation of customers and the problems associated with public good. Other way of financing
the development of green technologies is via tax system, which is very effective in Denmark.
To analyse the changes made by green energy and GreenPower the extensive research for data was
conducted from existing Australian statistics, reports and databases. This approach gave a lot of
freedom in choosing the appropriate data and possibilities for cross-checking and validations. The
analysis were conducted based on existing frameworks like PEST and Environmental Kuznets Curve, as
well as based on scientific articles written by researchers.
The results were not surprising- the green energy and electricity is more expensive than grey energy,
mostly due to high initial investment and the degree of uncertainty in the calculation of how much
energy can we produce based on weather conditions. The environmental policies are causing the
electricity prices to decrease due to Australian system of spot pricing, which can distort economic
valuation and future contracts. Also the voluntary participation program is not as successful and is not
raising enough capital to sustain the development of renewables- in 2013 GreenPower contributed
around 468,5 million DKK. In comparison, the same year, Danish tax system has put over 4 762 million
DKK into clean energy investments. The clean environment is being treated as impure public good,
which gives the incentive to be a free rider. This wouldnt happen under tax system, where everybody is
obligated to pay. The stated willingness to pay differs significantly from the actual actions of customers.
The actual participation is over 3 times lower- 9% than the sated (35%). The overall extra cost for a
single average household is not more than $76 per year, which means that most of the potential
participants are not aware of the actual cost and overestimate the premium price. With the green energy
having very little effect on energy sector and electricity market, there are no obstacles to invest more in
the development on these technologies, preferably through tax system similar to Danish one.

Contents
1.

2.

Introduction ...................................................................................................................................... 3
1.1

Problem statement .................................................................................................................. 3

1.2

Green energy terminology ..................................................................................................... 4

1.3

Structure of the thesis............................................................................................................. 4

Literature view ................................................................................................................................. 5


2.1

Environmental Kuznets Curve ............................................................................................... 5

2.2

PEST analysis ........................................................................................................................ 5

2.3

Porter's Five Forces ................................................................................................................ 6

2.4

Public good ............................................................................................................................ 7


2.4.1

3.

4.

Free rider ................................................................................................................. 8

Australian energy sector ................................................................................................................... 8


3.1

Energy sector organization .................................................................................................. 11

3.2

Nuclear power ...................................................................................................................... 12

The environmental policies ............................................................................................................ 13


4.1

Environmental Kuznets Curve ............................................................................................. 13

4.2

The Mandatory Renewable Energy Target .......................................................................... 14

4.3

Solar power schemes............................................................................................................ 15

4.4

Carbon Tax........................................................................................................................... 16

4.5

The GreenPower Program.................................................................................................... 16

4.5.1 Willingness to pay premium for GreenPower scheme ......................................................... 20


4.5.2
5.

PEST analysis of GreenPower .............................................................................. 22

Electricity market ........................................................................................................................... 25

5.2

5.1.1

Pricing ................................................................................................................... 26

5.1.2

Declining electricity demand ................................................................................ 27

Influences of renewable energy generation ......................................................................... 28


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5.2.1

Electricity generation composition ....................................................................... 29

5.3

Porters Five Forces ............................................................................................................. 31

5.4

Cost comparison between non-and renewable energy ......................................................... 35

6.

Tax system vs. voluntary contribution ........................................................................................... 36

7.

Public good and free rider .............................................................................................................. 37


7.1

Free Rider problem .............................................................................................................. 37

8.

Delimitations and subjects for further discussion .......................................................................... 38

9.

Conclusion...................................................................................................................................... 39

10. Reference List ................................................................................................................................ 40


10.1 Books ................................................................................................................................... 40
10.2 Articles ................................................................................................................................. 40
10.3 Other sources ....................................................................................................................... 40
11. Appendix 1).................................................................................................................................... 44

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1. Introduction
Building a sustainable future is one of the most discussed topics worldwide [1]. There are many ways in
which governments can contribute towards this goal and encourage citizens to behave in
environmentally friendly way. Discussion about sustainability brings forward many issues that need to
be taken care of- including the emission of greenhouse gasses. One of the factors contributing towards
higher CO2 emissions is the energy sector, and the same pattern can be seen in Australia, where in 2012
the energy consumption per capita was 3,6 times the world average[2]. Also Australia makes is to the
top of the list of countries emitting the biggest amounts of greenhouse gases. Australian government
designed instruments to reduce the emissions in form of environmental policies, which are mostly
targeting the electricity generation sector. One of these policies gives the citizens the opportunity to
contribute towards greener environment and development of greener technologies. The scheme called
GreenPower enables Australian electricity consumers to willingly pay premium on electricity bills to
ensure that some portion of their electricity comes from renewable sources [3]. Australian electricity
market operates on wholesale market with competitive pricing, therefore it is important to analyse the
state of the market before the policy was implemented and compare it to the situation at hand. Since
electricity generation makes up the biggest part of energy sector, the changes in one should lead to
changes in the other. The increase in energy produced from green alternatives should lead to decrease in
grey energy production, meaning the energy production composition by fuel should change. However,
there is a steady increase in energy demand, which leads to increased production. In Australian case, the
additional production is being exported. The percentage increase in green technology production is not
increasing as fast as grey production, therefore it is harder to see that emissions are being reduced as the
result of environmental policies. The difference that the policies are making can be seen on the
electricity market, and the composition of electricity generation, which is why the electricity market
will be examined. The market for electricity is governed by supply-demand relationship, with complex
pricing, that is being affected by green energy production. Since customers are important factor on the
market, their motivation to buy green energy over grey is of interest for the policy makers as well.

1.1

Problem statement

The purpose of this thesis is to analyse the impact of renewable energy sources on the energy sector and
the voluntary purchase of green energy proposed by GreenPower policy on the electricity market. This
particular scheme is important for the government, because it involves voluntary purchase of green
energy, which makes the consumers to bear most of the costs of the scheme, while government pays
minimum cost and the overall financial risk is minimized. Report will draw the data and use the
Commonwealth of Australia as the source of information and basis for analysis. The trend of
improvement environment will be addressed, and what kind of governmental policies were applied to
contribute to reduction of emissions. Emissions of greenhouse gasses can be traced to the particular
sector, which makes it easier to plan and control for the reduction. As it will be presented below, in the
case of Australia, its the electricity generation that contributed most towards environmental
degradation- therefore it is important to look closer at the market and analyse it. Another important
issue with green power implementation is that it brings forward challenges for both suppliers and
customers. Among these challenges is the effect on electricity prices. Progressing development is
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making the renewable energy cheaper, but its still more expensive than conventional energy. It might
be valuable to analyse customers motivation behind purchase of green energy for premium price and
uncover if the stated willingness to pay (WTP) is the same as the actual. To sum it up, this report has
two main areas of interest: the influence of renewable energy sources on energy sector and WTP for
green energy.

1.2

Green energy terminology

There is a need to understand what green power actually means to consumers and what would they be
willing to pay for it. The research conducted by Rowlands & Scott (2002) examined consumers
perception of green power and how is it correlated to the stated WTP. Participants in the research were
asked to state what source of energy can be marked with Greenlabel and what would they be willing
to pay in premium for green power. The study reviled that people connect the Greenlabel term with
wind, solar and hydro power. The estimated WTP was found to be $10/month CAD for 45% of
participants, while the rest was divided between $5 and $25 CAD/month (23% respectively). These
findings stay in accordance with what is usually defined under term green power, and for the purpose of
this thesis, the green power will be defined as energy coming from wind, solar, water and biomass, to
comply with GreenPower policy definition. Findings about WTP will be also used later in analysis.

1.3

Structure of the thesis

To give a clear overview of the thesis and issues that are going to be addressed, this section will provide
a small outline of chapters to follow. Next chapter will introduce the theories and frameworks that will
be used in later analysis of the case. Then followed by description of Australian energy sector: the
changes that it went through and the current state of the sector composition. As the environmental
policies are central part of the thesis, they will be looked into, and the theory based explanation will be
provided in order to answer a question about increased interest in environment. The GreenPower policy
will be introduced in that chapter and analysed. In the section 5 of this thesis a presentation of a
wholesale electricity market will be made together with the analysis of how previously mentioned
environmental policies affected the electricity production and retail. This will provide some of the
answers to questions in the problem statement. To give some point of reference about the effectiveness
of Australian schemes, a small section with comparison between Australian and Danish system will
follow. Since the report cant include all small factors and some variables cant be predicted at this
stage, a short section about delimitations of the thesis will be presented, together with some points for
further discussion. The thesis will be concluded with a proper conclusion and summary of all the
findings, followed by a complete reference list.

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2. Literature view
To conduct the analysis of the previously mentioned topics, several frameworks and tools will be used.
This section will look closer onto these frameworks, explain them and answer the question as to why
these particular theories have been chosen. Given the wide range of questions asked in problem
statement, the theories were selected from multiple disciplines within economics: sustainability,
marketing and economy. This will provide a better understanding of the topic and allow a broader
analysis from a range of different perspectives. The data used in this report where collected from
Australian Government websites and reports prepared for different Department. Other sources of
information are the scientific journals and previous research that were conducted on similar topics. All
data was double checked to ensure the validity and trustworthiness.

2.1

Environmental Kuznets Curve

The Environmental Kuznets Curve (also referred to as EKC) is a hypothesis derived from original
Kuznets Curve theory, which is widely used in economics (Grossman & Krueger 1995). It establishes
the relationship between income inequality and market development. The EKC presents similar
relationship between economic development and environmental deterioration. The graphic
representation has inverted U-shape, where in the first phase there is a positive relationship between
economic growth and environmental decay. They both growth until a turning point is reached, which is
believed to be a level of economic development where people start to value more the environment and
turn to greener technologies. Study by Grossman and Krueger (1995) aimed to establish EKC
relationship as theory, where they conducted cross- country studies about economic development
measured in GDP per capita and the environmental deterioration measured in the factors that affect air
quality. They tested for different factors like sulphur dioxide, smoke and heavy particles. What they
found out is that the turning point for economic improvement varies with pollutant, but it principle is
before $8.000 USD in GDP per capita. This amount is in 1985 USD, which translates into $17.601 in
2014 prices [4]. The conclusion of these findings on EKC is that for most of the observations, the
economic growth in initial phase cause an environmental deterioration followed by improvement. When
the turning point is reached and higher income is obtained, the government can seek out other, greener
technologies to secure the development and invest in those green technologies.

2.2

PEST analysis

PEST analysis is a good tool to analyse the macro environment around the industry, and it can also be
used in relation to introduction of new product within the industry and wholesale market (Grant&
Jordan 2012). This framework can be useful for determining on-going and future challenges. PEST is
an acronym that stands for four main categories: political, economic, social and technology.
-

Political- It describes a range of factors connected to government and current legislation.


Industries or companies must comply with taxation rules, labour laws and other public policies,
for example about pollution emission or market competition.
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Economic- Factors that can influence the business organizations like changes in the level of
economic activity, inflation, wage changes or exchange rates.

Social- This factor of macro analysis is as important part of the analysis as economic one. The
changes in demographics like the size of population and the attitudes regarding lifestyle and
standards can very much affect the whole industry. Since this factor describes directly
customers that make up the demand, all changes should be noticed and companies should react
accordingly.

Technology- This factor drives innovation and production of new products. New technologies
are being developed on daily basis, which could either make the processes within the company
more efficient, or out-dated. The important factor here is whether the business organization can
adapt to changing technologies and trend, with emphasis on green energy technologies,
environmental trends and information accessibility.

2.3

Porter's Five Forces

This framework has been chosen to understand the electricity industry and the forces behind it. It gives
a deep insight into how the market works and what can influence it (Kotler et al. 2009). Analysis consist
of five factors that determine the attractiveness of the industry and potential problems or advantages
when entering into said industry. This tool will be helpful in later analysis of the electricity industry and
will provide deeper understanding of how the electricity market works.

a) Industry competitors
Competition is one of the major concerns for all companies within the industry. The competition within
a segment can be very fierce, there might be a lot of actors already well-established in the industry,
making it unfavourable for others to enter. Another factor that increases the industry competition is high
exit barriers. If such barriers exist, the companies are pressed to stay within industry and compete even
if the sector is in decline and returns are diminished. The example of industry with high competition
might be airline industry, where there are already established actors- SAS, Norwegian and Ryanair, and
the exit barriers are very high- equipment and planes that can't be sold easily.
b) Potential entrants
The threat of many potential entrants is high when there are no barriers to entry or when they are very
low. That might lead to many actors entering the market when there is a good economic situation,
which can decrease the profitability. Favourable situation for the industry is when barriers to entry are
high, which limits the number of companies and generate healthy competition on the market. An
example of negative effect of low entry barriers is the food court- there are no significant barriers to
establish a small food cart, but many other may follow thus dragging the prices below the cost level,
causing all the actors to fail.

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c) Threat of substitutes
This factor depends on what kinds of products are offered by the industry. With highly substitutable
goods, established player might experience a decline in their sales when new technologies and more
advanced products are being introduced. The threat is greater when our product can be substituted for a
product from another industry. An example can be laptops and tablets. The technology is similar, so the
laptop users can switch to using tablets instead.
d) Buyer power
Buyers bargaining power can affect the overall attractiveness of the segment. When buyers have a lot of
power, they are more price- sensitive and can integrate upstream. Buyer power can also increase when
they have low switching costs or the product offered is undifferentiated. High buyer power can be seen
in the small electronic parts, where the parts are sold by many manufacturers to different brands. The
chips that are offered by manufacturers are very similar, and the brads that are buying the parts to
produce a ready device can become powerful enough to buy the small parts manufacturer or bargain for
deals.
e) Supplier power
Similar to buyer power, the more power is on the supplier side, the more unfavourable is the industry.
Where suppliers can adjust the prices and quantity, there is a lot of uncertainty for companies within
sector. Supplier power can increase when suppliers are concentrated or the good they provide is hard to
substitute. An example can be the pharmaceutical companies that are supplying drugs for hospitals or
clinics. They can be the only one with given product, which gives them lots of power in terms of prices
and quantities supplied.

2.4

Public good

Public goods and free riders are important part of the analysis of Green Power policy due to the nature
of the green energy. It provides both public and private goods, and as it's known from literature
(Tietenberg& Lewis 2012), where public goods are present, there is an incentive for free riding. In
relation to Green Power, this analysis can provide some insights about the WTP premium for green
energy and the ways to reduce free riding.
In economic the goods can be classified into two broad categories: private and public goods. Pure
private good means that only a customer enjoys all the benefits of a good. Pure public good has two
important characteristics: non-rivalry and non-exclusivity. Non-rivalry means that a consumers
consumption of a good can't limit the consumption of other customer, while non-exclusivity implies that
a customer can't exclude others from enjoying the benefits of a good. The most widely used examples of
public goods are national defence and clean air. However in real life most goods are seldom purely
public. In relation to green energy, that provides a mix of private and public good, the term impure
public good is often use. Kotchen (2004) developed an impure public good model to provide an
understanding about how demand for green power and environment quality depends on market prices
and technology. In this model an impure public good is described as a good that generate both private
characteristics and an environmental public. An example of impure public good can be a low-emission
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vehicle. It satisfies both private good feature- consumers can enjoy the benefits of having a vehicle, and
the public good feature- low-emission generated by the car is contributing toward better air quality
which is enjoyed by all consumers.

2.4.1

Free rider

Public goods are often under-provided, because of the problems with correct valuation and free riding.
The valuation issue arises because consumers have a tendency to under- value the benefit of public
good, while the providers of public good would set a higher value. Therefore the correct pricing might
be very problematic. The free rider problem is present in both cases, with pure public good and impure
public good. When a public good is provided for the public, individuals have a strong incentive to not to
contribute. Since the public good is non-exclusive, the non-paying individuals will still enjoy the full
benefits (Tietenberg& Lewis 2012). The under-provision is classified by economists as a market failure
by for example Samuelson 1954 and Olson 1965, therefore markets based on public goods are deemed
as not efficient, and there is a need for government legislation and provision of said public goods.

3. Australian energy sector


In 2012 Australia was the 8th largest producer of energy in the world and the 2nd coal exporter [5].
According to national data, the energy industry accounts for 7% of the Australian gross value added [6].
Therefore it is crucial that any changes and policies implemented on such a big part of national
economy should be carefully analysed with emphasis on long-term effects.
The production of energy is a growing sector, with the energy production increasing on average 2%
annually over last 10 years. Australia has a very diverse energy resources such as coal- black and
brown, natural gas, uranium, oil and possibilities for renewable energy. Given the increasing demand
for energy and the limited amount of non-renewables, the renewable energy is gaining more and more
importance. The Figure 1) below presents the production of primary energy in years 1990-2012
expressed in PJ. Petajoule is the standard unit of measurement the energy, where one watt of power
(1W) is equal to one joule (1J). One petajoule (PJ) is equal to 1015 joules or 278 gigawatt hours (278
GWh).

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Figure 1) Primary Energy Production (PJ)


21 000.0
18 000.0
15 000.0

Uranium

12 000.0

Natural gas
LPG

9 000.0

Crude oil
6 000.0

Renewables

3 000.0

Brown coal

0.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Black coal

Source: [33] BREE 2014, 2014 Australian energy statistics, BREE, Canberra, July,
Table J, own drawing

On the figure it can be seen that since 1990 Australia has seen a steady increase in energy production,
and that the main components of the energy production is black coal, natural gas and uranium. The
energy production differentiates between black and brown coal. The black coal has high energy content
and it is mostly used for export. The brown coal, also called lignite, has lower energy content, and its
deemed not suitable for export, therefore is used in Australia for electricity generation in power stations.
Over the years there are no big changes in the composition of energy production, with the exemption for
uranium, which is being produced exclusively for export. Production of uranium has increased by 220%
from 1993 level- 2.044 PJ to 4.497 PJ in 2003. More detailed information about uranium and nuclear
power in Australia will be provided in later section. Since renewable energy is the main area of interest
for this report, the production should be mentioned. From the Figure 1) it can be seen that the share of
renewable energy has been on the same level since 1990. However is should be noticed that since all the
production increased, the renewable production also increased proportionally, leaving the share of
renewables in total mix quite unchanged.
As steady as the growth in the energy sector might be, there are still times when the total production
suddenly increases or decreases. Most of these jumps can be explained by economic factors like supply
and demand mechanism or financial crisis. There can be seen a visible peak in production in 2008,
followed by a decrease in years 2009-2010. The sudden drop in production can be explained by the
financial crisis in 2008 that Australian economy has experienced it in years 2009-2010, as can be seen
on the Figure 2) below. Looking at the gross domestic product percentage changes, there is a visible
decrease in these years. Similar correlation between energy production and GDP can be seen also in
year 1999.

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Figure 2) GDP growth (annual %)


6
5
4
3
2
1
0
-1
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: Australian Bureau of Statistics, Table 1. Key National Accounts Aggregates


2013, own drawing

As it was mentioned before, Australia is one of the biggest exporters of coal in the world, and it also
exports all of its uranium production. This implies that the energy export plays a big role in the whole
sector. From 2004 there is a small but steady increase in export of natural gas that exceeded the export
of crude oil. This is due to discovery of new natural gas sources in Australia that increased the overall
supply of this resource. In contrast to production of energy, the coal export did not fluctuate much and
did not decrease during financial crisis. The big variation in export of uranium is probably due to slow
down in all economies during the crisis years and the controversies around use of nuclear power.
Energy sector supplies the energy to whole industries across the country. The consumption can be
divided into sectors of industry, which is helpful to pinpoint which industry is consuming most energy
and might be responsible for the biggest amount of greenhouse gasses. According to data summarized
in Figure 3) below, in 2012 the electricity, gas, water & waste services were responsible for the biggest
energy consumption. Other sectors that are equally big when it comes to energy consumption are
transport and manufacturing.

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Figure 3) Energy consumption by industry 2012


(PJ)
Agriculture, forestry and fishing
Construction
Mining
Manufacturing
Electricity, Gas, Water & Waste
Services
Transport & warehousing
Residential
Source: [33] BREE 2014, 2014 Australian energy statistics, BREE,
Canberra, July, Table F, own drawing

3.1

Other

Energy sector organization

The energy sector in Australia has gone through some major changes since 1990, where reforms were
implemented and new organization established that reshaped the sector. Before 1997 the energy sector
was divided into small separate units based in the different states in Australia: Northern Territory (NT),
Queensland (QLD), New South Wales (NSW), Victoria (VIC), Tasmania (TAS), South Australia (SA),
Western Australia (WA) and the Australian Capital Territory (ACT). The states operated with separate
public monopolies that were in charge of supplying energy and the interstate trade was limited. It was
believed that this model will not contribute to improvement in energy sector in terms of efficiency and
development, so the Council of Australian Government started to look into possibilities of reforming
the energy sector. In 1998 the National Electricity Market (NEM) was established to create a framework
for close cooperation and free energy flow through states VIC, SA, NSW, QLD and ACT. These states
have also privatised the energy generation and retail, and created a competitive market to ensure further
growth. The NEM has established spot pricing which is adjusted to real time supply and demand
changes in 30min intervals [7].
The reform was evaluated as successful, and The Australian Energy Regulator (AER) was implemented
in 2004 to improve the energy sector operations as retail and transition on a national level. Together
with AER, the Australian Energy Market Commission (AEMC) and Australian Energy Market Operator
(AEMO) were established. The primary objective of AEMC is rule making and development of market
for electricity and market, while AEMO develops systems to maintain the systems and safety on the
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wholesale electricity and gas market on national level. AER purpose is to enforce and regulate the rules
established by NEM. AER has a broad variety of responsibilities like:
-

Controlling and setting the spot pricing


Monitoring the energy supplier on wholesale market
Publishing information and reports on energy sector
Controlling the retailers and educating small business consumers about their rights

Two states in Australia are not part of the NEM- Western Australia and Northern Territory. They have
chosen to establish their own networks and market mechanisms, which are different from mentioned
above. The reason for not being a part of NEM is the relatively small population and huge remote areas
in both of these states.

3.2

Nuclear power

There is an on-going discussion about nuclear power generation and whether it should be included in
green energy. Nuclear power is not regarded as renewable resource, since it uses non-renewable
uranium as fuel. As it was previously mentioned, the production of uranium in Australia is solely for
export, and the country has only one operating research reactor. Given the considerable supplies of
uranium, nuclear power generation is one of the possibilities for Australia in terms of alternative
energy. The factors that so far have been preventing the development of nuclear power were presented
in report Uranium mining, processing and nuclear energy- opportunities for Australia in 2006 [22].
According to this report, the main reason driving the debate is the significant reduction of CO2
emission when switching from coal to nuclear power. On the other side, there are concerns regarding
the costs and safety. Australian customers enjoy energy prices at fairly low level, while the
implementation of nuclear power will mean significant investments which will be reflected in higher
end user prices. The findings from the report estimated that the prices would be 20-50% higher;
however they are expected to fall in long-term period. Although the citizens are not opposing the
prospect of having nuclear power plants, the plans are still not clear and no decision have been made in
that direction. Therefore the nuclear power is not taken into consideration in this thesis.

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4. The environmental policies


As established in previous section, the electricity sector is responsible for the most of energy
consumption. In 2012 Australia was the biggest emitter of greenhouse gasses GHG within the OECD
area, with the emission of 23.966 ton/ capita [8]. Carbon dioxide CO2 is the major harmful component
of greenhouse gases, which is why many environmental policies are created with purpose of decreasing
the CO2 emissions. According to Australian Department of Environment, in 2011 the CO2 emissions
were coming mostly from energy sector (77%) and agriculture (14%). It is clearly visible that energy
sector is the main problem for the environment. Within the sector, the main emitter of CO2 is electricity
production (46%). The number comes not as a surprise, given that main electricity generation source is
coal. Ever since 1990, the electricity sector has seen the strongest increase in emission of CO2, which
compared with 2011 levels increased by almost 50% [9]. Together with changing legislation that was
described in previous section, environmental movements started. Australia is the member country in the
Umbrella Group in the United Nations Framework Convention on Climate Change (UNFCCC), which
members represent over 30% of worlds emissions. Under UNFCCC Australia also ratified the Kyoto
Protocol in 2007, which compels Australia to limit or reduce emissions gradually over the years [10].
Recently new commitment period began, and its duration is 2013-2020. In that period, Australian target
is to achieve reduction in emission of 5% below 2000 levels before 2020.
In order to achieve desired reduction in emissions, Australian government implemented policies and
schemes to limit emissions and promote alternative solutions. Below are presented some examples of
the policies. The list is not complete, and for the purpose of the thesis, the policies have been chosen
based on their popularity and the national level, rather than local state level. As previously stated, the
energy generation contributes to the biggest emissions as single sector; therefore the policies presented
below are concerning the regulations on electricity market, not the direct emission reduction.

4.1

Environmental Kuznets Curve

The interest in environmental improvement can be driven by economic factors. According to EKC, the
more developed the economy, the more it shifts focus to develop better environment and technologies.
The established turning point is at $17 601 USD in GDP per capita. As presented below in Figure 4),
Australian GDP per capita is well above the turning point, which adjusted for 2005 USD is $14 520 [4].
Reaching the turning point income is not the only one factor that influences the interest in environment.
Even with higher GDP per capita it is possible that the economy was not stable enough, and the focus
was still in achieving the best economic outcome, fight the unemployment or income inequality. The
environmental concerns come forward once the basic economic level are on satisfying level and are no
longer the most pressing matter. Therefore based on EKC and Australian GDP it cant be concluded
with 100% certainty that the income level was the factor behind the environmental policies. The results
are stating that the assumption of turning point theory was satisfied in Australian case and the economic
situation was not an obstacle in environmental movements.

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Figure 4) GDP per capita


40000

35000
30000

GDP per capita


(constant 2005
US$)

25000
20000
15000
10000

turning point

5000
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: WorldDataBank 2015, own drawing

4.2

The Mandatory Renewable Energy Target

The Mandatory Renewable Energy Target (MRET), also called RET scheme has been effective in
Australia since 2001 [12]. The purpose of RET scheme is to:
-

Encourage the electricity generation from renewable resources


Reduce greenhouse gas emissions
Ensure that renewable energy generation is ecologically sustainable

The latest amend of RET sets an objective of ensuring that at least 20% of electricity production comes
from renewable resource by 2020. The mechanism behind RET is based on creating supply and demand
for electricity generated from renewable resources. Large renewable power plants and owners of smallscale renewable energy systems (solar cells, wind plants and hydro systems) can get certificate for every
megawatt hour (MWh) they produce. This certified energy is being sold to electricity retailers, who are
obligated to reach specific target of certified energy and report the results to Clean Energy Regulator
(CER). If an electricity retailer fails to surrender required amount of certificates, it has pay fine of
around $65 AUD per certificate [12]. Further, the RET scheme consist of two parts.

1.
The Large-scale Renewable Energy Target (LRET) that sets a target for renewable energy
production within the electricity industry. The ultimate target for 2020 is to achieve 41 000 GWh of
green energy. The LRET is governed by CER, which oversees the generation and trade of certificates on
the market. These certificates are called Large-scale Generation Certificates (LGCs).

Page 14 of 44

2.
The Small-scale Renewable Energy Scheme (SRES) is set to provide support for installation of
renewable systems and encourage independent production of green energy and trade from these
systems. When implemented, the SRES did not have a specific target to meet to remove the pressure
from producers. The electricity production from this scheme was estimated to be around 4 000 GWh by
2020, but according to newest report, already in 2013 the SRES delivered 6 400 GWh of green energy.
The certificates purchased under SRES are Small-scale Technology Certificates (STCs) and can be sold
through CER on so-called Clearing House market.
Combined with governmental subsidies on installation SRES, consumers are given the financial
incentive to contribute towards renewable energy. Over the years, RET has contributed to the overall
CO2 emission reduction in electricity generation sector. RET imposes extra costs on energy retailers, is
treated as a tax on production, which contributes to higher energy prices for end-users [12].

4.3

Solar power schemes

The Solar Cities program was initiated in 2004. It was a trial program that brought together Australian
Government, industry, businesses and local communities and enabled them to work together under the
same cause- reduction in emission and building green and efficient electricity plants [14]. The trial
projects were established in seven different locations in Australia and they finished in 2013 and it is
estimated that the total funding of the program was approximately $250 million AUD. The main
objectives of the program were:
-

To explore new sustainable business models with low financial risk


Generate valuable information for future policies about the effectiveness and efficiency of using
solar power
Benefit small businesses and households in helping them understand their energy use and
improve energy efficiency.

In 2013 the evaluation of Solar Cities was made by an external consulting group on behalf of Australian
Department of Resources, Energy and Tourism. In the report it was concluded that the stakeholders had
very positive experiences with the program [13]. Upon finishing the trial period, the government
decided to establish the Solar Cities as a long-term plan, and committed to supplement up to $2,1
million AUD for further development in years 2014-2017 [14]. The funding is available in form of
grants for purchasing and installation of renewable energy systems (solar PV, solar water heater
systems etc.). The systems installed with the funding assistance are eligible to RET certificates under
SRES scheme. The number of certificates is based on the electricity generation in MWh over the solar
power lifespan. The certificates can be either sold through the Clearing House market by the installation
owner, or the right to certificates can be sold to the registered agent, which in most cases is deducted
from the cost of solar panel. The Solar Cities system is flexible and easy to understand for the
customers. The $2,1 million AUD comes from the Treasury of Commonwealth, and most of the
customers interested in getting the subsidiary contact their energy retailers to help with applying for a
subsidy. Its available for both commercial and residential customers.

Page 15 of 44

4.4

Carbon Tax

The scheme started operating from 2012, as it was designed for only 2 years- until 1 July 2014. The
main objective was the decrease in GHG by 5% of 2000 level before 2020. As the name implies, this
scheme is taxation the emission of CO2 at fixed price of $23 AUD per ton for the CO2 emission above
the threshold. The cap was set at 25 000 tons of CO2 and businesses that emitted more were directly
liable for carbon taxation. However some businesses were eligible to apply for assistance in form of
free CO2 units in case if their position on international competitive market was in danger. There were
different ways to pay for the emission- direct tax, through fuel tax system or synthetic greenhouse gas
levies. In 2013 about 75 000 Australian businesses were liable to pay, from a range of industries, which
had an indirect effect on customers. The enforced extra costs for businesses resulted in higher end
prices for customers. The Treasury of Commonwealth of Australia has estimated that the average
impact of Carbon Pricing on household was around $9,90 AUD per week in increased cost of living. It
is estimated that Treasury has risen over $15,4 billion during these 2 years. Part of that money was used
to create compensation programs for households: income tax cuts, allowances and increases in pension
to support low-income households [43]. The repeal of carbon pricing in 2014 will have positive impact
on both the businesses and households. There will be no longer extra cost for businesses, which will
lead to lower prices for customers. Also during the years of Carbon Tax, the CO2 emissions were
significantly lower, and it gave incentive for development of alternative sources of energy [15].

4.5

The GreenPower Program

GreenPower is a central scheme in this thesis, because its based on voluntary customer actions and
reflects what are peoples attitudes and WTP for better environment. GreenPower operates nationally as
a joint operation in states NSW, VIC, QLD, SA and ACT under National GreenPower Steering Group
(NGPSG) [16]. It was established in 1997 in NSW and 3 years later it was launched on national level. It
targets the electricity generation directly and aims to help to achieve the emission reduction goal. The
program is important because if successful, it could be an important factor in transforming electricity
market to green energy funded by customers, where government bears the minimal cost (Mewton&
Cacho 2011). Under this scheme, the electricity retailers offer customers to purchase electricity coming
from renewable resources for a premium price per kWh. The retailers buy renewable energy from the
wholesale electricity market that can receive similar green certificates as under RET. However the
energy must be first sold to customer before the certificate can be issued, and later retailers submit them
CER to prove that they comply with the scheme. Also these certificates are not a part of RET scheme to
ensure that GreenPower will work as an addition. This means that the certificates produced from
GreenPower are not counting towards the renewable electricity generation target set by RET. Currently
it is estimated that with the additional contribution of GreenPower, Australia may reach nearly 27% of
renewable energy by 2020.

Page 16 of 44

The scheme was established with objectives to:


-

decrease GHG emissions within electricity generation

facilitate the installation of renewable energy generators beyond the RET requirements

increase customer awareness about renewable energy solutions and greenhouse issue[16]

The GreenPower scheme is not mandatory- both the electricity providers and customers have freedom
to choose to participate or not. However, after publicly presenting the scheme, it was perceived as a
source of competitive advantage for electricity retailers, therefore many of them has chosen to include
GreenPower packages in their portfolio. The providers are required to have a package of at least 10%
green energy in their product offer for both residential and commercial customers. It is of course
impossible to distinguish the green and grey energy in the power grid, which means that in reality
customers are getting all kind of mixed energy, so the premium paid extra is covering an intangible
good. According to the GreenPower official website, the premium paid to receive 100% of electricity
from renewable resources is around 5-8 cents AUD per kWh on top of regular electricity bill [3].
To ensure that the scheme is running smoothly and without any uncertainty, a legal framework for
GreenPower supply, demand, certificate purchase, marketing and customer handling was created and is
controlled by GreenPower Program Managers. For each quarter, the GreenPower providers are required
to submit a report with exact GreenPower sales, customers number and electricity provided from each
state. This is a controlling tool to ensure that green energy is being handled in responsible manner and
the reports are later used in the annual audit publications. These publications are the source of data
about the uptake of GreenPower and the changes in electricity sector over the years.
To compare the changes, the data from quarterly status report January- March 2014 will be compared
with the latest available report from July- September 2014. During these 10 years, the GreenPower has
gained more customers and keeps generating more green energy. In 2004 there were 12 electricity
retailers that offered 18 GreenPower accredited products in 6 states. In 2014 the numbers grew to 38
products offered by 29 providers in 8 states. In the early state of GreenPower, most of the customers
were based in QLD, VIC and NSW, and the total customer base was 95 955 customers. The number
increased 5 times over the years, but the composition by state stayed constant, with majority of
customers based in QLD.

Page 17 of 44

Comparing just the years 2004 and 2014 is not enough to get a complete picture of how consumers
participated in the program and what changes it went through. Therefore Figures 5, 6 and 7) are set to
show the annually change in GreenPower sales in MWh by type of customer and the state. Observations
in Figure 5) show that in years 2004-2010 there was a strong increase in sales of GreenPower, however
after 2010 the market saw a decrease. The possible reasons for the decrease are the increased uptake of
solar panels under Solar Cities scheme and carbon tax that was abolished in 2014 that contributed to
increased electricity prices.

Figure 5) Total GreenPower sales (MWh)


2500000
2000000
1500000
commercial

1000000

residential

500000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: [35] GreenPower Anual Reports 2004-2013, own drawing

Interesting thing can be observed in Figure 6 and 7), which shows the residential and commercial
customers by state. As concluded before, QLD, VIC and NSW have the biggest customer base, but
there is a difference between whether customers are households or businesses. The overall pattern of
GreenPower sales for both group follow the total sales, however the changes are more drastic with the
residential customers. This can be explained by the higher price sensitivity of households to electricity
prices. Commercial customers include the governmental organizations, which are operate on bigger
budgets than households and can afford to purchase GreenPower. Most of the residential customers are
located in the QLD and VIC, while most of the commercial customers are based in NSW and VIC. It
must be pointed out, that this data covers only sales in MWh, with no percentage of GreenPower
customer in given state. Given the differences in population of QLD and WA, it must be important to
remember that it doesnt necessarily mean that bigger portion of customer chooses GreenPower in
QLD. It simply states that there are more customers available in that region who are also willing to
participate in GreenPower scheme.

Page 18 of 44

Figure 6) GreenPower sales in MWh for


residential customers by state
400000
350000

NSW

300000

VIC

250000

QLD

200000

SA

150000

WA

ACT

100000

TAS
50000

NT

0
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: [34,35] GreenPower Anual Reports 2004-2013, own drawing

Figure 7) GreenPower sales in MWh for


commercial customers by state
400000
350000
NSW

300000

VIC

250000

QLD

200000

SA

150000

WA

100000

ACT

50000

TAS

0
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: [34, 35] GreenPower Anual Reports 2004-2013, own drawing

Page 19 of 44

NT

As it can be seen on the Figure 8) below, the overall electricity consumption is declining since 2010.
The reason for this is the electricity efficiency awareness within the households and businesses.
However it can be seen that the GreenPower share of consumed electricity is in decline since 2010. This
might be due to the intake of other environmental solutions like solar panels. The decrease might be
also caused by Carbon Pricing imposed on businesses. In that case, GreenPower might lost some of its
commercial customers due to costs. In the presence of direct carbon tax, GreenPower is just an addition
that can be cut short to improve profitability.

Figure 8) Electricity consumption by source


(GWh)
260 000
250 000
240 000
230 000

GreenPower

220 000

Other sources

210 000
2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: [35] Australian Energy Statistics and GreenPower 2014, own drawing

4.5.1

Willingness to pay premium for GreenPower scheme

A study about participation in GreenPower scheme was conducted by Hobman and Fredriks (2014)
where they examined the barriers to enter GreenPower scheme by means of online survey. The data
consist of answers to several questions related to GreenPower and overall environmental concerns. The
results revealed that almost 25% of participants were unsure whether their electricity comes from
renewable resources or not. Over 47% didn't participate in GreenPower, which left around 28% of
surveyed people with actual subscription to GreenPower. Of the barriers to enter, the most common was
the financial considerations (39%), negative perception of the scheme (17%) and lack of awareness
(15%). This data in comparison with data from 2008 shows an increase in participation and the
awareness. According to report prepared by ABS in 2008, 52% of surveyed households were aware of
the GreenPower scheme, and out of these 5% were already participating in the program [17].
Unfortunately only 32% of households were willing to participate in the program. This number is small,
but compared with previous results- 23% in 2005, it can be concluded that overall interest in the
GreenPower is increasing and we can expect it to rise over time.

Page 20 of 44

Willingness to participate in GreenPower scheme reflects indirectly the WTP premium for a green
energy. The research conducted by Mewton and Cacho (2011) analysed empirically the price elasticity
of GreenPower products. In their analysis, the researchers used the sales of GreenPower in MWh as
dependent variable and different independent variables like: price premium for GreenPower ($/kWh),
age of the scheme in quarters, composition of the GreenPower products, size of the company, degree of
economic activity for a quarter, proportion of GreenPower from new renewable resources and a set of
dummy variables. After estimating models and running regressions, the researchers have found that the
variable price premium is statistically significant and has a negative relation on the depended
variable. In the models, the range of the variable was from -1.53 to -0.39 with mean value of -0.96. This
number can be seen as the estimate for price elasticity for GreenPower with respect to its own price.
The analysis didn't recognize the residential and commercial customers separately, but it was assumed
that the residential customers would be more price- sensitive. This is because the residential households
are more price- sensitive in general and would react negatively to price increase. When price sensitivity
is high, even the smallest increase in price has much bigger negative effect on customers. The variable
age of the scheme was also significant meaning that the longer the GreenPower packages were
available, the more sales they generated. Another interesting finding was that the competition among
retailer was also increasing the sales, because of the ease of changing the provider for customers and the
difference in electricity packages offered.
The problem with estimating WTP and participation in the green energy program is that it only reveals
the stated preferences, not the actual behaviour. Knowledge about the result of the survey about WTP
premium for GreenPower from ABS (2008) and having exact number of customer for each from
GreenPower quarterly report provides an opportunity to compare the stated preferences and the real
sales. The survey conducted by ABS in 2008 asked a representative sample of households in each state
their WTP for green energy. The results are presented in Table 1) below. As it can be seen, the average
for Australia is 32,5% of respondents were willing to pay premium, while the majority- 55,4% weren't.
Out of the states represented, the highest WTP can be seen in households in WA- 37,6%. While the
least willing to pay extra are residents from NSW- 57,7% wouldn't pay extra.
Table 1) Stated w illingness to pay premium (%) by states
NSW

VIC

QLD

SA

WA

ACT AUSTRALIA

MARCH 2008
Willing to pay extra

30.9

30.9

34.6

30.9

37.6

36.1

32.5

Not w illing to pay extra

57.7

56.0

52.3

55.3

53.1

54.0

55.4

Did not know

11.4

13.1

13.1

13.8

9.3

9.9

12.1

Source: ABS (2008), 4602.0.55.001 Environmental Issues: Energy Use and Conservation

For the purpose of this thesis some calculations were made to find out how big percentage of
households actually were participants of GreenPower [35]. Since the survey by ABS asked for WTP of
households, it was needed to calculate number of all households in given states in year 2008. A number
of private dwellings in each state was found on CensusData from ABS [17]. This analysis requires
assumptions that:

Page 21 of 44

1. The number of private dwellings can be used as a base for calculating the total residential
households that can participate in GreenPower scheme
2. The annual increase in households is equal to the average difference between years 2006-2011
Given the lack of proper data, the analysis assumes that the above mentioned are true, therefore the
obtained results should be treated only as estimates with a margin of error.
Table 2) Calculated number of GreenPow er customers by state (%)
NSW

VIC

QLD

SA

WA

ACT

AUSTRALIA

# of housholds 2006

2,728,719

2,085,113

1,660,750

679,662

849,006

131,375

8,134,625

# of housholds 2011

2,864,531

2,277,967

1,826,449

727,676

960,717

145,229

8,802,569

27,162

38,571

33,140

9,603

22,342

2,771

2,783,044

2,162,255

1,727,030

698,868

893,690

136,917

8,401,803

207,801

290,058

158,937

72,769

7,737

11,070

748,372

10.41%

0.87%

Annual increase
# of housholds 2008
GreenPow er customers
-%

7.47%

13.41%

9.20%

8.09%

Source: Censusdata.abs.gov.au 2014, GreenPow er quarterly report Q3 2008

The results are as expected- much lower than surveyed WTP. In Table 2) above the calculations and
results are presented to give a better overview. The results are showing that the national average for
participation in GreenPower is 7,72%, much lower than stated. WA, which had the highest WTP in
survey, ended up with the lowest actual result of 0,87%. The highest uptake of GreenPower can be seen
in VIC, QLS and NSW (13,41%, 9,2% and 7,47% respectively). This is consistent with the data on
Figure 6), where the residential sales of GreenPower are presented in MWh. These states have the
highest scores in the participation in the program.
Given the results and the fact that the survey asked the directly about the WTP premium, it can be
concluded that the price is very important factor in the GreenPower scheme. It might be pointed that the
price can be a very strong barrier to enter the program, and to encourage participation, the government
should target the prices and made them more consumer- friendly or spread the knowledge that the
premium prices are not as high as people tend to believe they are.

4.5.2

PEST analysis of GreenPower

The GreenPower scheme can be analysed as a single product introduced on the national electricity
market. PEST can provide an overview over the market or industry, which can help to predict how the
market would react to GreenPower and what problem can arise. The GreenPower scheme has been
already in force for a couple of years, and it is working towards its objectives. Breaking down the
influencing factors might help in understanding why the participation in scheme has been declining in
recent years and what measures can be implemented to stop the decline.
- Political: Introduction of GreenPower happened when the electricity wholesale market was still
changing and it took some time before the scheme was available in all states. The legislation changed
over the years, also regarding the environment. Since the implementation of GreenPower in 2000 on
national level, the emission targets changed, which gave incentives for new environmental policies.
Page 22 of 44

8.91%

RET scheme and solar panels subsidies as independent environmental policies could influence
negatively the uptake of GreenPower, which might be an explanation as to why the GreenPower is
facing the decrease in sales since 2010.
- Economic: In this factor the overall economic variables and activity are being discussed. The financial
crisis had impact on Australian economy in years 2009-2010 as it was presented in the Figure 2), about
the annual growth in GDP in percentage. It could be expected that during that years the voluntary
contribution to GreenPower should decrease, but as it can be seen on Figure 6 and 7), in these years
there was an increase in sales. The GDP per capita as shown on Figure 4) is showing a steady increase
in terms of economic activity, which should have positive influence on GreenPower uptake. Based on
the data presented before, it can be concluded that there is no direct correlation between the GDP per
capita and GreenPower participation. To investigate the possible explanation for GreenPower's changes
in sales, data about Gross Households Disposable Income GHDI per capita was extracted and presented
in the Figure 9) below. The data was calculated to constant 2000 prices, the year the GreenPower was
launched nationally [4].

As it can be seen on the figure, up to 2009 there was an annual growth in GHDI of 3%, while after 2009
the growth was only about 0,67% [19]. Given the slight decrease in the disposable income of
households, who are the primary customers of GreenPower products, this stagnation in the income
could be a factor that limits the GreenPower participation.

35000

Figure 9) Gross household disposable income


per capita

30000

25000

20000

15000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: 5220.0 Australian National Accounts: State Accounts, Table 20, own
drawing

In 2012 the average spending on energy for an Australian household was $99 per week- $39 for
electricity and gas, and $60 for fuel [20]. The participation in GreenPower scheme can cost $0,05-8 per
kWh, and the average household consumes 120 kWh per week. Given 10% GreenPower plan, the price
per 1kWh rises to $0,4, which is roughly only $1,5 more than without GreenPower per week. The
difference is small and can be deemed insignificant- $76 per year for better environment. However
some customers dont know much about the program and they perceive it green energy more much
more expensive than it really is.
Page 23 of 44

- Social: This part of analysis was greatly covered in previous section about WTP and participation in
the program, as well the overall awareness of GreenPower. The Environmental Kuznets Curve can also
be used, as it shows when people's attention shifts from primary needs like employment, income and
consumption, to more elaborate needs for other goods like clean air and ecology. As it was established
before, the Australian income level is on high enough level to satisfy the EKC assumption and let
people to focus on environment. The awareness of GreenPower program and the environmental
concerns are increasing over the years as it was found by recent ABS report. However since
GreenPower is not the only available way to support the environment, many consumers might choose to
participate in different programs, like Solar Cities or simply show support by recycling and using
collective transport. Especially in connection with lower disposable income, households might consider
other means of supporting the environment.

- Technology: The green energy for GreenPower scheme comes from a wide range of renewable energy
generators all across Australia. The legislation set by NGPSG states that only generators commissioned
or upgraded after 1st January 1997 can get receive the GreenPower accreditation [16] to ensure the best
available technology and efficiency. All generators must be approved by the Program Manager. The
GreenPower measures the GHG reduction in MWh generated from GreenPower Generators 1MWh= 1
tonne CO2. The renewable-energy comes from:
-

Solar Photovoltaic (PV) and Solar Thermal Electric Systems

Wind Turbines and Wind Farms

Hydro-Electric Power Stations

Biomass- Fuelled power Stations

Geothermal Power Stations

Wave and Tidal Power Stations

As it can be seen, Australia has a wide variety of renewable resources that they can generate energy
from. As of 2014, the generation of renewable-energy from GreenPower power stations is 3 186MW. If
the generators work with 100% efficiency over the year, they can produce 3 186 MWh, which per year
would give 27 906 GWh of green energy [21]. This is the maximum green energy capacity that
Australia could achieve in a year, which could satisfy 11,5% of electricity demand in 2012. This shows
that Australia has a potential for developing new green technologies and improving efficiency. The
costs of building and upgrading new power stations are of concern, but with increased intake of
GreenPower scheme, more customers would voluntarily participate in funding.
Another factor is that Australia's energy consumption is on a relatively flat level since 2010, especially
in the electricity generation sector. Similar situation with the energy intensity- the levels have actually
fallen over the recent years, and in 2012 Australia has noticed 3% decline in energy intensity [20]. This
is due to shift in the industry sectors- from heavy production and manufacturing that requires a lot of
energy to services.

Page 24 of 44

5. Electricity market
The electricity market in Australia has gone through changes as the whole energy sector changed.
Before 1990, each state in Australia had its own single, vertically integrated government-owned
electricity supplier. The prices were set by the state, and there was no connection between states' power
grids. Before 1990 the market structure was similar to vertically integrated monopoly, while the
restructuration made it to unbundled, fully competitive market [32]. The Appendix 1) presents a
diagram overview of organization of Australian electricity market to explain in more simple and
understandable way the. NEM can be defined as a wholesale market place for supply and purchase of
electricity.
There is a lot of competition on the market along the whole supply chain of the electricity. The
generation and distribution of electricity are separated and are competing against each other
horizontally. Generators are company owned electricity providers that produce the electricity from
either fossil fuels or renewable resources. All the generators have open access to the distribution
networks to transfer the energy to retailers or the large industrial consumers. They sell the electricity to
AEMO for the spot price, which is then combined into wholesale pool of electricity. The retailers buy
the electricity on the wholesale pool market and later sell it to the end users- customers. It is worth
noticing that the retailers have no control over the distribution or transmission of energy, and they can
compete with other retailers via effective marketing and pricing.
Establishment of NEM was overseen by two companies: the National Electricity Code Administrator
Limited (NECA) and the National Electricity Market Management Company Limited (NEMMCO),
which were subsequently replaced by governmental organizations. NECA was replaced in 2005 by
Australian Energy Market Commission (AEMC) and the Australian Energy Regulator (AER). The
AEMC is responsible for legislation and market development, while AER is responsible for
enforcement of the rules and the regulation of electricity market and transmission networks. NEMMCO
was replaced in 2009 by Australian Energy Market Operator (AEMO). The central role in wholesale
market is played by AEMO, which the market operator, responsible for generator dispatches,
management and financial settlements in NEM [23, 24, 25]. AEMO is owned by both the government
members (60%) and industry members (40%). AEMO plays an important role on the market as it
decides which generators will be used for dispatching energy taking into consideration the demand and
cost effectiveness. Since the electricity can't be stored effectively, the AEMO works continuously with
matching the supply to the demand in real time. The purpose of implementing NEM was to supply the
electricity in the most cost-efficient way, match the demand and transfer electricity interstate if needed
[26]. AEMO has the power to issue notices to the generators if the demand exceeds the provided
supply. In critical cases, AEMO can cut off the electricity supply to large industrial customers to ensure
the sufficient supply to the smaller consumers (residential and commercial). On the consumer end,
AEMO oversees the retail market, ensuring the competitiveness of the retailers. The customers within
the NEM zones are free to choose their energy provider and are facing low switching costs in case of
low satisfaction with retailers' products. It can be concluded that the Australian national electricity
market can be evaluated as successful in their reorganization and functioning (Belyaev 2011). The
changes have brought down electricity prices, which are now lower than in most western European
countries for both households and industrial customers.
Page 25 of 44

5.1.1

Pricing

The NEM operates with a day-ahead spot pricing. The spot markets are formed in each state (zones) and
the electricity prices can differ in different zones. Since electricity supply and demand is very dynamic
and can be unpredictable, pricing of electricity on wholesale market is a very complex task that require
24/7 attention. There are seasonal peaks in demand- summer and winter time, as well as daily peaksmorning and afternoon [27]. The price setting starts with generators dispatching price every 5 minutes
and submitting it to AEMO, which decides on the quantity of electricity required and which generator
should be used with regard to cost effectiveness. AEMO also takes the average of dispatch prices and
calculates a spot price in half-hour intervals for trading for each region of NEM. This spot price is the
base for all financial transactions on the wholesale market. Given the high volatility of electricity prices,
buyers and sellers can agree on one price via contracts. These are the measures that secure and
minimize the uncertainty risk associated with high changes in prices. However the difference in price is
still paid by one party, depending on whether the price went up or down. Another protection against
significantly high prices is the Market Price Cap, which is a maximum spot price set for a year. January
2014 the cap was set at $13 100 /MWh, and each year it's adjusted against inflation. Together with the
maximum cap, the minimum price is also set- the market floor price, which was -$1 000/ MWh [26]. In
year 2014, the average prices per MWh were in the NEM zones: NSW $35,54, QLD $52,36, SA
$37,96, TAS $37,81 and VIC $30,67 [28]. It is important to distinguish that the spot prices are not the
direct prices paid by end users- customers. The average Australian spot price was 0,059 $/kWh, while
the customers paid 0,33 $/kWh in 2012. Customers are not directly a part of NEM they purchase the
electricity through retailers with different prices set independently by retailers. The price they pay
covers not only the electricity itself, but also cost of distribution and retail services. Retail price
regulation has been abolished in some of the Australian states: VIC and SA subjecting the price to
supply and demand mechanisms except for QLD, NSW and ACT. However AER has created a Retail
pricing information guideline for retailers. Its objective is to ensure that retailers are presenting their
electricity and gas prices in clear and consistent way, which makes it easier for customers to compare
retailers and choose the one that suits them best. Retailers are required to develop and publish an
Energy price fact sheets, which highlights the most important information to the customers like: price
of units, different fees, available discounts and the length of contracts. Another tool that assists
customers with comparing and choosing retailer is website Energy-made-easy controlled by AER,
where customers can compare the prices of tariffs given their postcode and average electricity usage.

Page 26 of 44

5.1.2

Declining electricity demand

The decrease in electricity demanded is a factor that influences all the actors on the market- generators,
suppliers and buyers.

Figure 10) Electricity demand by state (actual and projected)

Source:[29] State of the energy market 2014, BREE, Figure 1.2

As it can be seen on the Figure 10) above, there was an increase in electricity demand up until 2008,
and after that a slow decline happened. The biggest changes in demand happened in 2010-2012. In 2013
the NEM demand was 194 GWh, which is a 2,5% less than the previous year. On average, the demand
has been declining around 1,7% per year. There are reasons as to why the electricity demand is
declining:
-

Customers, both residential and commercial are getting better at energy efficiency and savings.
Also increased sales of electric appliances with energy efficiency and saving modes results in
better energy outcome

Increase in rooftop solar PV uptake by customers, which reduces the electricity demand. This
factor has been described closely in under the Solar cities and RET scheme

Page 27 of 44

Slower economic growth and activity, which weakened activities in sectors requiring heavy
electricity usage like manufacturing and mining [20].

These factors have led to oversupply of electricity which have both good and bad implications.
Electricity can't be stored, therefore oversupply creates losses for the electricity generators. On the other
side, it is projected that in all NEM states there will be no electricity shortage even in the peak demand
periods.

5.2

Influences of renewable energy generation

The environmental policies implemented in Australia have impacted the market and the sectors.
However it must be noticed that the renewable energy generation is uncertain and variable. Using wind
power as example- the energy generation relies on weather conditions, and can be predicted only days
ahead, with some degree of uncertainty and relies on weather conditions. There might be periods with
very little of wind activity, while the electricity demand has to be satisfied from some other source. This
feature of renewable resources would also contribute to big price fluctuations over time in tact with the
supply of renewable energy. In times with high wind, windmills would produce very cheap energy due
to economics of scale, which will decrease the spot price, while the low wind would cause the price
increase. This variability in the renewable energy generation is one of the biggest concern and barrier
for switching from fossil fuels energy generation (Morales et al. 2014). The variability imposes also a
need for quick and effective operational systems to manage and predict the changes, which generates
extra costs that increase the cost of renewable electricity.
The generation of energy from renewables has an effect on merit order- merit-order effect (MOE) on
the prices. Merit-order is used by the AEMO to asses which generator to use for electricity dispatch
based on the lowest marginal cost. Since the marginal cost of renewable energy like wind is very low,
this energy is getting prioritized based on costs. Given that, a big supply of renewable energy can
decrease the prices of electricity and put lots of pressure on competing generators. The effect is that the
high renewable energy generation in regions tend to result in lower and more volatile prices than in low
renewables penetration (Morales et at. 2014). In terms of environmental policies implemented in
Australia, some analyses have shown that RET scheme is putting some pressure on electricity prices, by
decreasing them [12]. From economical point of view, this situation is not favourable, as it can corrupt
the investment decisions. The overall, long-term impact of RET on households is relatively smaller than
the one on large industrial customers.
The policies mentioned previously in the report- the RET scheme and the carbon pricing, had a direct
effect on the electricity market, that can be measured and analysed. The most prominent differences can
be seen in the investment in electricity generation from renewables. Compared to before the policies,
lots of additional MW was installed in form of wind, solar and hydro generators.

Between 2012-2014, almost 1 200 MW of wind generation capacity has been installed, which is
equal to 6,3% of installed capacity. In Australia, SA has the biggest wind potential, with electricity
generation of 29% of total capacity, which is among the highest proportion in the world.

Page 28 of 44

In 2013, hydroelectric generators contributed for 16% of available capacity, with most of the
capacity installed in TAS.

There was a significant increase in solar panels for households rooftops uptake. The power
generated from these systems is not traded under NEM, but the electricity retailers are paying for this
electricity in form of deduction on electricity bill. The effect of solar PV is counted as the decreased
demand for electricity, which also contributes to environmental policies objectives. Over 1,3 million
households have invested in solar systems, and together they contribute to 3 370 MW of capacity, and it
can be noticed that the increase have happened in relatively short period of time- since 2010. AEMO is
forecasting that with decreasing costs of solar panels and increasing consumer interest in this
technology, by 2022, the solar systems will contribute to around 17% of electricity generation across
NEM [29].

5.2.1

Electricity generation composition

Electricity generation is changing with the demand and available capacity. It goes without saying that
the available capacity should always exceed the top peak demand, to ensure the constant electricity
supply to all parties. In the developed countries the electricity demand is increasing as more households
can afford more electric appliances, and industries and services are using more electricity than before.
However, in Australia in recent years, there has been a slight decrease in electricity demand. Since 2010
all states have experiences lower demand due to range of factors that were presented before.
Additional generation capacity from renewable resources is being used every year to produce
electricity. Over the years, the composition of fuels used changed, from coal-based to more mix of coal,
gas and renewable energy. The share of renewable has been slowly increasing over time, from 8% of
total generation in 2000, to 13% in 2012.
The main component of non-renewable generation is coal- black and brow, however the number is
decreasing every year. Since 2000, gas is gaining more importance, as large supply of gas was
discovered in Australia and the production of electricity from gas is emitting lower amounts of GHG.
As it can be seen on the Table 3) below, there is a steady increase in renewables share in generation of
electricity. The Carbon Pricing policy has put pressure on coal generated energy, which contributed to
overall decrease in coal consumption, also for the electricity generation purpose. In the years of the
Carbon Pricing (2012-2014), the consumption of black coal fell significantly, because as a great source
of CO2, it was heavily taxed. The coal-based electricity has been on its lowest level in 2012, with only
63% of total generation. During the years of Carbon Tax, coal power stations were being shut down or
offline, the renewable generation was increasing to keep the supply of electricity. The fossil fuel
generation is showing slower increase than the renewable generation. This can mean that the trend will
prevail and renewable generation will gain only more and more importance. However being more costly
to develop it might take very long, especially when there is a competition in form of gas and oil
generation.

Page 29 of 44

Table 3) Electricity generation change


2012-2013
GWh
Share (%)
Fossil fuels
216,508
86.9
Black coal
111,491
44.8
Brown coal
47,555
19.1
Gas
51,053
20.5
Oil
4,464
1.8
Other
1,945
0.8
Renewable
32,567
13.1
Biomass
3,151
1.3
Wind
7,328
2.9
Hydro
18,270
7.3
Solar PV
3,817
1.5
Geothermal
1
0
Total
249,075
100
Source: BREE 2014, Table O

average annual growth


2012-2013 (%) 10 years (%)
-3.4
0.3
-4.4
-0.9
-13.6
-1.7
5.1
5.7
65.2
13.9
78.8
0.8
26.2
6.2
3.5
6.4
19.9
29.7
29.7
1.3
49.2
56.4
0
0
-0.3
0.9

Figure 11) Renewable fuels electricity generation


(GWh)
35 000.0
30 000.0

25 000.0
Biogas

20 000.0

Wind
15 000.0

Solar PV
Bagasse

10 000.0

Hydro

5 000.0

0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: [36] BREE 2012, Table O, own drawing

Page 30 of 44

There hasn't been any big change in the composition of renewable energy sector, with the hydro and
wind generation being consistently the most used source. Figure 11) before shows the composition of
renewable energy generation. Hydro generation has always been the biggest source, while wind and
solar power are more recent trends. After 2008 both wind and solar started increasing, and the
generation is almost doubled every year. This can be due to the fact that these two sources are the most
popular ones and many governmental subsidies are available for funding of installations. Expansion of
RET and solar PV tariffs have contributed as well to the rapid expansion of wind power and solar
panels. However it can be seen that there has been a decrease in all renewable generation in 2011, but if
we look back at Figure 10) there was a decrease in demand. It might be the factor that explains the drop
in production.

5.3

Porters Five Forces

The electricity market can be analysed as a whole sector. Such an analysis can be helpful in determining
the power on the market and possible problems or ways of improvement.
1.

Industry competition

As it was said earlier, NEM operates as a competitive market, where the competition is on horizontal
level across the whole supply chain.
The generators don't have much power in that regard, as the price they are offering is based on cost of
producing the electricity. However, generators owners can strive to improve the generators and keep it
working on full capacity, which should decrease costs of running and maintenance, which in return can
lead to lower spot prices. AEMO is controlling the generation, which makes the competition within
generation limited [7].
Electricity retailers however have more ways to compete with each other as they are providing the
electricity to the customers. However energy is an important matter to the customers, therefore being a
new and small company just entering the market can be hard because of the big and established
companies big three: AGL, Energy Australia and Origin Energy.
Also there are no significant exit barriers. The generators can be sold to another party or competition,
while the electricity retailer can transfer its customers to another retailer and its business [30].
Factors influencing the intensity of rivalry:
-

Many competitors: between 10-16 electricity retailers in each state with around 30 different
offers [37]. The retailers can be classified as first tier big three and second tier based on the
time theyve been on the market and the market share size

Undifferentiated products- the basic product is the electricity, so the differentiation can happen
within the service quality: call centre operation hours, information provisions, cold calling,
online account access etc. In states with retail price regulation the differentiation is even more
limited
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Low switching costs for buyers: there is a high awareness of switching possibilities across
NEM (90% is aware that they have a choice). However most of the customers are happy with
their current retailer and perceive the change of retailer as too much hassle and not worth the
time since all the offers are the same [37].

Declining electricity demand- as it was described in chapter 5.1.2. Current demand is


completely satisfied by existing companies, and they will have the capacity to satisfy future
demand. That means that the rivalry will intensify in the future.

High brand loyalty- on average 66% of customers are very or somewhat satisfied with their
electricity offer, and have no intend to switch (38% is not looking around for better deal) [37].

Unequal size and market share between electricity retailers- the ratio of first tier to second
varies between states- the highest market share is held by ActewAGL in ACT (95%), while to
lowest for the big three is 70% in VIC.

The conclusion based on the factors above points that the intensity of rivalry is high. There are some
differences between states, but on average the rivalry is fierce and intensive.

2.

Potential entrants

Before operating as retail, a company must obtain an authorisation from AER. There are three criteria
that need to be fulfilled in order to receive an authorisation:
1. organizational and technical capacity- a company must have them both to meet the obligations
as a retailer
2. financial resources- applicant has to have sufficient financing for the operations
3. suitability- broadly speaking the applicant has to be suitable to hold the authorisation
The application process is regulated by the Retailer Authorisation Guideline, which also includes the
rules for the transfer, surrender or revocation of a retailer authorisation [30]. All pending and approved
applications are published in AER's public register for everybody to see. Given the three criteria,
obtaining the authorisation shouldn't be very troublesome providing that a company has sufficient
resources. It might not be an easy industry for small start-ups, which makes the threat of potential
entrants low. Becoming an electricity retailer depends on AER, which prevents all interested from
entering the market.
Factors influencing threat of new entrants:
-

High initial investment- need for authorisation that require a big capital ready for investment

Well-known brands on the market- the first tier retailers have very high market share. The big 3
companies: Origin Energy, AGL and Energy Australia hold almost 97% of market share in
NSW, ActewAGL dominates the market in ACT with 95% shares, 2 of the biggest in QLD
account for 82% shares [37].

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Price regulations- in ACT and QLD the retail price is regulated, meaning that the new entrants
cant offer lower price to attract customers. In the states without price regulation there are more
new entrants- second and third tier retailers entering the market. VIC is considered the most
welcoming for new entrants as the price regulation has been abolished.

Profitability of the market- it varies between the states based on regulated retail price. States
without price regulations notes higher profitability (NSW, VIC, SA). In ACT and QLD the
gross margin is lower as the companies are using deep discounting systems to attract more
customers.

It can be concluded that the threat of new entrants depends on the state of the market in given state:
from low threat in small, almost monopolized market in ACT, to slightly higher in VIC where barriers
to enter are lowest in all NEM.

3.

Threat of substitutes

Electricity as a product is not substitutable by any other industry than electricity market. The only
substitution can be made by changing the electricity provider or producing electricity on your own
through for example solar panels. Therefore it can be concluded that this threat is almost non- existent
on the electricity market, which is very favourable situation for the companies in the industry.
4.

Buyer power

There are two buyer powers on the market- retailers and customers. Retailers are buying electricity from
wholesale electricity pool based on the spot price from AEMO, which is supplied by generators. The
generators and retailers are entering contracts outside the wholesale pool, which makes the buyer power
equal to supplier power as they can negotiate the terms and pricing [30]. The second buyer power is the
customers of electricity retailers. There are many customers on the market- as many as households and
businesses. Since there are more buyers than sellers, the buyer power should be lower (Kotler et al
2009). However, there are some factors that increase the buyer power on the NEM
Buyer power depends on:
-

Switching costs for buyers- as it was described before customers are very well informed that
they are free to choose their power retailer. On average around 50% of NEM customers
changed their provider twice in last 5 years [37].

Buyers are price sensitive- of those customers who are interested in switching provider or have
done so, 65% of residential customers and 70% of commercial customers pointed the price as
the reason [37]. This is the average for NEM and it shows that the price increase or finding
better deal is the biggest motivation for customers to change.

Buyers are getting more educated in terms of choosing electricity supplier, have easy access to
compare plans via Energy-made-easy. Over 48% of customers are interested in getting better
deal for their power, but they are not actively looking for one. Even with easy access to
information many believes that its too much hassle, and all the offers are significantly the
same.
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Product is undifferentiated- the electricity offered by retailers is the same, only difference
experiences by customers can be the service quality. This makes it harder for companies to keep
customers who are unsatisfied with the service. Also customers have no influence over the
electricity package, they are only presented with some choices, but there is no possibility of
personalization.

No possibility for backward integration. It is virtually impossible for customers to buy out the
electricity retailer they are buying from.

Substitutes are no available- there is no substitution for electricity as it was described already in
the threat of substitutes.

Comparing these factors, it can be concluded that on the wholesale retail market for electricity, buyers
only have possibility to choose between retailers, but they have no power to personalize or affect the
product. Possibly in the states with no retail price regulation, the commercial customers can enter some
agreements with retailer and negotiate the price, which gives them some power.
5.

Supplier power

The suppliers in electricity supply chain are the electricity generators and retailers. The generators are
providing electricity to the common electricity pool based on the generation and prices chosen by
AEMO. Similar to the retailer- generator relationship from above buyer power, they are entering mutual
profitable agreements. In the customer- retailer relationship however, retailers can exercise their supply
power to some extent. There are many electricity retailers that compete against each other to attract
more customers. With lower supplier power, buyers can achieve better profitability, which leaves the
industry less competitive and attractive.
Factors that affect the supplier power:
-

Fewer suppliers than buyers- this factor is especially important in states where the market is
small and dominated by one big company, like ATC and TAS. Customers living in these areas
have very limited choices of their power supplier [37].

Low switching cost for buyers- as described before, switching from one retailer to other is fairly
easy and doesnt require as much hassle as customers tend to believe.

Other factors that are important have been discussed and described before. There is no need to describe
them in depth again, so only a short list is presented:
-

Price sensitive buyers


No differentiated products
Decreasing demand for electricity

Given the factors, it is important to also keep the market share of every company in different states. If
we take the ACT where single retailer ActewAGL controls over 95%, their supplier power is bigger
than the big three in VIC. However taking the average for NEM and the factors above, suppliers have
relatively low power, as any big changes will lead their customers to change the retailer.
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5.4

Cost comparison between non-and renewable energy

As it was established with the GreenPower analysis, and through the analysis of the NEM market,
pricing and the price of renewable energy has a great impact. Common conception is that renewable
energy is more expensive due to big initial investments and the low efficiency. In order to see if that is
true for Australian market, the general overview over costs will be given in this section. To delimit the
analysis a little bit to keep the focus, the analysis will present the simplified energy systems. The costs
will cover only the generation of electricity, capital required, operational and maintenance costs,
without the retailers and distribution costs, as they can vary a lot depending on NEM zone and provider.
This analysis was conducted by the Electricity Power Research Institute (EPRI) in 2010 on behalf of
Australian Government, Department of Resources, Energy and Tourism [31]. The report presents two
price outcomes- for 2015 and 2030, and the analysis of levelized costs of each technology. Levelized
energy cost (LEC) shows the price at which the electricity must be produced in order to break-even over
the entire life-cycle of a project, which makes it an effective tool to compare different energy sources
given different lifetimes of generators. This method requires a set of assumptions like: capacity usage,
geographical conditions, CO2 compression and capture technology and what costs are being included.
The results of this analysis can be true only for generators which fulfil those assumptions, which delimit
the generalization power. The report is very detailed and differentiates between many types of coal and
wind power, but for the purpose of this report, only the general numbers will be presented.

Table 4) Levelized Cost of Energy


Gas
Black coal
Capital
58
107
O&M
9
23
Fuel
79
19
CO2
8
18
LCOE
154
167
Source: EPRI 2010

Wind
155
15
0

Nuclear
137
26
10

170

173

Brown coal
134
25
11
21
191

Solar PV
401
35
0
436

In the Table 4) above are presented the levelized costs of energy for different types of source, based on
2009 numbers and expressed in 2009 constant $AUD per MWh [31]. It can be concluded that the gas is
the most cost-effective energy source. Nuclear power, which is not used in Australia looks like a viable
option for future, while wind power costs similar to black coal. Solar PV is so far the most expensive
option, but it must be noticed that in this report only one type of solar panels was taken into
consideration. The wind LCOE can vary between $137-214 based on the MW it can produce, while for
solar panels it can vary $327-473 based on type of PV. The obvious advantage of renewable resources
is that they don't require fuel and CO2 taxation, however their capital costs and operational&
maintenance are greater than non-renewables.
The conclusion of the report is that the renewable technologies are still high costs compare to nonrenewable, but the costs are expected to decrease as the development of new technologies advances.
The low price of gas generated electricity may be an explanation to why this type has gained more
interest. The costs presented are depended on the assumptions made by the analysis, and given the
uncertainty and lack of other costs: transmission and retail, they cannot be used for the market pricing.
Page 35 of 44

6. Tax system vs. voluntary contribution


Australian electricity is not subjected to direct environmental taxation. The residential customers are not
paying any green tax in their electricity bill until they voluntary participate in GreenPower scheme [20].
During the years of Carbon Tax (2012-2014) the industries and businesses were required to pay for the
amount of CO2 they emitted which consequently increased the prices of energy and transportation for
residential customers. The increase wasnt substantial- on average $9,90 per week (53 DKK) [15] for a
household. This tax rose over $13.8 billion (74 billion DKK) during 2 years, and at the same time, the
government has places various compensations and assistance plans to help households cope with the
increase in prices [42]. Carbon Tax was designed to operate for 3 years, and government has allocated
$15 billion in the assistance plan over these 3 years. Since the tax was only in force for two years, it can
be assumed that the actual amount of assistance was lower than $15 billion, but probably still high. The
money from Carbon Tax has gone to the Treasury, and was not invested in the further development of
the green technologies [43].
The environmental policy and system differs in Australia from European country. To see the differences
and be able to see which system is more efficient, the report will provide a small comparison of costs
and tax structure between Australia and Denmark. Denmark has been chosen because in 2013 it had the
biggest renewable power capacity per capita in the world [38]. The case with Denmark electricity is that
every customer is paying PSO with their bill, which is Public Service Obligations that covers the
development of green technologies [39]. The PSO is set for 0,211 DKK/ kWh ($0,039 AUD) for this
quarter and most electricity retailers are using similar rates and system for setting PSO. A customer
from one of the Danish retailers NRGI pays on average 1,57 DKK/kWh, and out of this 24% covers the
actual electricity, 13% covers the PSO and the remaining 63% covers various services provided by
company like transportation and taxes [40].
Knowing how much money is collected in Danish and Australian system for the development of green
energy can answer the question: Is the voluntary contribution a viable option for green technologies or
should a government rely on taxes? One mean of comparing these two systems is looking at how much
money was raised in given year- 2013 in our case, by the policy. According to a report from
Produktivitets Kommittionen, PSO raised 4 762 million DKK [41]. The average price per kWh paid by
Danish customer is 1,98 kr, of which 11% is PSO tax. In comparison, data presented about Australia
state that customers pay on average 1,78 kr/kWh, of which 18% can be contributed to GreenPower
program. The GreenPower in 2013 raised around 468,5 million DKK, since only around 9% of
customers participate. This shows that voluntary program is not raising as much money as tax system in
Denmark and collected taxes are 10 times bigger than voluntary contribution. However if all Australian
customers were to participate in the scheme, they could raise up to 5 203 million DKK for development
of green technologies. The problem with Australian system is that people are lacking the incentive to
contribute to the environment and there is a strong incentive to be a free rider.

Page 36 of 44

7. Public good and free rider


The theory has been described before and this section will provide a semi-analysis of what is the
relation between environmental schemes and the public good. In this analysis the generation of green
power will be treated as impure good (Kotchen 2005), and it can be connected both to the GreenPower
scheme and the solar PV financing. It is argued that supply of renewable energy can be classified as
public good based on characteristics that fulfil the requirements of non-rivalry and non-exclusivity
(Wiser et al 1997). The green power brings significant environmental improvement that can be enjoyed
both by customers and bystanders (people who dont participate or contribute in any way). However, a
single customer who contributes to green energy cant enjoy the benefits directly, as they accumulate
and spill over to all customers equally. This can be translated as the non-exclusivity trait since there is
no way to exclude not paying customers of GreenPower from enjoying better air quality that is caused
by paying customers. Coming back to renewable generation as impure good, it can be concluded that
green power provides both the private benefits (electricity supply for individual) as well as public
benefits (clean environment). Having established that renewable supply of energy can be classified as
public good, we can now focus on what does it mean for policy makers. When developing an
environmental scheme that relies on customer participation, it is assumed that their attitudes will push
them to paying premium. However, since green energy provides public good, individuals have a strong
incentive to free ride. This creates market failure, which can be corrected by government invention. It
can be seen with the governmental subsidies on solar panel, which decreases the free riding since more
people can afford the installation of solar systems. This holds true if customers are actually willing to
pay for green energy due to for example warm glow effect. The evidence shows that the voluntary
provision of public good will be typically below the optimal level, but not zero, which leaves possibility
for green energy to develop. There are still some questions that need to be answered like 1) will the
customer driven market for renewable energy develop? 2) how the green policies should be designed to
increase participation and decrease the free riding? (Wiser et al 1997)

7.1

Free Rider problem

The explanation of the problem has been presented in section 2.6.1 and this section will look closer on
why this is a problem in the GreenPower scheme. It is not possible to find out the true WTP for green
energy, which makes it really hard to estimate the amount of free riders. The evidence suggests that free
riding is an actual problem in the renewable energy sector. As it was established by the analysis of
WTP, more people stated that they would pay then actually did, which means that the people who didnt
pay but expressed willingness, are possible free riders. 32% of surveyed customers stated that they
would be willing the pay premium, while only around 9% actually paid. This leaves 23% of customers
as free riders, plus the portion of customers who were not willing to pay in the first place- 55,4% (Table
1 and 2). This means 78,4% of customers want the benefits associated with green energy, but are not
willing to personally contribute. Other possible explanations of the difference in stated and actual
participation are the problems with surveys and the products. Surveys can be biased or poorly
composed, while participants can express the willingness to give the correct answer. Another
research found that among green power scheme participants, many customers are concerned with the
free riders and feel that its unfair (Hobman et al 2014). They also stated that given a choice of
Page 37 of 44

voluntary and mandatory green scheme, they would prefer the mandatory one, as its deemed more
effective and fair (the Danish PSO system). With GreenPower there is no mandatory participation and
there are no data available about customers concern about free riders, but it can be assumed that there
is a great market loss present and as long as its a voluntary program, people wont be willing to join in
great numbers.

8. Delimitations and subjects for further discussion


Renewable energy and its effect on the market and energy use is a very broad topic that is hard to
describe in one paper. There are some sides of the policies and energy sector that are interesting but
havent been discussed in this paper. Some of the changes in renewable energy generation may have
been caused by other environmental policies that the ones described. The aim of the paper is to use only
some of the most known green policies and try to explain the changes on the electricity generation, not
to explore all the governmental legislation. There are a lot of concerns about customer motivation
behind the green power purchases that havent been analysed and could provide some insights. Since
customers are the main force behind the voluntary contribution scheme, their motivations should be
carefully analysed with i.e. interviews or surveys with Australian participants. There are researches
about available on customer motivation, but they were conducted in Germany and United States, so
they applicability to Australian customers can be challenged.
Similar generalization problem might be an issue with the renewables effect on the electricity and the
effect of environmental policies. This is due to the fact that Australia is quite a unique country with
many different resources and possibilities. The policies that they implemented might not work in any
other country due to limited resources.
The subject that could be discussed more in-depth which is also related to the project is the overall
emission reduction due to environmental policies. The Carbon Tax and the RET scheme have
contributed to the emission reduction, but the energy production is still polluting due to the energy
export. The coal based electricity generation is declining, but more and more coal is being produced for
export, which generates more CO2 emissions. The report doesnt take that increase into account. Also
there is an issue of international emission trade which is not being touched upon in the report, and might
be an interesting topic. The emission reduction in Australia might be less significant for the global
effect if other countries can buy the rest of Australian allowance and fill in the emissions.

Page 38 of 44

9. Conclusion
The aim of this project was to analyse the impact of growing electricity generation from renewable
resources on the market and the effectiveness of GreenPower scheme. The green electricity is getting
cheaper as better technologies are being developed and the initial investment is decreasing. However
the renewable energy is still more expensive today to buy than grey energy, even if the merit-order
effect is taking the place. The green electricity is causing confusion with the prices on the market,
which is not good for customer and suppliers. The introduction of renewable energy doesnt affect the
market in any other way than the price. The energy sector and electricity market is quite unchanged by
the green energy, there are other factors and regulations that affect them. The composition of energy
produced in Australia is not changed by the development in renewable generation, but the share of
renewables is still increasing, and it has the potential to satisfy 11,5% of Australian energy demand
today. The many policies implemented by Australian government had led to many MW installed in
form of windmills, solar panels and hydro stations. The RET scheme has proven a successful policy,
especially the SRES program that has resulted in over 6 400 GWh of green electricity produced by
small customers. The Carbon Tax has been abolished before it designed end- time, which points that the
policy wasnt effective or efficient. The money collected from the tax has gone back to citizens in form
of assistance and lower tax threshold, and only some small portion was directed to the investment in the
development of green technologies. The main focus of the report- GreenPower policy has a great
potential, but also carries a big disadvantage- it is voluntary. The stated WTP for green energy is far
lower than the actual WTP- only 9% of Australians were participating in the program, when 35% stated
that they would. Many of GreenPower participants point that the free rider problem bothers them, and
they would prefer a common and obligatory tax instead of voluntary scheme. The comparison between
Australia and Denmark showed that Danish tax system is collecting much more money for the green
technologies, while the difference between electricity prices paid by customers is not big. If
GreenPower was made into tax system, it could reach over 5 203 million DKK to invest in green
energy. Australia has the potential of satisfying more than 11% of electricity demand with green energy
with the sufficient funding. Shifting from voluntary system would also resolve the free riding and public
good problem.

Page 39 of 44

10.

Reference List
10.1

Books

Belyaev, LS (2011). Electricity Market Reforms: Economics and Policy Challenges. Springer
Science+Business Media
Grant RM, Jordan J (2012). Foundation of Strategy. John Wiley & Sons, United Kingdom
Kotler P, Keller KL, Brady M, Goodman M, Hansen T (2009). Marketing Management: First European
Edition. Pearson Education Limited, England
Morales JM, Conejo AJ, Madsen H, Pinson P, Zugno M (2014) Integrating Renewables in Electricity
Markets: Operational Problems. Springer Science+Business Media
Tietenberg T, Lewis L (2012) Environmental & Natural Resource Economics, 9th edition, Pearson

10.2

Articles

Grossman GM, Krueger AB (1995) Economic Growth and the Environment, The Quarterly Journal of
Economics, vol. 110, no. 2, pp. 353-377 Published by: The MIT Press
Hobman EV, Frederiks ER (2014) Barriers to green electricity subscription in Australia: Love the
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Kotchen MJ (2004) Impure public goods and the comparative statistics of environmentally friendly
consumption, Journal of Environmental Economics and Management, vol. 49, pp. 281-300
Mewton RT, Cacho OJ (2011) GreenPower voluntary purchases: Price elasticity and policy analysis,
Energy Policy, vol. 39, pp. 377-385
Rowlands IH, Parker P, Scott D (2002) Consumer perceptions of green power, Journal of Consumer
Marketing, Vol. 19 Iss 2 pp. 112 129
Wiser R, Pickle S (1997) Green Marketing, Renewables, and Free Riders: Increasing Customer Demand
for a Public Good, Environmental Energy Technologies Division, Berkeley Lab

10.3

Other sources

In order of appearance:
[1] UN 2002
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[21] GreenPower, List of Generators 2014


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Page 43 of 44

11.

Appendix 1)

Figure 10) NEM scheme


Source: BREE 2014, Own drawing

Page 44 of 44

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