Electricity prices have been very high and volatile during the months of June and July in parts of Australia, and specifically in South Australia (SA). One of the reasons, of course, is that the electricity demand has been high and fluctuating due to some serious cold-snaps in SA over that time.

Some of the media were hasty in blaming the electricity price spikes on the large share of renewables, especially wind farms, in the SA energy generation mix.

This was met with rebukes from other media outlets, which pointed to many of the other reasons why electricity prices have spiked in SA over the period.

So, what to make of all this? Firstly, it is worth noting that the observed price spikes in SA are not unique or unprecedented in the Australian context. We usually get similarly high price spikes in the summer months in Queensland .
Secondly, a thing to bear in mind is that the extremely high price spikes last for short periods of time, say an hour or two.

The reasons for electricity price spikes are multiple. The local electricity generation mix is only one of the contributing factors. Other factors that are as, or probably more important are: availability of supply from other regions, the length and severity of the particular hot or cold weather snap, as well as speculation on the National Electricity Market (NEM), which is rife at times of great electricity price volatility.

Another point to note, which has not been mentioned in the media, is that the spot prices observed at NEM are only counting for a relatively small proportion of the electricity actually traded among market participants. This is because most participants in the electricity market take part in an incredibly active market for derivative contracts for electricity (e.g. electricity futures, options and swaps), which they use to hedge their positions. So in reality, the enormous price spikes have relatively little actual bearing on the players in the market.

At any rate, the argument that renewables are exclusively to blame for the situation in SA does not really hold. This was acknowledged by the new federal energy minister. The intermittency of supply that plagues renewable energy sources is well known, but that doesn’t mean that renewables do not have a place in the electricity generation mix.

The fundamental problem is the interconnectedness of electricity networks. Given that Australia is an isolated / island continent, and that electricity networks in Australia itself are not entirely interconnected, we have difficulties to meet a surging local demand at critical times. High prices on the NEM reflect those difficulties. Building a better connected energy networks within Australia, and ideally, linking with the Asian electricity markets in the future would reduce the chances of price spikes.

In fact, a wider (and possibly in the future, a global) electricity network connectedness combined with improvements in transmission efficiency would be best possible ways to overcome the intermittency of renewable energy supply. The sun is always shining somewhere on this planet, and the wind is always blowing somewhere!

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May in Sydney was absolutely gorgeous! Bar these last few days, the weather was dry, warm and sunny. It was one of the warmest Mays in history! Ideal for lazy weekends enjoying the sun, going for a walk, or indeed going to the beach.

However, the glory of several of these weekends in May was spoiled by the smoke coming from the back-burning activities in the numerous national parks and forested areas in and around Sydney. The air quality was extremely poor, and in fact in parts of Sydney it was a health hazard to be outdoors.

The cause of the smoke was that the Rural Fire Service (RFS) took advantage of the nice weather conditions to conduct back-burning of lose vegetation (dead leaves, branches, etc.) to reduce fuel that could result in bushfires in the spring or summer. And they are doing this on the weekends, presumably because there are volunteer fire-fighters who can join on the weekends.

While the benefits of back-burning are indisputable, the question remains of whether or not they can be conducted in a way that minimises the negative effects on the public. If it is to be judged by the extent of the area affected and the duration of the episodes, it seems that RFS may not be taking into account the full cost of conducting the back-burning. There are significant health costs imposed on the wider public as a result of increased incidence or respiratory and cardio-vascular diseases due to poor air quality. In addition, there are significant costs resulting from diminished recreational and site-seeing benefits imposed on a very large number of Sydney residents and visitors. They cannot enjoy being outdoors, being at the beach, or sightseeing. Environmental economics has shown that the losses of these benefits can be very large when expressed in monetary terms.

Back-burning is an important activity for bushfire prevention. However, taking into account the health effects and diminished recreational and site-seeing benefits warrants that RFS takes a much more prudent approach to it. And, the sheer importance of back-burning should not be used as a trumping argument against calls for minimising its negative air quality effects!

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The Parliament of NSW has launched an inquiry into the water supply for rural and regional NSW.
I am guessing that the word ‘augmentation’ was deliberately put in the title of the inquiry, even though the word ‘management’ might have been more appropriate. The term ‘augmentation’ explicitly implies that current supply is not enough, and that greater water supply is needed for rural and regional areas of NSW. This is in response to the acute water crisis experienced in the Far Western NSW earlier this year.

Economists have known at least since the early 1980’s that augmenting water supply in what is called ‘a mature water economy’ is going to be increasingly difficult (see a paper by Alan Randall in AJARE from 1981). This is due to increasing social cost of capital for new water infrastructure, increasing costs of maintenance of existing infrastructure, and greater environmental concerns about new water impoundments, among other things.

Despite this strong economic argument, governments and politicians tend to panic in times of acute water crises, and talk about ‘proofing’, as in ‘drought-proofing’, ‘flood-proofing’, ‘future-proofing’...
We have already seen the failure of that approach in Sydney, where a 3 billion dollar desalination plant was built to supposedly ‘augment’ the water supply at the time when Warragamba Dam was only 37% full. The plant was build, the costs incurred, but it has practically never operated. At least some local politicians in Far Western NSW are being reasonable and oppose the panic reaction that calls for costly quick fixes.

On top of these economic concerns, the inquiry has also been criticized for not taking climate change explicitly into consideration.

Water use and management in NSW should be in the public eye, and the fact that NSW Parliament is taking water issues seriously is encouraging. However, the terms of reference of the current inquiry seem to have missed some important points about economic feasibility of water supply augmentation, and the likely effects of climate change. Let’s hope amends could be made in the course of the inquiry itself.

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Recent newspaper report alerted me to the fact that the latest edition of the NSW State of the Environment has come out.

The newspaper article highlights a figure from the report that emissions of green house gasses (GHGs) in NSW have only fallen by 1% since 1990 (1990 being a benchmark year under the Kyoto Protocol, and in fact Australia as a nation had an agreed increase in emissions from that 1990 benchmark).

Looking at the report a bit more carefully unpacks some of the reasons for it. Electricity demand, which is one of the largest factors determining GHG emissions, has been falling over the last six years. This is paralleled with a significant change in composition of electricity generating capacity, with no new coal-fired plants, and significant addition of new gas, wind and solar capacity. Surely, this should result in significant reduction in total state GHG emissions, right?

Well, not exactly, because as the report states, the energy consumption in the NSW transportation sector has experienced strong, stable and sustained growth, which is predicted to continue in the future. In the same time, we have not seen major changes in emission efficiency of the NSW vehicle fleet. While there is some penetration of electric and hybrid vehicles this is still very, very small. As a result, transportation is now the single largest GHG emitting sector of the NSW economy.

And it doesn’t look like improvement can be expected any time soon. Trucks and cars are cheap (nominal prices have barely changed over the last 10-15 years, which makes real prices low in relative terms), petrol is cheap (cheapest that I have seen certainly over the last ten years, and again I am talking nominal prices), and public transport is expensive (catch a bus and a train to and from pretty much anywhere in Sydney, and it will be at least $10 on your Opal).

So, we will keep driving, ‘enjoying’ the traffic jams in Sydney, and sending GHGs in the atmosphere. Well done NSW!

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Last week we hosted an international workshop here at the University of Sydney, which focused on theories and methods for measuring productivity and efficiency when environmental considerations are taken into account, and on including natural resources in economic accounting. The main aim of the workshop was to discuss some of the new ideas in this area of growing significance at the interface of environmental/resource economics and productivity analysis and national accounting.

The need to account for environmental impacts from various economic activities in human society is increasingly important as the environment and the ecosystem services it provides are significantly threatened by air pollution, land degradation, deterioration of water quality, and biodiversity losses. This raises a fundamental question of how to accommodate environmental effects into the standard practices for measuring productivity and efficiency, and in the accounting of overall economic activities.

One group of talks at the workshop focused on the treatment of negative environmental effects associated with productive activities, such as emissions of CO2, SO2, wastewater pollutants, and environmental degradation attributable to taking water from the environment. New approaches presented had to do with explicit treatment of an abatement technology, non-parametric estimation of abatement costs and shadow prices, and with the use of alternative reference frontiers when there is regional and technological heterogeneity among polluters. The point of considering the exposure to emissions when it comes to spatially-distributed pollutants, which has so far not been widely treated in this literature, was also made.

The other group of talks focused on accounting for natural resources, and on estimating productivity growth in agriculture under climate change. There were important new approaches presented in terms of deriving user costs for sub-soil assets (e.g. mineral resources), as well as making inroads in accounting for the contribution of natural resources (e.g. soil) to agricultural productivity.

Overall, it was an exciting workshop, and to be followed by an edited book based on presented papers, as well as on the work by colleagues who could not make it to the workshop. So, watch this space!

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Australia should pride itself in having one of the most advanced and clever ways to secure environmental flows through the buy-back of water licenses by the Commonwealth Environmental Water Holder (see several previous posts on this blog explaining the CEWH). However, media recently reported some instances of disquiet with the way environmental water is managed by the agency. Some of these concerns have come from very wealthy individuals who have previously sold large amounts of water rights to the government. But, concerns also came from smaller irrigators who are tired by the endless bureaucratic processes in which they are asked to participate.

These are indications that problems start to emerge in allocating environmental water and in adequately engaging stakeholders in the Murray-Darling Basin (MDB). In terms of principles for allocating environmental water, a key is to attempt to allocate water where the benefits from it will be highest at the margin. Despite the inherent difficulties in evaluating benefits pertaining to environmental improvements, including provision of environmental water, one can usually sense when the benefits of feeding ever more water in a particular region are becoming small. This appears to be the economic reasoning behind the concern raised in relation to allocating large amounts of water to the Lower Lakes. In the same time, there seem to be other obvious areas where the allocation of water will yield greater benefit. In light of this, the CEWH should try to better target its environmental flows allocation, so as to maximise benefits to the whole community that pays for those flows (i.e. the Australian taxpayers).

In addition, the relevant agencies (CEWH, the Murray-Darling Basin Authority, and the state government departments and agencies) seem to be entangled in a never-ending process of consultation, evaluation, validation, etc. that on one hand alienates stakeholders, and on the other delays tackling the problem of optimal allocation of environmental water flows. I thought that one of the main points of the Murray-Darling Basin Plan was to centralise jurisdiction and the decision-making process, so as to improve the efficiency of basin management. However, it seems that the old habits of compartmentalised governance in the MDB have not completely dissipated, which makes things more complicated than they should be.

Securing water for the environment has been one of the big challenges in water management in the 21st Century. In Australia, we got the main principles right in that we have a mechanism to procure water for environmental purposes in an efficient way through market mechanisms. However, we are facing challenges in optimally allocating the environmental water flows that were secured in such an efficient way. Those challenges are to be expected, as we are dealing with complex problems. However, the early warning signs that something is not right should be taken seriously by the CEWH and MDBA, who should work towards improving allocation mechanism for environmental water and a more meaningful engagement with basin stakeholders!

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The great social debate about climate change that has been taking place over the last twenty odd years has been plagued with controversy, disagreement, and confrontation. However, one notion coming out of this debate seems to be gaining almost universal acceptance. It is the notion that the future lies in a ‘decarbonised’ economy much less reliant on fossil fuels for its energy needs. It is slowly but surely gaining wide acceptance by governments, by some of the world’s largest corporations, and by individuals.

But, the process of ‘decarbonisation’ has just started, and it will be a long and challenging process that will be implemented in a very uneven way across the globe. So, don’t hold your breadth for the Paris conference that starts in a few days.

Besides all the sensationalist build-up of expectations, it is hard to believe that any major international treaty on climate change will be brokered in Paris. And perhaps that’s not as bad as it sounds. If the CoP 21 manages to deliver a strong message that will further support the nascent process of ‘decarbonisation’ by encouraging technological and institutional innovation, it would be a good outcome.

Human society has already embarked on a journey towards a future world much less reliant on fossil fuels. Single events, like the one in Paris, can speed up or slow down the journey, but cannot reverse its course. Nevertheless, at this early stage, it is important that such events fan some wind in the sails, and I hope the CoP 21 does exactly that!

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