Given the political uncertainty at present, the choice between entering into a carbon-inclusive versus carbon-exclusive contract is a difficult one. The following article describes how the two contract types work and Energetics’ recommendations for analysing these options.
Firstly, when we talk about “carbon exclusive” contracts, what you actually see on an energy bill are two line items: the energy rate and then a separate line with an additional carbon charge. A transparent formula is used which typically references the published average carbon intensity of generation in the National Electricity Market (NEM). If the carbon price is repealed, the carbon costs are removed and only the energy rate is charged from that date onwards. However, the longer it takes for the repeal to take effect, the greater the cost.
The term “carbon inclusive” bundles the energy rate and the carbon cost. Should the carbon price be repealed, the rate will not change and needs to be paid until the contract’s conclusion. However, under this contract type, the political uncertainty is acknowledged and the carbon cost component comes at a discount.
What does the electricity futures market tell us?
Electricity futures market prices incorporate an expectation of the carbon impact on the energy price during the contract period. If a tranche of power is purchased using electricity futures through the ASX (one of the sources of retailers’ hedge contracts or risk management products), the price holds irrespective of legislative changes to the carbon tax.
The most widely held view, as reflected in futures market pricing, is that with the Coalition's victory, the earliest we could expect the carbon legislation to be repealed is July 2014. Whilst carbon premiums in futures contracts for the 2013/14 financial year generally reflect the full expected carbon cost under the existing legislation, those premiums for the 2014/15 financial year show a significant discount. In other words, it is thought that the carbon price would cease to apply (or reduce) at some point in the 2014/15 financial year.
Another factor to consider is that some legal experts are suggesting that repealing the carbon legislation may not take place by July 2014, due to the design of the Clean Energy Act, the timetable for parliamentary sittings and the timings of terms for incoming Senators. To read more on possible dates a repeal could take effect, Energetics “The future of the carbon price” offers different viewpoints.
If the carbon price remains until the end of the fixed price period in June 2015, those who have signed up to carbon inclusive rates for 2014/15 will be paying less than if they signed up to carbon exclusive rates with full carbon pass-through. But if the carbon price is removed from July 2014 or earlier, they will be paying more than those on carbon exclusive rates who will have nothing added to those rates from the day of repeal and during the 2014/15 financial year.
To ensure that your decision is well-informed, the two carbon pricing scenarios should be modelled to understand the cost impacts – and particularly the costs that increase over time under a carbon-exclusive contract, until the carbon price is repealed.
Energetics’ energy and carbon markets experts can help your business understand this range of impacts and the risks involved.