Singapore’s carbon tax – too small a step in the right direction?

Will Singapore’s new carbon tax make power producers invest more in energy efficient assets, or will it result in higher electricity prices for consumers? NTU’s Sanjay C. Kuttan outlines ways to make this work.

The carbon tax announced at the recent Budget presentation in parliament will push up costs for power generators and translate into higher electricity prices for consumers should the power generation companies pass through this additional cost to the market.

Alternatively, this additional cost burden may incentivise the generation companies to adopt cleaner and more energy efficient technologies to limit impact of or eliminate emissions should carbon capture technologies become economically viable or the carbon tax high enough to balance the economic-environmental equation.

The tax will start from 2019, and will be levied on greenhouse gas emissions at between S$10 and $20 per tonne. It will be applied to power stations and other large direct emitters, rather than electricity users.

The key question is, is the proposed S$10 to S$20 per tonne tax sufficient to trigger new energy efficient asset investments and improve operational behaviour? Or will it result in loss of competiveness in key industry clusters such as refining, petrochemicals, etc that has served Singapore well during the post-independence period of economic development?

Power generators 

Power generators have the following options:

1. Do nothing, and let the additional cost of operations pass through to the market which then sets the new price points.

Although S$10 to S$20 per tonne translates on average to about S$4 to S$8 per MWhr, at the current grid emission intensity factor, each generator will have a different carbon footprint depending on the type of assets, age of assets, operation and maintenance regimes, and therefore will be impacted differently by the same tax rate.

Theoretically, this will create different cost structure and, hence, will widen some competitive gaps between generators when they bid into the market.

Note also that generation companies on vesting contract would have greater margins to absorb the impact of the carbon tax versus those that are not (e.g., Hyflux, incineration plants, embedded generation).

Therefore in a low priced market, the pain from margin squeeze is felt more by the power generators than the consumer.

2. Do something, if they are uncompetitive versus other players, and need to consider some other levers to reduce CO2 emission.

a) Power turbine technology

Over that last 15 years, all power generators have either upgraded or installed the most efficient turbines available then, therefore these turbine assets are not fully depreciated with residual cost that would need to be written off if replaced. Furthermore, any improvement in the technology is highly dependent on the OEMs R&D pipeline for more efficient turbine technology.

There is a new turbine technology (GE “H” Class with efficiency of 61 per cent) but then the cost equation must make commercial sense i.e., the accelerated depreciation of the current system plus the new turbine depreciation plus the project cost less the negated cost of CO2 tax. There could be a case for replacement or upgrade if the price point of the electricity market makes the cost benefit analysis work.

The government’s plans to recycle the carbon tax of $600m a year is both pertinent and an imperative in our efforts towards building a sustainable future for all in Singapore.

 

b) Operations

Most if not all turbine OEMs are also in charge of the maintenance and reliability of their turbines in operation hence performance contracts may be established (if not already) to ensure the investment benefits are maintained.

Some, depending on the age of the turbines could opt for turbine optimisation services to ensure the turbines are humming at a high performance point.

In the immediate term, the key opportunity for CO2 reduction is good operations and maintenance practices to ensure the turbines are operating at optimum point, which means they are operating at high load, where efficiency is the highest.

When turbines are operating at partial load due to low demand, the turbine becomes inefficient and burn more fuel, thus producing more CO2 emissions.

c) Ancillary on site loads

Here waste heat recovery systems and even solar installation where possible can be considered to reduce the CO2 footprint, albeit marginal.

Better management of energy usage in facilities from lighting (LED), air conditioning (tri-generation), air management (demand side controls), boilers systems (higher efficiency fuel system and low losses from leaks) regulated by smart sensors and control platforms will add to reducing ancillary loads and some savings can be extracted to reduce cost and the CO2 footprint.

d) Spinning reserve strategy

This is a policy requirement by the regulator to ensure power system resilience by having spinning reserve available as a contingency for unplanned generation lost.

Generation companies have a choice of providing both power into the market and spinning reserve but the latter cannibalises the former and in doing so, the turbines operate at a lower load and, hence, lower efficiency.

The carbon tax however impacts only the carbon from the power generated, as such there is no carbon from the spinning reserve; which has its own decision making economics. 

e) Peak demand turbine

Use of lower efficiency gas turbine (open cycle) for peak demand, is based on the difference between the price point for usage and the cost debits from the carbon tax. Operational and economic operation strategies will kick in here to decide which way to go.

Or they can install more efficient peak demand power generators. It is important to note that grid emission intensity is an average across all operating gas turbines and fuel generators regardless of efficiency, hence by removing inefficient peaking generation then the grid emission intensity will be lowered.

This for example will make electrification of transport system even more favourable when compared to fuel-based transport.

f) Alternative fuels

The potential injection of H2 into the fuel systems could help with fuel burning efficiency, or the use of biofuels with carbon neutrality could lower the carbon footprint, however, the OEMs will need to come on board due to warranty issues of the operating assets.

Large direct emitters (& consumers?)

For large emitters, participation in the interruptible load program could recover some of the impacts of the tax.

Furthermore, the carbon tax is estimated to generate about $300 to $600 million annually (i.e., 70 per cent of total emissions of 45MT/year by major emitters and power generation) in revenue for the government that could be ploughed back into programs to encourage the adoption of energy efficient equipment or better operational regimes.

This could lead to emissions reductions via capability building and monitoring devices.

Emergent business models e.g., performance contracting could facilitate such adoption coupled with CAPEX financing from such funds.

For large consumers, they may be subjected to a “double whammy” i.e., as they will be paying for higher electricity prices (where tax is passed through) from the generation companies and again taxed for their large energy consumption.

Similarly, if the energy required to produce water is significant and are captured in the carbon tax regime, will there be a “triple whammy” for large consumers?

The recent announcement by Keppel Infrastructure Holdings, a division of Keppel Corporation, that signed an agreement with Singapore Economic Development Board (EDB) to develop, own and operate a gasification facility on Jurong Island, throws the national carbon reduction efforts into some sort of disarray.

Whilst the facility will use proven and best-in-class technologies to produce hydrogen, carbon monoxide, and other industrial gases from predominantly coal feedstock, the carbon emission footprint must be significant to draw a hefty tax penalty and hence may justify carbon capture and utilisation or storage technologies.

But is this a logical approach, in that you create more carbon only to tax it and justify recapturing it; whilst a more economical way would be not to generate it at all in the first place?

It remains to be seen how this will best be managed in light of the COP21 national commitments. Based on current knowledge, there is no scenario where the COP21 commitments can be achieved if the Coal Gasification project goes ahead.

Furthermore, the decision to go ahead with the Coal Gasification has resulted in mixed signals, to the public, industry, climate change allies and policy makers, with respect to Singapore’s effort in mitigating the impact of green house gases on climate change.

Bloomberg New Energy Finance recently reported that the average annual rate of customers leaving traditional utilities is nearly 12 per cent, more than double the rate a decade ago.

The largest six utilities in the UK alone lost more than 2 million customers since 2010. The availability and deployment of new technology and the push toward low-carbon energy by both green consumers and policy makers has caused customers at Europe’s largest and most-established utilities to flee e.g., Centrica Plc and EON SE.

This is despite of all their efforts of offering everything from rooftop solar panels to connected home devices to satisfy their customers.

But new companies are promising lower prices, better customer service and a resolute commitment to renewables. They may have started a movement away from traditional utilities that will be impossible to reverse.

In Singapore, power generators will need to re-invent themselves to be an active participant in this changing landscape enabled by intelligent devices coupled with new business models.

The decision to go ahead with the Coal Gasification has resulted in mixed signals, to the public, industry, climate change allies and policy makers, with respect to Singapore’s effort in mitigating the impact of green house gases on climate change.

With installed capacity of 13GW approximately double peak load, the electricity market in Singapore is extremely competitive and power generators jostle to bid into the market based on merit order. Therefore, the potential options faced by power generators include the following;

  1. Power generators may have to consolidate. This is not really a bad thing for the industry as a whole as the excess capacity means the average generation efficiency is actually far below the rated efficiency of the CCGTs because of part load issues
  2. Power generators will move more aggressively into renewables generation and storage, to embrace the Nation’s ethos towards sustainability and consumer demands for green electrons
  3. Power generators may roll out incentive programs for key customers to improve their EE (a new business model to earn revenue, e.g. if the power generators does performance contracting). Here partnerships with or acquisition of ESCOs with such technological solutions maybe required.
  4. Power generators may promote greater electrification (e.g. EVs) assuming the grid emission factor is less than the carbon emitted from burning fossil fuels. Here partnerships with fuel retailers who already have the distribution network maybe something to think about

 Other options

Carbon offset mechanisms could be considered, however, if we plug into an international carbon offset program, then our national efforts for carbon abatement will not move in the right direction.

Furthermore, we run the danger of thwarting efforts to build the right operational and investment behaviours that will positively impact a sustainable future.

Therefore to enhance the efforts for carbon abatement and its impact at a national level, we should consider a Domestic Emission Offset Program.

This program will leverage carbon abatement efforts through participation in the demand response program, the adoption of electrified transportation, deployment of solar PV installations, tree-planting, energy storage deployment, waste recycling, green building conversion or development and work place practices that lower the carbon footprint amongst others to obtain “carbon credits’ that can be used to offset some if not all CO2 produced.

Furthermore, this also creates greater synergies and coherency of government policies aimed to lower our national carbon footprint.

Another positive outcome would be the creation of a domestic ecosystem where those involve in carbon abatement efforts can trade with those responsible carbon emission. This carbon footprint “exchange” helps drive deployment of low carbon technologies which can extract value for “willing buyers” of the carbon credits from “willing sellers” which extends the positive impact of the carbon tax beyond the electricity market.

Whilst there is merit to incorporate a simple carbon tax regime, to consider the merits of carbon intensity i.e., carbon emitted per economic yield, could also change corporate management mindset to drive operational behaviors that focuses on extracting the most economic value from the energy utilised (or carbon emitted).

Based on past experience on carbon markets, a price point of S$50 to S$100 is suggested to be more impactful to change industrial operational behaviour and reconsider investments in energy efficiency measures.

However, what is evident by the proposed tax regime is that the government has now put a wedge in the door that for a long time has remained closed and will have the ability to keep increasing the tax amount in the future.

This, in order to achieve the right response from large carbon emitters to fulfil Singapore’s obligations to COP21, and furthermore with this moral authority, despite Singapore’s small size, influence the guidelines for better management of commitments for other countries.

It is also conceivable that if S$10 to S$20 per tonne does not shift the needle that establishes a reduction trajectory to meet the COP21 commitments, raising the tax level to a point that meets the desired objectives is inevitable.

Therefore, the government’s plans to recycle the carbon tax of $600m a year (or higher based on a higher tax rate) is both pertinent and an imperative in our efforts towards building a sustainable future for all in Singapore. It is a significant lever to wield in our fight against the destructive tides of climate change.

Dr. Sanjay C. Kuttan is the programme director, Multi Energy Systems & Grids (SMES), Energy Research Institute, at the Nanyang Technological University, Singapore.

 

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