Published in IEEE Transactions on Power Systems, 2010 1 Abstract — The Australian electricity sector is expected to undergo major changes to reduce the current sectoral CO 2 emission of 190 million tonnes to 96 million tonnes by 2050. This paper summarizes two major modeling studies that have been undertaken since 2006 to understand the full set of investment, price and financial impact on existing generators, especially coal- based generators. We have used a long term capacity and dispatch optimization model to comprehensively analyze both least-cost and market-led expansion of the system to accommodate alternative emission reduction targets from a shallow cut to a deep cut. The modeling results demonstrate the cost of meeting the target can be over $30 billion in NPV terms. A mix of clean coal technologies, gas and nuclear technologies is expected to displace the existing stock of conventional coal which varies significantly depending on the emission reduction target. The analysis also show that mandatory renewable targets or technology standards are inefficient policies in comparison to a market based policy such as the proposed emissions trading scheme. Index Terms—Greenhouse gas policy, Investment optimization, Dispatch, Game theoretic analysis, Pricing. I. BACKGROUND reenhouse gas reduction from the Australian power sector has been firmly on the political agenda over the past 2-3 years. The electricity sector in Australia accounts for 35% of the national greenhouse gas emissions. It is likely that policies introduced to manage those emissions will affect many of existing coal-fired power stations and also impact on future generation mix. The newly elected Labor government has signed the Kyoto Protocol that mandates a carbon reduction policy. An Emissions Trading Scheme (ETS) termed as the Carbon Reduction Policy Scheme (CPRS) is planned to commence in 2010 [1]. In addition, the federal government has also introduced a national renewable policy that is expected to see around 45,000 GWh or 20% of the national generation through renewable resources by 2020. There are however considerable uncertainties around some of the key issues including sectoral emissions target, cost of clean technologies such as carbon capture and storage (CCS). Nevertheless, considerable discussions and debates have taken place over the last two years around potential emissions targets and their implications for the Australian electricity sector. Deb Chattopadhyay is a Director of Deloitte, Australia in Melbourne (e- mail: dechattopadhyay@deloitte.com.au. Some of these studies include, the National Emissions Trading Taskforce (NETT) study [2], the Prime Minister’s Taskforce study on Emissions Trading [3], the study undertaken by the National Generators Forum [4-5] and a recent study by the Business Council of Australia [6]. Although these studies differ slightly in terms of their focus and some of the data/assumptions, the common theme across these studies has been to compare and contrast the efficacy of the following greenhouse gas reduction policies [4]: 1. National Emissions Trading Schemes covering both static and dynamic carbon price schemes, 2. Technology Benchmark Schemes (best practice on technology standards for emissions.), 3. Mandatory Low Emission Technology (MLET) schemes (accelerated research on low emission technologies), and 4. Extension of Mandatory Renewable Energy Target (MRET) schemes. While there is no specific emission target profile has been announced yet, all these studies [2-6] have made important contributions to shape the CPRS. For instance the general emissions reduction trajectory depicted in Figure 4.5 of the CPRS Green Paper matches those used in [2-6]. The emissions reduction targets for the electricity sector used for the study were developed by the NGF members [4-5] that among other things used an economy-wide study conducted by the NETT [2]. The recent study by the BCA [6] titled Modelling Success: Designing An Emissions Trading Scheme that Works has undertaken a comparison of the key ETS studies and concluded the generation capital and operating costs, emissions reduction trajectory and various other assumptions, as well as the broad outcomes across these studies are broadly comparable. In the backdrop of the recent developments, this study presents an extensive modeling analysis in partial-equilibrium setting for the electricity sector only, that provides a quantitative assessment of the scenarios discussed recently [2- 6] using data and assumptions that are developed as part of the studies [4-5]. The present study has in part stemmed from the analysis conducted for the NGF [4-6] to examine the impact of alternative carbon policies on the mix of generation technologies, sectoral emissions and the broad commercial impact on different technology groups within the electricity generation sector. The study also considers the potential impact on wholesale energy prices due to changes in costs arising from different emission policies. The policy options investigated in the study includes a range of mechanisms and reductions in emissions from the Australian electricity Modeling Greenhouse Gas Reduction from the Australian Electricity Sector Deb Chattopadhyay G