The Potential Role of Carbon Pricing in Thailand's Power Sector

Thailand relies heavily on fossil fuels to generate its electricity. However, it has committed to play its part in the international efforts to mitigate GHG emissions through its nationally determined contribution (NDC) and NDC roadmap. Thailand is currently preparing its first Climate Change Act. The introduction of a carbon price could help accelerate a transition to low-carbon energy, particularly in the power sector. Internalising the cost of carbon could provide incentives for a shift away from fossil fuel-based electricity. Based on an understanding of Thailand's regulated power market structure and key policies, this report assesses the potential role of carbon pricing in Thailand's power sector in reducing CO₂ emissions and promoting a shift towards cleaner generating sources. It also explores the potential implications of carbon pricing with respect to operating costs and electricity prices. This report is part of IEA support to the Thailand Greenhouse Gas Management Organisation (TGO) on policy design for clean energy transition and climate change mitigation in Thailand.

The analysis builds on the results of an in-depth production cost modelling exercise1, the purpose of which was to study the effect of carbon pricing on generation dispatch in Thailand in 2030. It examines two scenarios for Thailand's power system in 2030, with each scenario comprising four cases of different carbon price level selected on the basis of international studies and Thailand's internal assessment on carbon pricing: USD 0/t CO₂, USD 10/t CO₂ (THB 320/t CO₂), USD 30/t CO₂ (THB 960/t CO₂), and USD 40/t CO₂ (THB 1 280/t CO₂). The first scenario is called the PDP scenario, representing Thailand's power sector in 2030 based on the current Power Development Plan produced by the Ministry of Energy (PDP2018 Revision 1). The second scenario is called the Flex scenario, representing a more progressive vision for Thailand's power sector in 2030 with higher renewable penetration and more technical and contractual flexibility in the power system. 

The modelling results demonstrate that a carbon price can incentivise CO₂ emission reductions in Thailand's power sector by shifting the generation from more carbon-intensive plants to plants with lower emission intensity. The carbon price imposes a higher cost for carbon-intensive plants to operate, increasing their variable costs and pushing them further down in the merit order under economic dispatch decisions.

Under the pre-determined power capacity mix composed of existing and planned power plants, a carbon price set at a moderate level would be able to initiate a dispatch shift from coal-to-gas generation and deliver effective emission reductions while still maintaining contractual obligations and system reliability. The modelling results shows that a carbon price of around USD 30/t CO₂ in 2030 could trigger a shift from coal to gas. Coal power plants have the lowest fuel price and the highest emissions intensity. By comparison, natural gas plants have a higher fuel price but a much lower emissions intensity. A USD 40/t CO₂ carbon price could incentivise a shift of  23 TWh of coal to gas and reduce carbon emissions from electricity generation by 11% (13 Mt CO₂) in 2030 under the PDP scenario compared with the PDP scenario without a carbon price.  

The overall coal plant capacity factor would decrease as generation shifts from coal to gas. This implies that current coal power purchase agreements (PPA) may need to be revised. Retrofitting, repurposing or early retirement could potentially be cost-effective measures for some coal power plants, especially since Thailand is forecasted to continue having a high reserve margin relative to the international standard. 

Combining a moderate carbon price of USD 30/t CO₂ or more with more variable renewable energy (VRE) capacity and system flexibility would enable an effective shift from coal to VRE, which enables further emission abatement and drives a deeper transformation of Thailand's power sector.

In the Flex scenario without a carbon price, having more VRE capacity than under the PDP2018 Revision 1 and more technical and contractual flexibility in the system could reduce power sector emissions by 11 Mt CO₂ in 2030. However, due to the relatively higher operating costs of natural gas, which in 2030 would be mainly in the form of combined cycle gas turbine plants (CCGT), the modelling results show that new additions of VRE capacity in the existing power system without a carbon price would trigger a shift in generation from natural gas to VRE with a limited impact on coal.

Introducing carbon pricing in tandem with VRE additions could bridge the cost gap between natural gas and coal, leading to an effective shift from coal to VRE, and reducing the generation of emission-intensive coal power. A USD 40/t CO₂ carbon price combined with an additional 15 GW of VRE capacity and a more flexible power system could reduce total emissions from the power sector by 26 Mt CO₂ compared with the PDP no carbon price scenario in 2030. Meanwhile, compared with a USD 40/t CO₂ carbon price in the PDP scenario, the emission abatement impact of carbon pricing is amplified in a more flexible power system with additional VRE capacity, delivering more emission reductions at the same carbon price level due to a higher decline in fossil fuel generation.  

On a levelised cost of energy (LCOE) basis, wind and solar could become price competitive in Thailand's power system around mid-2020. If implemented today, a moderate carbon price could accelerate the price parity point between these technologies and fossil fuel power plants by 2022. In addition to changing the competitiveness of wind and solar vis-à-vis new fossil fuel capacity, a carbon price above USD 20/t CO₂ could potentially make investing in new VRE more cost-competitive than maintaining and operating an existing fossil fuel power plant by 2030. Any revenues from a carbon pricing mechanism could also support VRE technology development and accelerate a clean energy transition.

The LCOE is not the only element to consider in the adoption of VRE because thermal plants can provide flexibility, peak demand capacity and other necessary services to support the grid. Nevertheless, previous IEA studies have shown that Thailand can accommodate more VRE penetration as planned in the PDP with additional technical and contractual flexibility.2 Given Thailand's centralised planning process for power sector development, the introduction of a shadow carbon price within the integrated planning process could expand VRE in the next round of target-setting during the power development plan update.

While delivering considerable emission reductions, a carbon price of USD 30 or USD 40/t CO₂ might lead to a notable increase in the total power sector operating cost3 compared to the 2019 level. However, due to fuel cost savings, the adoption of a larger renewable component in the power mix would lead to the total operating cost decreasing from THB 0.97/kWh in 2019 to THB 0.86/kWh in 2030 under the PDP scenario without any carbon price. When a carbon price is applied, the overall electricity generation cost increases due to an increase in operating costs and carbon pricing liability. With a USD 40 carbon price, the PDP scenario's operating cost and carbon price liability combined reach THB 1.33/kWh by 2030. The operating cost increases by only THB 0.06/kWh from the PDP scenario without a carbon price as a result of the shift from coal to more expensive natural gas generation. The carbon pricing liability is THB 0.41/kWh, representing 87% of the total cost increase. 

If all of the operating cost increase and carbon liability were passed through to consumers, the end-use electricity price would increase. However, this cost impact could be mitigated by carefully designing and adapting a carbon pricing mechanism for Thailand’s power sector. An important observation is that most of the cost increase is from the carbon liability, while the operating cost change remains relatively marginal even with a USD 40/t CO₂ carbon price.

One option is to focus on effectively recycling and relocating the revenue from the carbon pricing to help limit the cost impact on consumers and to provide a revenue stream for clean energy deployment in the long term. Design features such as restructuring the current tax components on electricity and adapting the allocation scheme could also be considered. 

Considering Thailand's power sector structure, another potential policy option would be for the Electricity Generating Authority of Thailand (EGAT) to apply an implicit shadow carbon price for dispatch decisions in parallel with an explicit carbon price set at a limited level. A shadow carbon price is a hypothetical cost used during the planning process that helps businesses internalise the cost of carbon when making investment and operational decisions without actually paying for the carbon cost liability. Introducing a shadow carbon price could help reduce the potential economic impact of a sudden high carbon pricing liability and give businesses time to transition to and better prepare for a clean energy transition. A significant disadvantage of the shadow carbon price, however, is that it cannot generate additional revenue for the government with which to address climate-related issues.

Thailand has already had diverse experience with carbon pricing mechanisms from many pilot and voluntary programmes. Carbon pricing can help internalise the cost of CO₂ emissions. It can also leverage market forces to optimise decision making and thereby help mitigate the overall cost impacts for society and contribute to the sustainable development of Thailand’s emitting sectors. While carbon pricing in the power sector could deliver considerable emission reductions from the country's largest emitting sector, in order to ensure its effectiveness and mitigate the associated costs and distributional impacts, its design needs to take into account the power system's specific features.

• Thailand's power sector has the following key characteristics that are relevant to carbon pricing design:
• a regulated, enhanced single buyer model with limited competition
• the dominance of natural gas, a considerable share of which must be imported, giving rise to energy security concerns
• a flexible grid with the technical capability to support renewable integration
• a high reserve margin indicating potential over-capacity.  

Considering the specificities of Thailand's power system and that no single policy measure will be sufficient to meet the sustainability goals, the following policy elements would be necessary when introducing a coherent carbon pricing package.

• Setting a carbon price at a sufficient level to shift generation away from coal and encourage investment in renewable energy could help accelerate power sector decarbonisation in Thailand.
• Designing the carbon pricing mechanism with new measures that address the cost concerns for electricity consumers and the social-economic impacts, particularly to vulnerable groups.
• Introduce more flexibility in electricity pricing, contracting and services. Additional flexibility measures can significantly reduce system operating costs, mitigating some of the cost impacts of implementing a carbon price and providing needed system support for VRE adoption and integration.
• Effectively use carbon revenues to accelerate a clean energy transition and reduce the impact on the economy of carbon pricing. Carbon revenues could be redistributed back to consumers in personal and corporate tax cuts, especially for low-income households or small businesses. They could also fund technology development and mitigation measures to lower the long-term clean energy transition costs. Mechanisms to transfer the revenues from the carbon pricing to the population would also allow faster and less politically challenging carbon pricing scheme implementation.
• Introduce a shadow carbon price in the power plant dispatch rules to complement a lower explicit carbon price to mitigate concerns over high carbon cost liability for the power sector. A shadow carbon price in dispatch decisions could help optimise the generation profiles by accounting for the emissions intensity of different generation sources without actually paying for the cost of carbon. A gradual transition from a shadow to an explicit carbon price could help manage total power system operating costs.
• Designing the carbon pricing mechanism alongside changes to power system planning, operation and regulation to improve the effectiveness of carbon pricing instruments and assist in a clean energy transition.
• Value the electricity generation provided by dispatchable fossil fuel plants for flexibility and ancillary services. With a moderate carbon price signal, existing coal-fired power plants would see their running hours decrease sharply. Ancillary services could guarantee system reliability while reducing emissions by running fewer coal power plants. This could also encourage retrofitting and economical coal phase-out strategies.  
• The government could consider elevating aspirations in the PDP to help shape investment. The PDP acts as a roadmap for future power sector development, sending a strong political and policy signal. Including a shadow carbon price in the next PDP revision process could help accelerate Thailand's overall renewable energy ambitions and cost-effectively prepare for VRE energy adoption. An integrated planning process that considers supply and demand, transmission and distribution, VRE location and generation patterns, and investment would maintain system reliability with an adequate expansion of VRE and gas-fired power capacity.