Electricity: falling demand in the NEM

Electricity: falling demand in the NEM
16 Dec 2013Archived News David West, Mark Bourne Climate Change Matters

Electricity consumption across the Australian electricity markets is in decline.  This article discusses the causes of falling demand evidenced over 2013.

“Since 2009-10, electricity consumption in Australia’s largest interconnected electricity market, the National Electricity Market (NEM), has fallen by 4.5 per cent.”1

In November the NEM market operator, the Australian Energy Market Operator or AEMO, updated its 2013 Statement of Opportunities.  The Statement of Opportunities is the long-term assessment of energy demand.  Energy forecasts provide a key input into electricity infrastructure planning.  The November update confirms the continuing downward trend in electricity demand. “In the first quarter of 2013-14 (July 2013 to September 2013), AEMO observed a variance of -3.5% in NEM-wide actual electricity consumption compared to the forecast.2"   

The falls are not only limited to the NEM.  Australia’s other large electricity network, the South West Interconnected System (SWIS) which supplies south-west WA has recorded flat growth, despite the resources boom.3

What is driving these reductions?

A number of reasons have combined to impact electricity demand growth and outlook:

  • A sustained growth in domestic rooftop PV installations through deliberate policy initiatives, such as the various state and federal rebates and reduced system installation prices.

  • Lower than expected growth in most industrial sectors, stemming from a downturn in manufacturing and a higher Australian dollar.

  • Impact of energy efficiency measures, such as improvements in energy efficient appliances and changes in building standards and regulations.

  • Reductions in electricity usage as consumers react to high electricity costs.

How does a reduction in energy demand flow through to wholesale electricity prices?

Orthodox economic theory dictates that falling electricity demand should lead to falling wholesale electricity prices.  

There is no question that there currently exists an oversupply of generation capacity in the NEM.  AGL have recently found that this ‘under-demand’ has produced about 9000MW in excess generation capacity in the NEM, equating to around 16% of the market.4

“These changes result in all regions except Queensland having adequate generation capacity over the 10-year outlook period.5 Queensland energy growth will be driven by LPG plant investment.

Although wholesale electricity prices have fallen in recent times due to the fall in demand and the subsequent oversupply, the impact on total energy costs may not be so predictable.

Recent commentary has sought to understand why electricity prices have been rising despite falling demand over a number of years.6

Energy price increases have substantially exceeded CPI. The introduction of a carbon price explains some of this increase, however network charges have exerted the greatest upward pressure on energy costs. This may continue. Therefore we need to understand the link between energy and network costs. 

For some time, it has been observed that the billions of dollars spent on network assets will have to be recovered7, despite the potential reduced need for this network capacity as energy usage falls.  

Although the energy and network components are priced independently of each other, they are inextricably linked.  Last week’s Grattan report 8 asserts that network cost increases can offset the reduction in wholesale electricity costs, for some sectors.  A large portion of network costs are recovered by the network operators based on electricity volume, so that if volume falls, prices will rise to offset the loss in usage. 

This problem is compounded by an overspend on the networks, which means their regulated asset base is inflated.  A network operator’s revenue is determined to a large extent by this regulated asset base.  Most of the network spend in recent times has been a response to the need to meet rising peak electricity demand – i.e., making sure the network can supply electricity in times of very high consumer demand.  While most large commercial and industrial customers have paid significant fees for this demand availability, through the peak demand components on their network tariffs, many users are not being charged for this capacity and instances of cross subsidy may exist.  An underlying driver of this peak network investment has been the saturation of residential air conditioning.

These are complicated issues which will require considerable thought on the part of policy makers. 

What is the outlook for 2014?

On a final note, the other unknown which has the potential to apply downward pressure on wholesale electricity prices, is the expansion of PV installation into the commercial market.  The rollout of PV has had a marked impact on energy demand from the grid – as highlighted in the AEMO forecasts, but to date this has only been limited to the residential market.  The commercial and industrial market is yet to fully embrace this technology, which if repeated on the same scale as residential PV take-up, could have dramatic impacts on the energy supply market.  

Energetics can provide further advice on how these developments may impact your future electricity costs and steps you can take to maximise the opportunities presented by these changing market conditions.   

1. Wood, T., Carter, L., and Harrison, C., 2013, Shock to the system: dealing with falling electricity demand, Grattan Institute, page 3.
2. 2013 NATIONAL ELECTRICITY FORECASTING REPORT UPDATE For the National Electricity Market, page 2.
3. Wood, T., Carter, L., and Harrison, C., 2013, Shock to the system: dealing with falling electricity demand, Grattan Institute, page 4.
4. Wood, T., Carter, L., and Harrison, C., 2013, Shock to the system: dealing with falling electricity demand, Grattan Institute, page 12  
5. AEMO, 2013 ELECTRICITY STATEMENT OF OPPORTUNITIES, Executive summary, iii.
6. Wood, T., Carter, L., and Harrison, C., 2013, Shock to the system: dealing with falling electricity demand, Grattan Institute
7. Jutsen, J: “Why electricity prices are rising – the horse has bolted”, ReNew economy, 24.8.2012."
8. Wood, T., Carter, L., and Harrison, C., 2013, Shock to the system: dealing with falling electricity demand, Grattan Institute, page 12

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