What Happened To Demand Growth Down Under?

This is a sample article from the April 2012 issue of EEnergy Informer.

Australia’s demand growth appears tepid. Is this the beginning of the end for demand growth?

In March 2012, the Australian Electricity Market Operator (AEMO) released a report that shows the actual electricity consumption in the Australian National Electricity Market (NEM) superimposed on a forecast of electricity demand made in August 2011. An interesting graph, reproduced below, to say the least. The question is what happened to demand, and — more important — why are the two — the actual and the forecast — so divergent and seemingly disengaged?

Demand: Flat and decoupled from the forecast?

The AEMO attributed the drop-off in demand to “The changing economic landscape [i.e. structural decline of manufacturing], a more energy conscious public, the impact of rooftop solar photovoltaic installations and milder weather … all contributed to lower than forecast annual energy across Eastern and South Eastern Australia.” That may be part of the story, but one wonders if the flattening demand is a temporary phenomenon or there is more to it.

Climate Spectator, an Australian-based on-line news source, speculated on the implications of the flattening demand without addressing the underlying causes on 6 March 2012 (emphasis added):

  • “Firstly, it raises questions about the wisdom of forecasts the network businesses have used to justify over $40 billion of expenditure on networks over the next 5 years. Investment in networks is driven by peaks in instantaneous demand, not overall annual energy consumption (which is illustrated in the graph above). Yet it makes you wonder, if they can get this forecast so badly wrong, maybe they’ve done the same with peak demand forecasts as well.”
  • “Secondly, it is seriously depressing wholesale electricity prices. This is likely to continue for some time, although there will be some relief from the introduction of the carbon price. This makes it hard to proceed with any large electricity generation project, whether conventional or renewable.”
  • “Thirdly, it suggests that Australia could achieve a more ambitious domestic emission reduction target at lower cost than what many models currently project (often built on assumptions of far faster growth in electricity consumption).”
  • “Fourthly, this provides an inkling of the potential to reduce emissions through enhanced energy-efficiency, rather than decarbonizing the supply of energy.”

As we see it, the flattening demand growth is an emerging reality not just in Australia but in many developed economies experiencing tepid economic and/or population growth, continued improvements in energy efficiency and robust growth in distributed generation. Distribution companies from Sydney to San Francisco are experiencing the early signs of this new trend, an important paradigm shift.

Vexing cost allocation problem

Even setting aside the current economic downturn, in some developed countries, the population is not growing as rapidly as it used to, if at all. At the same time, higher electricity prices coupled with higher appliance energy efficiency standards and building codes are beginning to lower volumetric consumption. Add the growth of rooftop PVs, solar hot water systems, ground-source heat pumps and so on, subsidized and encouraged through incentives, and the net effect is lower demand growth.

Peak demand, however, remains a problem. In fact, many distribution companies report that it is becoming more pronounced. While overall demand is flat or barely growing, peak demand continues to grow. Consumers appear to be using more of the limited kWhrs during peak demand hours when it is most expensive to supply.

It makes a nightmarish business scenario: Flat or potentially falling volumetric sales with peakier load patterns. The combination makes it more expensive to serve while putting more pressure on the transmission and distribution network. Since distribution costs are essentially flat, higher costs must be recovered from a shrinking volume of sales. This means higher tariffs, which will result in further drop in consumption. Higher rates and rising bills would also appear paradoxical to consumers since they are using less and expect to pay lower bills. Try explaining the opposite to consumers and see how far you can go.

The issue is already making headlines in Australia, and elsewhere, as distribution charges are rising at a much faster rate than generation charges. Utilities and their regulators must find new cost allocation formulas to deal with the vexing problem.

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