Rising electricity demand could be here to stay

Over the past five years, electricity demand has fallen in Australia. That’s good news for the climate: falling demand has helped reduce Australia’s carbon emissions.

But in June this year, forecasts from the electricity market operator (AEMO) revealed residential and business demand has risen for the first time in five years. The trend could be here to stay, according to a report released today from the Australia Institute.

Meanwhile, a separate update from analysts Pitt & Sherry shows that carbon emissions have increased since the repeal of the carbon tax, largely as electricity generation has switched back to carbon-intensive coal.

So what’s going on in Australia’s electricity sector?

Rising and falling

In mid-June, the Australian Electricity Market Operator released its 2015 National Electricity Forecasting Report. The forecasts show that, overall, demand in 2014-2015 fell on the National Electricity Market (which covers all states except Western Australia).

However, close examination of the data shows that residential and business demand, which accounts for three quarters of demand, went up for the first time in five years, by 1.5%.

Unless this new trend is reversed, consumption of electricity will resume growth at rates more closely aligned with population.

Large industrial demand, which accounts for a quarter of demand and includes aluminium smelters and paper mills, continued the downwards trend.

Let’s break down consumption

The new Australia Institute report, of which I am an author, looks at reasons for falling demand up to 2013-2014, using data from the market operator and the Australian Energy Regulator (these data don’t show the increase in demand but we’ll come back to that later).

Looking first at the three groups of consumers, it is clear that residential consumers have contributed the greatest share of total demand reduction.

Demand has fallen over the past five years, driven mainly by residents.The Australia Institute

Changes in demand by large industry are mainly driven by such events as the closure of aluminium smelters. From 2014-15, the Queensland LNG producers will be responsible for a steady increase in large industry demand in Queensland, as they will be using electric motor drive to pump the gas from the CSG fields to the LNG plants.

The new demand will add about 5% to current demand by 2018-19. It is likely to be entirely supplied by coal fired generation and therefore add about 8.5 million tonnes of CO₂-equivalent each year to Australia’s greenhouse gas emissions.

Business demand currently accounts for nearly half of total consumption. The most striking feature is the steady fall in electricity demand across all states, despite varying intensities of electricity consumption.

Despite varying energy intensity, business demand has fallen.The Australia Institute

We see a similar trend for residential customers, despite differences in total household use due to climate and proportion of energy from gas.

Household demand.The Australia Institute

What caused the fall?

National regulations mandating increases in minimum energy efficiency for appliances (known as Minimum Energy Performance Standards), and performance standards for new buildings were major factors behind the fall in demand, as you can see in the chart below.

Energy efficiency has driven the reduction in household demand.The Australia Institute

Other actions taken by businesses to reduce their demand by using electricity more efficiently, stimulated to a significant extent by government programs such as Energy Efficiency Opportunities, were also very important.

The rise in electricity prices appears to have little immediate effect on business demand, probably because most businesses cannot make short-term reductions in electricity demand without also reducing their output.

But households immediately responded to higher electricity prices, which started around 2010.

Reductions in demand by households have moderated the impact of rising electricity prices. While on average, real electricity prices increased by 40% between 2010 and 2014, real annual spending by households increased by only 20%. If their consumption had remained the same, the total household electricity bills across the whole market would have been A$1.4 billion higher, which equates to A$67 per household.

We risk going backwards

These analyses show how important efficiency standards and other government programs have been in reducing the previous steady growth in consumption of electricity. As at mid-2013, there were a number of proposed new efficiency regulations planned to be introduced over the following years.

These proposals covered refrigeration, air conditioning, lighting, water heating and other equipment types used in both the residential and commercial sectors. There were also proposals to extend efficiency standards to currently unregulated equipment types.

However, progress was stalled during the last year of the Labor government under Julia Gillard. Since the change in government, it has been effectively blocked by a requirement that, in the name of reducing “red tape”, every new regulation introduced must be offset by the abolition of another regulation within the same program.

Unsurprisingly, the presence of this requirement to find regulations that can be abolished is proving a near insurmountable obstacle to further upgrades in the energy efficiency of appliances and equipment across all sectors of the economy.

In addition, there are problems across states and national government that have resulted in widespread non-compliance with the regulated energy efficiency requirements for new buildings.

In 2014, the government also abolished the Energy Efficiency Opportunities program, which was an important Howard government initiative. It claimed reducing the regulatory burden on businesses, estimated to total A$17.7 million each year, was a major reason for the abolition. But a review of the program, completed in 2013, estimated the program had saved or would save businesses A$786 million each year.

While existing regulations will continue to help moderate growth in demand, this will eventually slow as old appliances are replaced. The current freeze on new regulations, and the lack of action at the national level, will then lead to rising demand, driven by population and economic growth.

In the absence of large reductions in the share of coal-fired generation in total electricity supply, accelerating growth in electricity demand will inevitably result in accelerating national greenhouse gas emissions.

Hugh Saddler is a member of the Board of the Climate Institute Principal Consultant in the Climate Change Business Unit of Pitt & Sherry.