Attending the AEMO’s feedback session on their planning documents yesterday, I was reminded that I had meant to follow-on my discussion about how demand is changing across the NEM with some of the possible reasons that we’ve either deduced for ourselves, or have had suggested** by a number of our clients.

** Suggestions made by clients and others have been included below, where possible.  Any mistakes in these explanations are entirely ours!

In no particular order, the following are some of the possible reasons.

1)  Factors contributing to demand growth levelling off, and maybe declining

It’s probable that most (if not all) of the following factors have been combining since 2006 to change the pattern of demand in the NEM (+ probably other factors we have not listed here, or thought of).

1a)  Demand might be being offset by…

i. Solar PV

The high level of support for small-scale solar PV installations across the country (through deemed multipliers on RECs in the SRES) and state-based feed-in tariff has reportedly seen an explosion in the installation of solar PV across the country.

It is our understanding that no-one really has a full picture of what is installed across the country:

1)  It was reported here in the Fairfax press that 1,100MW had been installed across the country;

2)  We heard yesterday that Energex has 300MW currently installed in their distribution area alone – amounting to “one in fifteen homes” as reported here.  I can recall hearing something like 500MW in Sydney, as well.

If anyone can point us at more detailed (and/or accurate) information, we’d be very curious to know?

ii.  Other embedded generation

At a larger scale, we’re also seeing some movement in terms of cogeneration and other embedded generation projects in the commercial and industrial space.  Some examples include:

1)  Origin (through their Cogent Energy subsidiary) and their commercial project at 101 Miller St in North Sydney, which they talk about here.

2)  Earlier this year, AGL announced (here) their partnership with Qenos in the installation of a sizeable cogeneration project at the Qenos site in Victoria – to follow on from other cogeneration projects at Coopers Brewery, Melbourne Water and elsewhere.

3)  Several years ago, Sucrogen upgraded its Pioneer sugar mill to become a sizeable cogeneration plant, and the other sugar mill operators are looking to complete similar projects.

1b)  Demand might be being reduced by…

i. Hang-over from the GFC

When the Global Financial Crisis (GFC) first hit, we did some preliminary analysis here.

Though the effect of the GFC was much lower, and less persistent, than in some other parts of the world, it has certainly had some effect.  It would not be possible to ascertain precisely how much.

ii. Two-speed economy

It has been commonly reported that Australia might be blessed (or cursed) with a two-speed economy.

If this is the case, and the majority of the benefits of the mining and commodities boom is being seen in Western Australia (not connected to the NEM) and Queensland (including some parts not connected to the NEM), it is probable that the results seen in terms of changing demand shapes would be attributable (at least in part) to this.

Of particular interest, in terms of electricity demand, is the reported “hollowing out of Australia’s manufacturing base” – and the disproportionate effect that might be seen in terms of electricity demand, as a result.

iii. Energy Efficiency Measures at Home

Driven by a combination of higher prices, raised environmental consciousness (through “Earth Hour” and other initiatives) and government initiatives, it’s commonly acknowledged that there has been progress towards greater energy efficiency in our homes.

A number of measures will have contributed to this, including:

1)  Higher efficiency lighting.  Some back-of-the-envelope calculations shows that this benefit, in terms of ongoing reduction in demand, might be substantial.

2)  Higher efficiency appliances, such as more efficient air-conditioning and and large-screen TVs – along with better standards for standby power.

3)  The much maligned federal ceiling insulation scheme would be contributing to reduced demand for electricity across much of the year.  A more difficult question would be to ascertain by how much.

4)  Additionally, we’ve started to see reports (such as in “McMansions losing their allure” on 22nd August in the AFR) that we might have collectively turned the corner in terms of demanding ever-increasing floor areas in new housing stock, with a decline in average floor area apparently seen since 2009.

iv. Energy Efficiency Measures at Work

Various State and Federal government initiatives (such as EEO and NGERS) would also be having some impact on the changing pattern of demand.

v. Price sensitivity of demand

I previously started a discussion about how rising prices for electricity were a major concern for large industrial energy users.  This is the type of analysis that is never really finished…

Undoubtedly the recent increases in prices will have had some effect of moderating consumption – both at work and at home.

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Can you see other possible contributing factors?  If so please either:
1) Give us a call +61 (0)7 3368 4064 and let us know; or
2) Post them as comments below.

2)  Possible implications of this

We haven’t given this a whole load of thought, but it does appear to be very significant to the market and the electricity supply industry as a whole, for a number of reasons – including:

(a)  Numerous people have spoken about how the declining load factor in the NEM (and elsewhere around the world) makes for a more expensive electricity supply system (in capital terms) and also an accelerating average cost (per MWh).

(b)  This points to a greater need for measures such as Demand Side Response to mitigate these market-wide costs.

(c)  At a more fundamental level – there may be a paradigm shift under way, and one that might accelerate under a “smart-grid” enabled but carbon-constrained world.  If this is the case, then there will be a greater level of uncertainty about what might unfold in the future.  This means that previous “rules of thumb” might no longer hold true, and that there may be cost implications about this level of uncertainty.

(d)  Additionally, it also means that there are a greater range of stakeholders who have a significant impact on where demand will head for the future.

Key to considering possible implications is to understand whether this is a transient occurrence (such as if it is driven by a depressed economy in some sectors, or by retrofitting existing stock with insulation and changed light-bulbs etc…) or whether it is a more fundamental change (such as if driven by new technology).

When we have a bit more time, we’ll continue to ponder this situation – and will post some analysis of each of the factors, when we are able.

We’d welcome comments below – or on the phone +61 (0)7 3368 4064