Danger signs for a power price surge?

Judging the future electricity demand needs of the country is fraught with danger, as recent events show, with a fine line between paying too much for network upgrades and risking our energy security.

Trying to plot east coast electricity demand is not getting any easier.

One example of this is the fact that, having risen by about 7,000 gigawatt hours over four years to 2008-9, annual consumption in the five eastern states and the ACT is set to be 7,000 GWh lower four years later.

However, according to the planning model being used by the Australian Energy Market Operator, one of six scenarios it has developed, we can expect demand to again be about 13,000 GWh higher than today in four years’ time.

And then, forecasts AEMO, we can anticipate customer sales continuing to rise out to the end of the decade, reaching more than 208,000 GWh annually in 2019 – which means that the supply business will have grown about 12.5 per cent over 14 years.

This is a time frame that spans one of the country’s worst droughts, harsh enough to persuade many Australians that climate change warnings were right and to help shuffle John Howard out of office. This has been followed by flooding rains and mild summers, with the public mood swinging against the introduction of a carbon tax and likely to demolish the Gillard government – and we are now stuck on a track where many are totally fed up with rising electricity prices.

It seems to me to be a racing certainty that we will see the network regulator, riding re-arranged rules, insisting on using the current low demand numbers to suppress capital outlays between 2014 and 2019 for the power delivery system – after concerns about rising demand and underspending led to the introduction in the middle of the past decade of a system that has succoured a record capex rush, exceeding $35 billion for 2009 to 2014, on the east coast.

If you take this regulatory U-turn and put it alongside AEMO’s end-of-decade forecasts, you can conclude that consumers around the beginning of the twenties may be in for another bout of power price shocks.

Throw in to this brew what may happen to generation fuel costs – especially the price of gas, but including more expensive coal contracts and a higher RET bill – and you have to wonder what demand will look like around 2022.

Who cares? That’s 10 years away.

Well, investors building new power stations or those contemplating buying existing ones, not least the gencos in New South Wales now being sold by the O’Farrell government, most certainly care. 

A large new power plant commissioned in 2013 will have a working life of at least 20-25 years, taking its overall financing requirements out to the mid-thirties.

The Bayswater A power station, the most desirable asset being sold by O’Farrell, was commissioned between 1982 and 1984.

Absent some draconian move in the name of carbon abatement, the 2,640 MW plant, which produces 25 per cent of the electricity used in NSW, will still be running in the 2030s.

The operators of transmission and distribution delivery systems care, too.

Network investments today can expect 30-40 year lives.

The charges distributors can levy on users depend on consumption – more gigawatt hours of demand mean that per kilowatt tariffs can be lower and vice versa.

Renewable generators, which mostly means wind farm operators at present, care about where the east coast demand is heading between now and 2020 because it could impact on how much retailers are forced to buy of their product.

Whether or not falling demand should result in a lower volume of mandatory green purchases by retailers is a debating point at present.

The upturn AEMO is projecting for 2020 would help to alleviate this concern for wind farmers – some of whom want to see the target increased.

Basically, for all concerned in supply – where the demand question for more than a decade has been “how high?” rather than “is it going up, down or sideways?” – this is a tricky period.

For the authors of the energy white paper the federal government is committed to produce – expected to appear around September – the present lack of clarity about demand trends must be a pain in the neck, with their number crunchers, including the Bureau of Resources & Energy Economics, which produced projections to 2035 only last December, now under the pump to remodel and re-analyse.

The analysis isn’t straightforward either.

The GFC-induced slump in Australian manufacturing, made worse by the impact of much higher power bills and the carbon tax, can be expected to push down the biggest slice of consumption – the sector accounts for 28 per cent of national electricity use.

For example, what will happen to the aluminium industry as the decade wears on? It is a substantial part of energy-intensive industry consumption. The automotive industry? The plastics and chemicals industry? The cement industry?

While population growth will push up residential needs, an apparent shift in behaviour is reducing the average household’s consumption and the uptake of solar PV is making some inroads, too. This sector is another 26 per cent of national demand.

The third big bite comes from commerce (including retailers) and public services (hospitals, universities etc). The state of the economy will play on this consumption, which accounts for about 25 per cent of demand.

The largest of the consumer also-ran sectors is mining, now at 7 per cent of demand but expected to hit 10 or 11 per cent by the decade’s end. (Think of what those LNG trains at Gladstone and the major coal mines expected to be built will need in the way of power.)

Overall, this is not only a big, big game because of the billions of dollars of sales and billions of dollars of capex involved, but also because getting things wrong will come at a hefty cost.

We can wring our hands over carbon emissions as much as we like, but energy security is the biggest game of all. We literally cannot afford to lose the plot.

An example of what happens when you stuff up planning is the late 1990s Auckland blackout, when hot weather, poor logistics and technical failures combined to make life a nightmare in a major city – and impose a cost of some $6 billion on the New Zealand economy.

This is why what’s happening to electricity demand is not just a debate for energy geeks and carbon chatterers. Every one of us has skin in this game.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.

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