How to spot an energy use scapegoat

Julia Gillard's 'clean energy future' relies on a long-term slowdown in electricity demand growth driven by a decline in manufacturing. But the big question remains: is it a blip or a trend?

Blip or trend? This is a multi-billion dollar question currently bugging electricity suppliers, their watchdogs and politicians who find themselves in the firing line when consumers (aka voters) eventually get cross about either power costs or power security, or both.

Electricity consumption growth is flatlining at present, but is this because of the coincidence of the global economic crisis and the wettest, coolest summers in years – or is there an underlying shift in demand? A shift driven by concerns about climate change, the pressure of much higher prices and the inroads of more energy-efficient appliances.

The energy regulator is already signalling that it wants to use the current situation to drive down the bids by network businesses for billions of dollars in capital outlays and related operating expenditure, a reaction to the wall of sound generated by householders and energy-intensive industries as their power bills keep climbing.

This is not a new experience for the networks.

From the start of the east coast market in the late 1990s until the middle of the past decade, the regulatory system – although not the Australian Energy Regulator per se as it wasn’t around then – sat on capex and opex to keep prices down.

Not surprisingly, this had the effect of also suppressing necessary investment in replacing ageing equipment. And, when the catch-up time could no longer be avoided (ie now), it coincided with pressure to service growth, especially in peak demand, and meet political demands for greater supply reliability, delivering today’s price shocks.

The most visible manifestation of all this occurred in Queensland where Peter Beattie inherited threatening (for his government) power supply under-investment and resulting poor service. Following an independent inquiry, the state ended up with expenditure of $12 billion in the past seven years to improve its electricity reliability by 15 per cent – necessitating a 40 per cent rise in power bills, a factor in the current election.

Leaving aside the mining boom state of Western Australia, where the weather and the growth in demand dictate ongoing large power supply expenditures and an end to a decade of populist tariff protection for householders, the big question is what is now happening to east coast demand?

The Australian Energy Market Operator has scaled down its forecast of east coast consumption for 2011-12 from 202,600 gigawatt hours to 192,000 GWh, a five per cent cut.

While commentators (especially those leaning to the green side) have tended to focus on household behaviour to explain this, it needs to be understood that demand is split 70:30 – with business accounting for the big bit.

Where the residential sector is important is in its air-conditioning driven requirements for peak power, currently also seen to be slowing down, but surely under the influence of La Nina.

Looked at in the long term, as they should be, the consumption dynamics raise some interesting questions.

A study by consultants Ernst & Young for the Australian Energy Market Commission, the rule-maker and high level watchdog for governments, and AEMO, which manages the wholesale energy market, has thrown up a useful breakdown of demand between 1973-74 and 2009-10.

The time frame has a particular resonance just now because the federal government’s efforts to develop a long-term strategy through the energy white paper is leaning more towards 2034-35 than the middle of the century, a time horizon used by Julia Gillard, Wayne Swan and Greg Combet to sell the "clean energy future".

Looking back, Ernst & Young highlight important trends.

The biggest mover in consumption over 35 years has been the manufacturing sector, with demand rising from 24,300 GWh to 66,900 GWh, outstripping the household sector, for which the rise has been from 19,080 GWh to 60,100 GWh.

The flier coming up on the outside has been the commercial and public services sector, with consumption starting at only 9,400 GWh and reaching 57,200 GWh.

The survey shows that manufacturing demand growth has averaged 2.8 per cent annually versus three per cent for households – while commercial and public services has averaged five per cent and has shot up 38 per cent since the start of the new century.

The politically sticky side to this for Gillard and Swan is that their "clean energy future” scenario predicts a long-term slowing down in electricity demand growth that relies on a decline in manufacturing.

Tucked away in the Treasury papers used to support the policy is an acknowledgement that manufacturing areas like metals processing, petroleum products, automotive, plastics and chemicals and clothing "will all experience annual growth lower than the national average” over time.

This reads interestingly against the political crocodile tears being shed daily as companies announce job cuts in the face of difficult economic times.

The trend is a lot easier to stomach for politicians when it is disguised in the 'clean energy' trip to the far horizons than when it is happening in the here and now and may be hastened by carbon policies.

Trawling through another new report, 'Energy in Australia' by the federal Bureau of Resources & Energy Economics, throws up a further point: annual demand in the three states that account for most of the electricity consumption (New South Wales, Victoria and Queensland in that order) is declining – it peaked at 182,200 GWh in 2008-09 and fell to 177,300 GWh in 2010-11, with the biggest drop of 3,000 GWh in NSW.

The extent to which this relates to falling business needs, rather than any reduction in aggregate household consumption will be revealed when the Energy Supply Association produces its next data yearbook in mid-2012.

Which brings us all the way round to the key question: trend or blip?

More spiky still is the question of the extent to which the resources boom directly and indirectly will push overall demand back up again later this decade, aided and abetted by a rising population, and where this will happen.

The odds on the southern states being the biggest losers are pretty good and there are ramifications for politicians and power suppliers if that is the case.

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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