The demand drop mystery explained

Until 2010, for well over a century, through two world wars and the Great Depression, the quantity of electricity used in Australia each year was greater than the year before. In the three years since 2010, the quantity used each year has been less than the year before. There is no evidence this trend will reverse in coming months.

The electricity consumption decrease has been relatively large in the National Electricity Market, which covers the five eastern states and the ACT, but is also occurring in Western Australia.

Specifically, NEM demand in 2013 (financial year) was almost 8 terawatt hours (4.3 per cent) lower than in the peak year of 2009. If electricity consumption in the NEM had continued to grow from 2005 onward at the same rate as it did for the previous 20 years, consumption would have been about 37 TWh higher in 2013 than it actually was.

Trends in total and per capita annual electrical energy consumption in the NEM.

Why is this important?

Consider that 37 TWh is equal to the output of almost 5000 MW of coal fired generation capacity. This is just less than the combined capacity of Bayswater plus Eraring in NSW or, in Victoria, Loy Yang A plus Loy Yang B plus Hazelwood.

All of the decline in consumption has in fact been at the expense of coal fired generators. Many are now barely profitable. Greenhouse gas emissions fell by 9.2 Mt CO2-e, roughly 2 per cent of Australia’s total emissions, in 2012 alone.

Until less than two years ago, official expectations were for rapid demand growth to resume in the NEM.

To be precise, what the above figures are measuring is not electricity used by final consumers, but electricity supplied to the national grid system by large generators which participate in the (wholesale) National Electricity Market.

It is very difficult to find consolidated data on the quantities of electricity supplied by small distributed generators, such as rooftop photovoltaics and landfill gas plants. But the Australian Energy Market Operator has estimated that in 2012-13. photovoltaics supplied 2.7 TWh and other small generators supplied 3.1 TWh. So, although important and growing, these sources alone do not account for the whole of the 8 TWh reduction from the peak year, let alone the 37 TWh reduction from the long term trend.

Changes in electricity generation in the NEM by fuel type.

Research we have recently completed concludes that the three largest factors contributing to the recent dramatic changes in demand for electricity are:

– the impact of (mainly regulatory) energy efficiency programs

– structural change in the economy away from electricity intensive industries

– since 2010, the response of electricity consumers, especially residential consumers, to higher electricity prices.

Energy efficiency

Australia’s first mandatory regulatory energy efficiency measures were introduced in the late 1990s. These were Mandatory Energy Performance Standards for refrigerators and freezers.

Since then, these standards have been extended to a very wide range of residential and commercial appliances and equipment. Analogous energy efficiency requirements have been applied to new buildings. We have used data in reviews of the appliance and equipment measures and the building measures to estimate that the increased impact of these measures between 2006 and 2013 has in total reduced annual demand for electricity by 10.5 TWh, or 28 per cent of the total 37 TWh reduction.

Smaller demand reductions have come from increased uptake of solar and heat pump water heaters (supported by various government programs), the Home Insulation Program (the so-called 'pink batts scheme'), and the Victorian and NSW retailer energy efficiency obligation schemes. All of these schemes together contribute another 8 per cent of the reduction.

The effect of major energy efficiency policies and programs on electricity demand.

Industry restructure

Between October 2011 and September 2012, three major industrial electricity users, all in NSW – the Port Kembla steelworks, the Kurri Kurri aluminium smelter and the Clyde oil refinery – were partially or totally shut down. These closures removed approximately 3.6 TWh of annual electricity consumption from the NEM, which is about 10 per cent of the 37 TWh reduction.

However, detailed analysis of annual public reports of National Greenhouse and Energy Reporting System shows that, other than the companies linked to the above closures, electricity consumption by the largest 100 electricity users in Australia over the three years from 2010 to 2012 was remarkably constant.

While there was negligible growth, there was no decline. There certainly wasn’t a “collapse”, of manufacturing. This is consistent with sectoral value added data in the National Accounts.

That said, the longer term structural shift in the economy away from manufacturing to services (and mining) has accelerated in recent years.

For several decades, ending around 2006, Australia has had steady growth in output of primary metals and other electricity intensive commodities, and this drove a steady increase in electricity consumption. This growth ceased in 2006.

This means that over and above the absolute decline caused by the closures, lack of growth in output of electricity intensive commodities is contributing to lack of growth in demand for electricity, amounting to about 14 per cent of the 37 TWh. Declining manufacturing output overall is not, in general, causing an absolute fall in demand.

Consumers cutting back

If all the above contributions to reduced electricity demand are added to actual demand, starting in 2006, the result is a series of total annual numbers, which can be thought of as total demand for electricity services. This includes both actual electricity and services provided by using a given quantity of electricity more efficiently. We found that demand defined and calculated in this way (and also including the reductions from the major industry closures) closely tracks the historical trend growth in electricity demand, up to 2010 . Since then, however, there has been a marked departure from trend.

Households have adjusted to higher prices by reducing their consumption.

From 2010 to 2013 a widening gap between the modelled demand for electricity services and the historical projected demand emerges. This gap can be completely accounted for by introducing consumer response to higher electricity prices into the model. This report finds that the price response explains 19 per cent of the 'shortfall' in 2013.

The most interesting finding of this part of the modelling is the abrupt change in consumer responsiveness to higher prices after 2010. It is surely not a coincidence that 2009-10 was the year in which the possible effect of a carbon price on electricity prices became a major national political issue. It was also the year when increasing political attention was paid to the rapid increases in electricity prices already occurring, mainly because of higher network costs.

Electricity prices remain a major preoccupation of political debate. The hypothesis is that the political attention being paid to electricity prices led consumers to pay more attention than they had previously done to their expenditure on electricity.

Once they paid attention, consumers responded by reducing their consumption to limit their spending. The outcome showed up strongly in the total electricity demand figures from 2011 on.

There is powerful evidence to support this. Looking at the recently published ABS Energy Account data, we can see that real average annual household expenditure on electricity grew strongly until 2009-10. Since then it has barely increased, despite continuing large increases in electricity prices.

It seems residential electricity consumers have managed, very sensibly, to almost completely offset the effect of higher electricity prices on their household budgets by reducing consumption.

Hugh Saddler is a research associate at the Centre for Climate Economics and Policy at Australian National University.

Hugh Saddler does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

This article was originally published at The Conversation. Read the original article here.