Why residential electricity demand is not growing

If we are lucky, history may recognise that a speech last week by Energy and Resources Minister Martin Ferguson was a milestone on the road to a truly low emission energy future. 

In the speech Ferguson said:

“Revised…forecasts provide for a new demand and investment dynamic in the National Energy Market... And demand is not expected to return to growth in the years ahead.”

This was the first acknowledgment by the government that the era of steadily increasing demand for energy, which has lasted over a century, may be coming to an end.

Unfortunately, however, Ferguson's speech was as notable for what he did not say, as for what he did. Among the factors to which he attributed the decreased demand for centrally supplied energy were rooftop PV, closure of aluminium smelter potlines, milder weather, and higher prices for energy.  The array of energy efficiency programs – some of the most important of which are delivered by his own Department – did not rate a mention. 

Data deficiencies make it virtually impossible to estimate the effect of energy efficiency programs across the totality of energy demand. But it is possible to form a very good picture of the effect on residential demand for electricity.

First, it should be noted that, although Minister Ferguson's speech referred to “aggregate annual energy demand,” his subsequent comments concern demand for electricity only. As it happens, final demand for gas has also been decreasing, at least in eastern Australia, but demand for petroleum products has not.

Residential demand accounts for about 30 per cent of total demand for electricity and generation of electricity accounts for about 36 per cent of national emissions and what was, until recently, the fastest growing part.  Hence residential electricity consumption is responsible for about 11 per cent of national emissions. 

The following analysis relates only to electricity demand in the eastern states National Electricity Market (NEM), but this accounts for 90 per cent of total national residential electricity demand. The starting point is to recognise that what is called demand in most discussions of the NEM, including Ferguson's speech, is not in fact demand by final consumers, but the quantity of electricity supplied by generators despatched by the Australian Energy Market Operator (AEMO). This is affected by both changes in demand for electricity by final consumers and also by changes in electricity supplied by all types of generator embedded in distribution networks, including rooftop PV and small/medium scale co-generation or tri-generation.

Demand in the true sense is electricity used by final consumers. The only consistent source of national data for this is the table of electrical energy consumption in the Energy Supply Association of Australia's (ESAA) statistical annual, Energy Gas Australia. This table separates sales to residential consumers from all other sales.

Because it is not affected by large, one-off events, such as closure of an aluminium smelter potline, residential demand, which accounts for about 30 per cent of total final demand for electricity, lends itself more readily to meaningful analysis of causal factors. The most recent issue of Electricity Gas Australia contains data up to 2009-10.

For over 20 years the Equipment Energy Efficiency (E3) program has been seeking to increase energy efficiency of common energy-consuming equipment such as refrigerators and light bulbs. This was initially through use of energy efficiency labelling alone, and also, for more than a dozen years, by the application of Minimum Energy Performance Standards (MEPS) to an increasingly wide range of equipment and appliances. Since its inception, the bulk of regulatory action undertaken through E3 has been directed towards residential electrical equipment.

A 2009 study for E3, estimating past energy demand reductions attributable to MEPS on residential appliances and equipment, and projecting future demand reductions, has been used to estimate the effect of these regulations on electricity consumption, shown on an index number basis in the chart below. 

The estimates in the study have been reduced by 10 per cent to remove WA and the NT. To this has been added the estimated effect on electricity demand in the NEM of the SRES, which encourages greater uptake of solar and heat pump water heaters, and the effect of the residential components of the Victorian and NSW Energy Efficiency Schemes, as estimated in a recent study by Green Energy Markets for the REC Agents' Association.

The chart above also shows an index of real electricity prices, calculated from CPI data. The numbers graphed are a simple non-weighted average of the index number for the electricity component of the CPI in each of the relevant capitals, i.e. excluding Perth and Darwin. Since residential electricity prices in each of the other six cities have shown a broadly similar path over the period since 2000, failure to use a volume weighted average will have very little effect on the combined index values.

It can be seen that the combined effect of these programs can account for the majority of the departure from trend in annual residential electricity consumption since around 2006. The programs have reduced residential electricity consumption by 10 per cent below the level which would have prevailed in their absence.

Also the chart below shows index numbers of the same data, but on a per capita basis, thereby eliminating the implicit contribution of population growth to growth in residential electricity consumption.

What this simple analysis suggests is that, contrary to the assertion in Minister Ferguson's speech, consumer response to higher prices did not greatly affect residential consumers' demand for electricity, at least up until June 2010.

The fact that demand for electricity (and gas) has grown only very slowly for the past five or more years is fundamentally inconsistent with the assumptions used by Treasury, and others, in their modelling for the Clean Energy Future legislation. Indeed Treasury had to make major revisions to its electricity demand forecasts in its 2011 modelling compared to what it forecast just three years previously.  

The fact that this curtailment in demand for electricity, at least in the residential sector, can largely be explained by the impact of regulations and not rising electricity prices has major implications for how we could reduce emissions at the lowest cost.

Hugh Saddler is Principal Consultant, Energy Strategies at pitt&sherry.