A surprising Q&A – analysis of Victorian Electricity Consumption and Demand from 2004 to May 2012

by CarbonetiX Director Bruce Rowse

Background

The Australian Energy Market Operator (AEMO) publishes half hour data for each state in the National Electricity market showing electrical demand in megawatts (MW) and the recommended generator pricing.

Electrical demand is the electrical load on the network at any given time. Electricity consumption is the amount of energy used over a period of time. By way of example, consider a power board which supplies a 15 watt desk lamp and a 100 watt computer. When both the lamp and computer are on the electrical demand on the power-board is 115 watts. If both the computer and lamp were on for one hour, the electricity consumption would be 115 watt-hours. If the computer was then switched off, and the lamp remained on for another hour, electricity consumption over that hour would be 15 watt-hours. Over the two hours the total electricity consumption would be 130 watt hours and the peak electrical demand 115 watts.

The AEMO data for Victoria is summarised, discussed and presented in graphs below, along with temperature data from the Bureau of Meteorology’s Melbourne weather station where appropriate (data from 2005).

Question 1 – Are we winning the war to reduce carbon emissions by reducing electricity consumption?

The case for reducing carbon emissions is clearly stated and supported by 97% of global climate scientists. The need for urgent action is clearly presented by eminent scientific experts such as Dr. James Hansen.

And yes, in Victoria, it appears as though electricity consumption is starting to go down!

Consumption in 2011 was the lowest in six years.

Electricity consumption in 2011 was 4% less than in 2008.

Possible reasons for why electricity consumption is dropping are:

• Minimum Energy Performance standards (MEPS) for appliances.
• Minimum design thermal performance standards for new homes in Victoria since 2004 – the Victorian Home Energy Rating system.
• The phasing out of electric hot water heaters (where gas is available) in new dwellings.
• Increase in household solar electricity generation since 2009 (which isn’t counted in the market consumption figures).
• Insulation in homes under the economic stimulus package.
• The state government Victorian Energy Efficiency (VEET) scheme since 2009, providing incentives for the installation of items such as energy saving light bulbs and low flow showerheads.
• Greenstar and NABERS ratings for commercial buildings, particularly office buildings but more recently expanding to shopping centres and hotels.
• State and local government taking action to reduce their energy consumption and emissions.
• Business taking action to reduce its emissions, particularly large business under either the State EREP scheme or national EEO scheme.
• The global financial crisis (GFC).
• Voluntary action by individuals and businesses to reduce their electricity use.

As can be seen by the list above, there have been multiple policies implemented by government that have contributed to this drop in electricity consumption.

Since 2002 pretty well all I’ve done is energy efficiency in existing buildings, and CarbonetiX has helped many organisations cut their electricity consumption. So it rationally makes sense to me that electricity use is down, as I’ve been one of many contributing to this.

However at times it has felt a somewhat futile task. So looking at the aggregate data above my emotional response is “Yippee – this is FANTASTIC – I feel as though I’m actually making a useful contribution”.  And those who have fought to bring in legislation that has driven much of this abatement should be commended.

It is s hard to know what the impact of the GFC has been. However I am cautiously optimistic that we have turned a corner and that when the economy eventually  picks up – and consumption continues to drop the beneficial impact of the many measures implemented to reduce electricity consumption will become clearer.

Q 1.b. Does the extra rainfall and cooler weather account for some of this change?

Probably not. The average temperature hasn’t changed much over those years. It was 1% warmer in 2011 than 2008.

Q2 Why are electricity prices rising?

Excellent question!

Electricity prices are rising, particularly residential. For example, my February 2009 bill was at a tariff rate of 13.24 cents/kWh. When I put in a solar PV system I was then moved to a off-peak/peak tariff. In February 2012 my off-peak charge was 11.5 cents/kWh and peak charge 30.34 cents/kW. Over three years my average tariff increased from 13.24 to 20.47 cent/kW, an increase of 55%.

Two arguments have been put forward to explain electricity price rises over recent years:

• Levies to cover the cost of renewable energy investments or state based energy efficiency schemes.
• Increases in the cost of distributing energy, due to rising peak demand, and the need for network investment.

The impact of the levies has been relatively small according to most commentators. The charges aren’t listed on residential bills. For large market consumers, for whom we often undertake energy audits, these charges are spelt out on the bill, as follows (2012 bills):

• SRES (Small Renewable Energy Scheme) charge. This is to support subsidies for residential solar electric and solar hot water systems.
• VEET (Victorian Energy Efficiency Target) charge. This is to support the subsidising of items such as low flow showerheads etc.
• LRET (Large Renewable Energy Target) charge. This is to support the uptake of large renewable energy generation, such as wind farms.

Randomly selecting three 2012 client bills shows that these charges account from between 9.1% to 14.7% of the bill value.

Network investment is said to be the main cause for price increases, with the electricity distribution businesses needing to upgrade their infrastructure to cope with increased peak demand. Peak demand is the highest electrical load on the electrical network in the year, which will typically take place in the afternoon on a very hot day. Air conditioners are becoming more prevalent, and it makes sense that in a home that previously had one air conditioner, and now has two, that on a hot afternoon the electrical demand of the household, with both air conditioners on, will be higher than it was in the past.

The electricity distribution businesses say that, with peak demand on the rise, they need to undertake substantial investment to their networks to cope with the expected increase in load. Which makes sense – if a suburb is being supplied by a transformer that can cope with a peak load of 100 MW, and the peak load now on a hot summer afternoon is 90MW and is growing, there is a very strong case for upgrading the transformer. Let’s say the transformer has an expected life of 30 years, it then makes economic sense to size the transformer for the expected load in 30 years. And as peak demand is going up, that could mean that the 100 MW transformer is replaced by say a 200 MW transformer – an expensive upgrade, paid for by increasing the network charges.

Q2b So peak demand must be going up then?

It was – but not lately.

Peak demand generally occurs in the first three months of the year. In fact since 2004 peak demand has always occurred in either January, February or March.

Demand peaked in 2009, but then has dropped. Presuming that we have already seen the 2012 peak, then peak demand in 2012 will be 13% lower than in 2009.

Q2b Surely then our maximum temperatures must have been lower in recent years?

Yes, our maximum temperatures have been lower.

In many years the maximum temperature also occurs in the first three months. If this is the case in 2012, the maximum temperature for 2012 will be 14% below that of 2009.

So the cooler maximum temperatures may explain the lowered peak demand.

Q2c So what you are saying is that because we haven’t had days of very hot weather in the last few years peak demand has dropped, but if we get more very hot days this will show that peak demand is actually increasing?

Yes, and no. Yes, peak demand has dropped because its been cooler. But this may not be all that is reducing peak demand. If  we have more hot days – for example another day at 46^OC – peak demand may well be lower than it was in 2009.

The scattergram above shows the clear trend of increasing demand to 2009. For example in 2008 the maximum temperature is similar to 2007, but demand is much higher.

But look at 2011 and the estimate for 2012 (assuming peak demand and peak temperature occur in the first 3 months of the year). With similar maximum temperatures peak demand in 2012 could be quite a bit lower than in 2011. This indicates that in fact peak demand may be dropping in comparison with the high of 2009.

What might be causing demand to lower? Well, many of the reasons that are likely causing consumption to lower also lower peak demand.

• Minimum Energy Performance standards for appliances. For example, your new flat screen TV may have half the electrical load of the one you purchased in 2007.
• Minimum design thermal performance standards for new homes since 2004. And in 2012 there are now Building Code of Australia requirements that restrict residential lighting power density to 5 watts/m².  This will effectively spell the death of 50 watt halogen downlights and their replacement with 10 to 15 watt LED downlights.
• Increase in household solar generation since 2009. Note that generally a solar system will be producing electricity at 4 to 5 pm on a hot summers day when the peak demand typically occurs . And how many solar PV systems are in your street now compared with 2008?
• Insulation in homes under the economic stimulus package. With a well insulated home you may decide you don’t now need that extra air conditioner.
• The state government Victorian Energy Efficiency (VEET) scheme since 2009. A lot of 60 watt incandescent light bulbs have been replaced with 15 or 18 watt compact fluorescent lamps under this scheme.
• State and local government taking action to reduce their energy consumption and emissions. Many of our customers for example have undertaken lighting upgrades that have cut their lighting load by 20% to 50%.
• Business taking action to reduce its emissions, particularly large business under either the State EREP scheme or national EEO scheme.

Q2d – Maybe then the electricity price rises are due to generation costs going up?

No. Average generation prices for electricity have dropped a lot from the 2007 highs.

In fact in 2011 the generation RRP was below that of 2004. And for the commercial energy consumers I deal with, the drop in generation charges since 2007 are worth more than the extra renewable energy charges.

Based on the average RRP price and annual consumption figures, generator income has actually dropped from $3,286m in 2007 to $1,473m in 2011. That’s right – generator income has possibly more than halved! Now some electricity purchases may be off the market, so it’s a little hard to know what has happened to generator income. But clearly the trend is down.

Q3 So if electricity consumption is down, peak demand doesn’t appear to be growing and may be dropping, and generators are earning less, why have electricity prices increased by much more than the new renewable energy charges?

Perhaps you might like to ask your retailer or local electricity distributor this question.

I’m really pleased to see Victoria’s energy  consumption dropping as it reduces greenhouse gas emissions. And I believe that it is appropriate for renewable energy levies to be included on electricity bills to help enable this.

And if high electricity bills encourage energy conservation and the switch to renewables I’m all for that too.

In fact the challenge of climate change is such that I would support even more increases to the cost of electricity, knowing that this may drive some consumers to use less/switch to renewable, but also on the basis that  extra revenue was invested to further reduce Australia’s carbon footprint.

But at the moment it appears as though there is some serious gouging going on. Consumption is down, peak demand doesn’t seem to be increasing, generation charges are down, carbon levies are relatively low, yet prices, particularly residential prices, are well up.

Now the rapid increase in peak demand up to 2009 would certainly have been a very concerning trend to distribution businesses and the energy regulator, and resulted in predictions that massive investment in network infrastructure was required. But it appears as through the trend has been broken. We appear to now be in a new paradigm. And that means thinking differently. The thinking of 2009 is no longer appropriate.

Some of the investment in upgrading network infrastructure – either planned or now happening – may not be necessary.

Q4 So where are we heading and what are the implications of unreasonably high electricity prices?

The introduction of the carbon price on 1 July will push up electricity bills further, and there will likely be a continuation of blaming electricity price rises largely on carbon pricing. However, as shown above, this is not the cause. The main cause of electricity price increases is extra charges being levied by distributors and retailers, and, on the basis of trends over the last 3 to 4 years, these charges appear to be unreasonable.

As technological improvements continue to drive down the cost of solar systems and energy using devices such as lights (ie LED lighting), it is likely that there will continue to be a reduction in electricity consumption and peak demand in Victoria.

Suddenly we have entered a new paradigm. Demand and consumption can no longer be expected to increase.

Retailers and distributors will no doubt try to reverse the impact that lowering consumption and flat or decreasing demand has on their income. Efforts are and will be made to block embedded distributed generation (ie home solar PV), for example by lobbying for feed-in tariffs that are based on the cost of large centralised generation, and ignoring the reduced distribution costs where electricity is produced where it is consumed.

Government has largely been largely concerned with the reliability of the electrical network, and may continue to respond to distributor modelling showing  increasing demand, with any reduction in demand possibly blamed on temporary economic setbacks such as the GFC. This would lead to government continuing to authorise increased network charges to cover the costs of augmenting network infrastructure.  Infrastructure which may never be needed.

Under the new paradigm – electricity consumption down, and peak demand flat or even declining, the old consensus no longer holds true. And in light of the new paradigm, much of the electricity price increases since 2009 appears unwarranted.

The problem with the unwarranted increase in charges by the retailers and distributors is that it essentially negates the economic benefits of energy efficiency and distributed generation. This is both harmful from an economic perspective, and damaging from an environmental perspective, as measures that reduce carbon emissions are wrongly blamed for large energy price increases.

In effect much of the benefit of energy efficiency is being appropriated by the electricity distributors and retailers. This is perverse. For example, a company may invest to reduce its electricity consumption, but still face increases in its electricity bill. The investment in energy efficiency actually hasn’t saved the company money, it has simply reduced the amount its electricity bill has increased. This may make the company more competitive locally, but if it is a manufacturer that exports does nothing to improve its international competitiveness.

For example one of our clients invested to reduce its electricity consumption by 34% between 2006 and 2011. Yet its electricity costs in 2011 were 6% higher than in 2006.

The bulk of the return on the company’s investment in energy efficiency has in effect been robbed by the distribution business and retailer supplying the company.

Q5 What can be done?

A key argument for policies that support energy efficiency and renewable generation is that it delivers a net benefit to the economy. Energy efficiency delivers a more immediate benefit, with the investment in renewables providing longer term benefit  to the Australian economy. But in actual fact much of these immediate and long term benefits in Victoria are now not accruing to those making the investments (essentially all Victorian electricity users) but are going to a much smaller group, the shareholders in the retail and distribution businesses.

So there is therefore a need at the political level to recognise the new paradigm and take on the vested interests that have unreasonably increased electricity charges, and indeed to claw back the unjustified price increases already in place.  Political commitment has driven the introduction of environmental levies that are designed to contribute to a slowing of climate change and to provide long term economic advantage. We now need political commitment and will to ensure that the benefit flows through to all Australians, and not just to a select few shareholders.

The carbon price has now come in, and this may see even more rorting, although ASIC has issued stern warnings. But, based on the trends over the last 3 to 4 years in Victoria, we already have unreasonable price increases. Action should be taken to ensure we all reap the benefit of policies already in place that are designed to reduce carbon emissions. Governments have fought to bring in measures to reduce the use of coal powered electricity and associated carbon emissions. They now need to fight to capture the economic benefits of this – which are possibly appearing earlier than expected. I would argue that the benefits should be captured to accelerate the transition to a low carbon economy and provide long term value to all.