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AEMO slashes energy demand forecasts by nearly 10 per cent

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The energy market game-changer, falling demand: Developers and network operators can tear up their business plans. And so can some renewable hopefuls too – the era of solar PV and price-conscious consumers is here.

For decades the greatest virtue of the electricity market was its predictability. All planners had to do was plug in the forecasts for GDP growth, and demand could be expected to respond accordingly. Building new generation and poles and wires in such a regulated environment was comparatively simple, if a little dull.

How that has changed. Now, thanks to new technologies, the factoring of environmental factors, and a dramatic consumer response to rising prices, the electricity market is being turned on its head – or at least it’s head has been turned. A whole range of new factors, mostly the installation of air conditioners and rooftop PV beyond the front door of the home – normally beyond the view and interest of the market operators – has made this a wildly unpredictable market. The electricity industry suddenly got interesting, and difficult to manage.

The best reflection of this is in the ability of industry bodies such as the Australian Energy Market Operator to predict future demand. Since the 1960s, this has been relatively easy, but in the last couple of years, its prediction, and those of the industry’s – have been trashed by the “significant” changes it says are occurring in the market. Today, it released a report that conceded demand for 2011/12 was 5.7 per cent below forecast of just a year ago. Its updated predictions for 2012/13 are now 8.8 per cent below the forecast made 12 months ago.

In some states, such as South Australia, where there has been a greater penetration of rooftop solar PV than any other state, and a much higher pentration of wind, its demand forecasts have been cut by 12.2 per cent. In Queensland, another strong solar PV state, the variation is 10 per cent

This is an extraordinary development for an industry that has been raised on regulated returns and predictable outcomes. AEMO hasn’t completed its statement of opportunities – the complexity of the new market means that for the first time these two exercises have been separated – but AEMO boss Matt Zema says any plans for new generation will need to be deferred. And some generators and network operators may be wondering if recent investments will prove to be wise.

How did this happen? Zema says through changes in technology, manufacturing, and the “social fabric”. This is the third consecutive year of a demand downturn – the first two were blamed on the GFC and floods. “But when we copped a third year, we realized that this is more than just a once off, this is about significant change in our energy demand,” Zema told RenewEconomy in an interview.

“This is the first time we can find that even with strong GDP growth there has not been an increase in energy consumption. We are seeing quite a shift.” And, he says, a lot of that is happening at consumer level. “People are saying yes I can have a good standard of living but do I need four plasma TVs all on standby? People are conscious about how much they are paying for energy.”

According to AEMO, the principal contributing factors in percentage terms to the 5.7 per cent variation in forecasts were a decline in large industrial loads (3 per cent), mild weather (one per cent), consumer response to price rises and energy efficiency measures (one per cent), and the impact of solar PV (0.7 per cent).

This latter – solar PV –will remain, with changes in consumption patterns, the biggest and the most constant swing factor. In 2011/12, AEMO estimates that solar PV contributed 1,702 gigwatt hours, or 0.9 per cent of estimated annual energy production. This is expected to jump nearly 50 per cent to 2,473GWh in 2012/13, or 1.3 per cent of annual energy, and to 7,558GWh, or 3.4 per cent of total energy, under its medium growth scenario, by 2021/12. It could well be much more.

“The forecast increases in rooftop solar photovoltaic system allocations are expected to offset a large amount of electricity that would have otherwise been provided by the NEM,” AEMO says.

And this is the key for generators – both incumbent and aspiring coal and gas generators, and for renewable energy players.

This graph below shows how AEO’s forecasts for 2021/22 have changed in a matter of 12 months. The difference between the high growth forecast of last year and the low growth forecast from this year is 30 per cent. The median changes are well over 10 per cent. The market is not even expected to return to 2009 levels until 2017.

This has considerable implications for incumbent generators. Lower demand has already had a biting impact on wholesale electricity prices, and profit margins, for the largest generators. When Origin Energy ‘s Grant King told RenewEconomy in February there was no need for new baseload before the end of the decade, that was based around Origin Energy’s forecasts of around 250 terrawatt hours.

AEMO’s latest “highest” forecast is for less than 240TWh in 2020, its median forecast is for less than 220TWh and it says it could be as low as 200TWh – a full 20 per cent below Origin’s estimate of just four months ago.

That in turn, will increase the stakes of the review into the Renewable Energy Target being undertaken by the newly created Climate Change Authority later this year. In May, King argued that the RET should reflect actual demand rather than a fixed amount of renewable energy production (a total of 41,000TWh to add to the pre-existing mostly hydro capacity of 15,000TWh).

Even though Origin Energy had previously argued for a fixed target, for the sake of certainty, it now argues that this would represent nearly 25 per cent if including solar PV. That number jumps to nearly 30 per cent under AEMO’s revised forecasts. You can be sure that Origin Energy and others will be arguing their case.

But if it was morphed to an actual percentage, then the new build renewables could fall by more than half – a disaster for the wind and solar industries in this country. You can be sure that the renewables industry will be arguing their case too, if they can manage that with one effective voice.

 

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  • Bro

    Another picture worth kilos of words. Despite a clear downward trend for the last few years ALL projected scenarios are for increases and for the short-medium term at that.

    Makes one wonder, given that the experts “know”that electricity demand always goes up how certain we can be that “the stock market always goes up over the long-term”?

  • http://thisnessofathat.blogspot.com.au/ Gillian

    Yes, Bro, that struck me too. Even the Low forecast expects an increase.

    It’s true that population continues to increase, and GDP continues to increase, but wouldn’t continuing efficiency and solar PV offset some of that? And do we expect industrial demand to continue to rise? Surely carbon pricing will motivate greater efficiency there?

    Australia has a lot of slack in the system and has a L-O-N-G way to go before it matches Germany’s electricity consumption per capita. A cold country with a strong industrial base, German per capita electricity consumption is about two-thirds that of Australia.

    Solar’s still in its infancy, watch it grow.

    http://bit.ly/N9oFYA

    I fully expect AEMO’s next forecast will be revised downward again.

    • Bro

      Why should it only offset some of it, Gillian? That seems to be the AEMA assumption. Population and GDP have been increasing since the GFC but electricity demand has fallen rather than just been partially offset.

  • http://www.global-roam.com Shayne Whitehouse

    Seems like they are trying to hit a moving target but at least the target is moving in the right direction.

    http://www.acoss.org.au/images/…/energy%20110913%20-%20pierce.pdf is by the Chairman of the AEMC last year and there demand was expected to increase by 25%. Given what we know now I wonder what the implications are for investment in both generation and transmission.

  • Chris Fraser

    With improvements in efficiency, I can only hope 2007 was the last year of the energy consuming CPI beast. How long before grid designers understand the current costs of poles and wires in tarrifs is forcing down demand (-1%), and will this be enough to avoid gold plating the grid ? I’m not against improving grid integrity, but many of us are now more aware of over capitalising. I consider home storage will be a significant factor in future demand and time of use patterns which will short circuit grid overinvestment.

  • http://heliocurrent.com kyle

    Nice: This one’s going on my facebook. Terrific the way your site zooms in and out from Australian to international topics from post to post. Very fun.

    You see the same thing I do: parity rushing up to meet the ecological demand. I had taken attention away industry metrics for a several years to care for a loved one. Upon refocusing in late 2011, I was shocked.

    As I perceive it: long-term impact should be continuing drops in energy prices through many decades. For example: Even though chips have gotten things down to $1 per watt, there is still lots of room for interesting things to occur: An eventual shift to films and improvements in technologies like integrated micro-inverters should eventually compress installation costs; and true DIY is not completely inconceivable, either.

    Economic implications are broad! As a U.S. citizen I’ve learned to appreciate that much of our 20th century explosive growth was on the back of being the first country with loads of cheap oil and then continued with our access to cheap coal….Look at what THIS cheapening energy source, solar, does to the global economy over many decades. This is a very very good thing. It opens the door to many more millions of small businesses by lowering their costs.

  • Ben

    Just after some clarification with respect to solar PV:

    0.7% of the drop in forecast demand is attributed to the impact of solar PV (I’m assuming this is small-scale rooftop installations?). I’m wondering how this is “seen” by the market. For example, it would appear that AEMO treats small-scale PV penetration as an overall reduction in demand, but in reality this demand is still there but being supplied from decentralised sources (i.e.: not from the grid). Is this correct?

    Thanks

    • Giles Parkinson

      Yep, pretty much correct. It was unseen until it became big enough to have an impact – so when the installation doubles and trebles and get to the same penetration as South Australia (nearly three per cent, almost equal with Germany), it becomes significant. And then when it accounts for 10 per cent of demand that would otherwise be sourced from the network, it is really significant, particularly as it all comes in day time hours, where in Germany it shows tat solar can account for between 30 and 50 per cent of demand at certain times.

      • Ben

        Thanks Giles