Why is electricity consumption in Australia falling?

For more than a century, the quantity of electricity consumed in Australia was more than the year before. That all changed in 2010, as explained by Hugh Saddler, Principal Consultant, Energy Strategies, pitt&sherry, in The Australia Institute report ‘Power down: Why is electricity consumption decreasing?’

In the past three years, the amount of electricity used has fallen. The electricity consumption decrease has been relatively large in the National Electricity Market (NEM), which covers the five eastern states and the ACT, and in Western Australia. NEM demand in the 2013 financial year was almost eight terawatt hours (TWh), or 4.3%, lower than in the peak year of 2009.

If electricity consumption in the NEM had continued to grow after 2005 at the same rate as it had for the previous 20 years, consumption would have been 37 TWh higher in 2013 than it actually was. This difference is equal to almost 5000 megawatts (MW) of coal-fired generation capacity, almost the combined capacity of the Bayswater and Eraring power stations in NSW.

The three largest factors contributing to the dramatic changes in demand for electricity are: the impact of energy-efficiency programs; structural change in the economy away from electricity-intensive industries; and the response of consumers to higher electricity prices since 2010.

Energy efficiency

Australia’s first regulatory energy-efficiency measures were introduced in the late 1990s in the form of Mandatory Energy Performance Standards (MEPS) for refrigerators and freezers. Since then, MEPS have been extended to a range of residential and commercial appliances and equipment, while analogous energy-efficiency requirements have been applied to new buildings.

It is estimated these measures have, in total, reduced demand for electricity in 2013 by over 13 TWh, or 37% of the total shortfall. The appliance and equipment MEPS account for most of this reduction.

Between October 2011 and September 2012, three major NSW-based industrial electricity users (Port Kembla steelworks, Kurri Kurri aluminium smelter and Clyde oil refinery) were partially or completely shut down. These closures removed about 3.6 TWh of annual electricity consumption from the NEM, about 10% of the 37 TWh shortfall. However, detailed analysis of National Greenhouse and Energy Reporting System (NGERS) annual reports of the 100 largest electricity-using businesses shows that electricity consumption from 2010-2012 was relatively constant for all companies other than those linked to the above closures.

Meanwhile, ABS data of value added by each economic sector in Australia conveys a similar picture; that manufacturing output in real terms has been fairly constant. According to Dr Saddler, this means “manufacturing is gradually declining as a share of the total economy, but is not markedly declining in absolute terms”.

Historically, Australian output of primary metals, such as aluminium and other electricity-intensive commodities, has grown steadily. However, since 2006, there has been no growth in output; and in recent years, absolute decline.

The lack of growth in output of electricity-intensive commodities is contributing to the lack of demand for electricity, amounting to about 14% of the 37 TWh shortfall. In contrast, declining manufacturing output is not causing an absolute fall in demand. The growth in output from rooftop photovoltaics and other small, distributed generators has contributed about 13% of the shortfall.

Consumer response

From 2010 to 2013, a widening gap between the modelled demand for electricity services and the historical projected demand emerges. This gap can be accounted for by introducing consumer response to higher electricity prices to the model, explaining 19% of the demand gap in 2013.

Consumers responded abruptly to the higher prices in 2010. In the same year, the possible effect of a carbon price on electricity prices became a national issue and increasing political attention was also paid to the rapid price increases that were taking place, mainly because of higher network costs.

“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. When they did, they responded by reducing their consumption, so as to limit what they were spending, and the outcome showed up strongly in the total electricity demand figures from 2011 on,” said Dr Saddler.

Evidence to support the latter contention is found in the latest ABS Energy Account, from which it can be calculated that real average annual household expenditure on electricity grew strongly until 2009-10, since when it has barely increased despite continuing increases in electricity prices.

“It appears that residential electricity consumers have managed to almost completely offset the effect of higher prices on their household budgets by reducing consumption,” said Dr Saddler.

Changing weather

It has been suggested that Australia’s summer weather has been milder over the past few years. Therefore, less electricity was being consumed for air conditioning, causing a reduction in total demand.

Analysis of all NEM states over each summer and winter from 2005 to 2013 showed that the relationship between seasonal electricity consumption and the severity of seasonal weather has followed the same trend as total electricity demand.

Comparable seasonal weather over the past three or four years has been associated with progressively lower electricity. Milder weather may affect year-on-year changes in consumption, but it is not driving the longer term downward trend in demand.

The logical conclusion of the complete findings is that although growth in electricity consumption may resume in the next few years, it will be at much lower annual rates than those that prevailed for more than a century up to about 2004.