Power prices across NSW are set to climb by an average of 18 per cent.

Market forces do their work - higher prices turn off consumers. Photo: Paul Jones

Electricity prices and the power sector have probably never been more in the news. And no wonder.

Households have been slugged by a 50 per cent surge in power prices over the past five years. The arrival of the carbon price in the last few months has intensified the debate and added to the bill shock.

A swarm of government reports – an Energy White Paper, the review of the 20 per cent renewable energy target, and the Senate inquiry into electricity prices - will land in coming weeks, flaring arguments over who is to blame. Analysts will bicker over whether recommended reforms curb or exacerbate industry excesses.

Complicating the debate is a development that has caught the industry completely off guard - the amount of electricity the country uses stopped growing in 2009 and is now shrinking. And the industry and regulators seem very much in the dark about what’s going on.

Brendan John, the bureaucrat responsible for drawing up the Energy White Paper, was asked at the Senate inquiry whether his department had done any analysis of the drop in demand and its relationship to the price spike. His simple response: “No we have not.”

Matthew Warren, the head of industry lobby group the Energy Supply Association of Australia, could shed little light.
“We are happy to discuss the drivers of the fall in aggregate demand but the truth is they are unclear,” Mr Warren told the senators. “There is no data in Australia.”

“No-one anticipated this decline in aggregate demand.Until we have a handle on that we do not know where that is likely to go or whether it is likely to keep going in the future.”

The National Generators Forum, another lobby group, weren’t much help either. They said they struggled to get access to data.

Private information

The paucity of information – even for the government – owes much to the privatisation of part of the industry, said Alan Pears, an energy researcher at the RMIT.

“The networks own it and won’t give it to them,” said Mr Pears, citing companies such as SPAusNet, Jemena and CitiPower. “The first thing that goes in a competitive market is free access to information.”

The Australian Energy Market Operator, the body charged with managing the eastern Australian market, this year finally gave up relying on industry-supplied estimates for demand projections. The result: a slashing in the expected demand in 2020 by 10 per cent, or about 20,000 gigawatt-hours, that some analysts say may have to be lower further.

“It’s quite extraordinary what’s happened” to demand, said Professor Mike Sandiford, director of the Melbourne Energy Institute. “The process is accelerating.”

Demand slump

The process itself is clear enough.

Higher prices are prompting people to use less power, whether at home or at work. The higher dollar has forced some energy-intensive manufacturers to reduce output or shift abroad.

Solar panels sprouting on roofs at the pace of about 300,000 homes a year and more insulation batts underneath them are also curbing demand, particularly at peak times. Buildings are also much more energy efficient.

Tony Wood, energy program director at the Grattan Institute, said nobody had done serious modelling on the relative contribution of those factors to the demand slump. And some of those shifts may be temporary, particularly if a hot summer sets in, prompting millions of air-conditioners to be turned on.

The intense interest in electricity prices, though, has already affected behaviour, he said.

“Just the sheer publicity and the forward views that prices are going up, means that individuals  and particularly commercial organisations see greater value now in implementing programs or policies that could increase their energy efficiency,” Mr Wood said.

The arrival of less power-hungry appliances is also playing a part, said Professor Ray Wills, an advisor to the Sustainable Energy Association of Australia.

For instance, he notes, consumers were shifting from desktop computers, which use about $80 worth of power a year, to laptops, which consume about a quarter as much. Now tablet computers are fast replacing both, and use just $4 worth of power: “The exciting thing is those devices are coming with storage - they don’t need 24/7 power.”

That’s more bad news for the power industry. According to the Productivity Commission on electricity network regulations out yesterday, less than 40 hours of peak electricity consumption – or less than 1 per cent of the time – delivers about 25 per cent of annual household electricity bills.

The big incumbents have never expected the market to send such a signal 

Earlier this week, Queenland's Ergon Energy announced 500 job cuts while EnergyAustralia's Yallourn power station halted output at one of its four units in response to a 10 per cent demand drop from average highs of several years ago.

Comparison of the NEM-wide energy projections (low, medium and high scenarios)

National Electricity Market demand projections have been slashed.

In short, the market is doing its job, with higher prices resulting in a demand response. The signal for suppliers is also clear, said Professor Sandiford: shutter excess generation capacity.

“The big incumbents have never expected the market to send such a signal.”