Demand changes and solar impact continue to shock experts

The rapid transformation of the electricity market – and the crucial role of household and commercial consumers – continue to confound the experts, including the energy market operator, which has announced yet another downgrade of its forecasts.

AEMO (Australian Energy Market Operator) last week quietly released its latest “Supply Demand” snapshot for February, with the biggest takeout being that demand continues to fall way below forecast, despite big revisions in the last few years.

In June, AEMO slashed its forecasts for the current fiscal year by 2.4 per cent. That came after a 10 per cent downgrade for 2012/13, which still overshot the result by 1.1 per cent.

In November, it noted that consumption in the first quarter of 2013/14 was 3.5 per cent lower than it had forecast in June – leading it to cut its overall forecast for the financial year by a further 1.3 per cent.

Now, it says, consumption in the October to January period was 1.5 per cent lower than even the November revision. It blamed this mostly on “variances in commercial and residential consumption” in November 2013, likely to have been caused by the increase in rooftop solar in the past year.

AEMO noted that 500MW of rooftop solar had been installed in the first 9 months of 2013 – although this was 30 per cent lower than a year earlier. But is seems – from this and other reports – that the combination of solar, energy efficient devices and bill awareness is causing a fundamental change in the consumption profile of residential and commercial users.

The South Australian network distributor recently reported, for instance, that household consumption had fallen 5.7 per cent in the latest year, despite an increase in population. EnergyAustralia reported an “unprecedented” fall in demand as it reported massive losses and the write downs in the valuations of several key generation assets.

“There has been a downward trend in consumption from the grid over the last five years, and current forecasts indicate that this decline will continue for the remainder of 2013–14,” AEMO writes.

“On a year-to-date basis, 2013–14 consumption to January 2014 is 2.3% lower than the same period in 2012–13. The recent announcement that Alcoa Australia’s Point Henry aluminium smelter will close in August 2014 will further reduce industrial consumption in Victoria by approximately 360 MW.”

The AEMO data shows that 2,400MW of baseload power – nearly 10 per cent of Australia’s baseload capacity (coal and gas) has been withdrawn from service – either temporarily or permanently.

The latest was the Swanbank baseload gas generator in Queensland, although as RenewEconomy reported last week, the Darling Downs baseload generator is now likely to be used only as a peaking plant in future, EnergyAustralia has written down the value of its Tallawarra baseload gas generator, and black coal generators – particularly in NSW – are operating at vastly reduced capacity factors.

The AEMO report is likely to be used as further grist to the mill from the appeal by generators to bring the renewable energy target to a stop, or at least to reduce it dramatically. But the focus on costs to consumers highlights the point that these appeals are entirely framed as an appeal to generators to protect their own investment.

The RET was designed to hasten the transition to clean energy, but no-one anticipated it would be quite so successful. That’s because no-one anticipated the rapid uptake of rooftop solar and the impact it would have on demand.

Here is the latest AEMO graph chronicling the decline in demand since 2008 – when assumptions of high demand growth were used as the launch-pad for much of the $45 billion investment in networks across the National Electricity Market. (This graph does not include the WA grid or other isolated grids in WA, NT, and Queensland).

Even Queensland, which is anticipating a 1GW rebound in demand when the massive LNG plants start to come online later this year, will not need any new capacity as early as thought.

AEMO said previously the state might need new capacity by 2019/20, but that is likely to be pushed out beyond at least another year. No other state has any new demand requirements within the 10-year modelling horizon.

Clean energy investors abandon Australia, head overseas

Clean energy and low-carbon investors are abandoning Australia as the new Federal government, and its conservative colleagues at state level, turn their interests and policies away from renewables and long-term abatement incentives.

Several key players in the clean energy finance industry have told the Senate hearings into the proposed Direct Action policy that investors are looking to Europe, the US and some South American countries to find low-carbon opportunities.

“My members are looking at the United Kingdom, Ireland, the United States, France and some South American countries as having more stable investment environments for low-carbon opportunities,” said Nathan Fabian, the head of the Investor Group on Climate Change.

“Direct action is not an investment grade policy,” he said, noting that investors viewed it more like a short-term grants scheme. Banks were likely to take a similar view.

He also proposed review of the RET “appears to be another very clear signal that Australia will not be a market for low-carbon investing for the next few years.”

Tim Buckley, a former Citigroup analyst, funds manager, and now with the US-based Institute for Energy Economics and Financial Analysis, said the Australian clean energy industry is regressing because of the lack of clarity on policy.

“We are worse than stalling; we are actually investing in assets that I think will become stranded as a result. Internationally, companies and economies are building industry capacity to transition for the long term. We should be building capacity as well and we are not doing so.”

He said Australia was currently missing out on hundreds of billions of dollars that being invested every year in renewables, in energy efficiency and in development of these new technologies, and the hundreds of thousands of jobs being created in China, in Germany and in America.

Numerous other parties have dismissed the proposed emissions reduction fund as “unfinancable” – mostly because it offers a maximum 5-year investment horizon. That reflects the view of most people, and possibly even the government, that Direct Action is not a long-term policy position, just part of a short-term political manoeuvre that has helped deliver power to the Conservatives.

Still, it is the situation that is facing investors – be they developers, financiers, bankers or infrastructure investors – in Australia in the coming year.

Tim Buckley, a former Citigroup analyst, funds manager, and now with the US-based Institute for Energy Economics and Financial Analysis, said the Australian clean energy industry is regressing because of the lack of clarity on policy.

“We are worse than stalling; we are actually investing in assets that I think will become stranded as a result. Internationally, companies and economies are building industry capacity to transition for the long term. We should be building capacity as well and we are not doing so.”

He said Australia was currently missing out on hundreds of billions of dollars that being invested every year in renewables, in energy efficiency and in development of these new technologies, and the hundreds of thousands of jobs being created in China, in Germany and in America.

Players in the renewables industry say the sector is facing its biggest crisis in a decade, when the last Coalition government brought a close to the then mandatory renewable energy target , causing new manufacturing facilities to close, international groups to withdraw, and local developers such as Pacific Hydro and Roaring Forties to move the bulk of the operations overseas.

The assessment by Fabian and Buckley is consistent with frustrations expressed privately by international investors, who have seen policies on hold, the price of renewable energy certificates fall by nearly half, the carbon price subject to repeal, and a proposed replacement that holds no interest for financiers.

One investor said recently there is a complete lack of liquidity in the market, because everyone is in “wait and watch” mode. Banks are not able to price the forward market, and the outlook looks poor.

Its ironic, one noted, because the market for conventional generation is dead, but there is currently little to interest investors in clean technology, particularly new emerging technologies. The ACT auction program, part of its plan to seek 90 per cent renewables by 2020, is the one exception. But while welcome and of interest, it is relatively small-scale in a global or national context.

Buckley said Australia appears to be working on the premise that the world is going to do nothing on climate change.

“That is a flawed premise, he said. “We are investing tens of billions of dollars building new assets to promote fossil fuels, be it in LNG, coal, the Galilee in particular, Abbot Point port infrastructure. The investment is huge and I think it is going to end up leaving us with stranded assets because we are missing the point that China, India, America and Germany are moving full steam towards a low-carbon economy.

“They are not going to need our fossil fuels in 20 or 30 years time, and we are building assets with 50-year lives. To build a coal port in the middle of the Great Barrier Reef with a 50-year life means we are effectively becoming a price taker for fossil fuels. Those assets will be stranded and we will see very, very significant write-downs on the back of them. “

Fabian said the scenario that Buckley cited could begin to “bite quite hard” within the next decade. “That compromises our investors, compromises the beneficiaries and workers and compromises the pensions that we guard. That is the essential policy risk that we are trying to address with a long-term framework.

Fabian said that the carbon price, the renewable energy target, and institutions such as ARENA and the CEFC play critical roles in assisting and building the capacity of the Australian financial community in low-carbon investing.

“This is a strategic question for Australia in terms of what competency we are going to have in our financial markets,” he said. “We need to move markets to places where they are not quite sure they should be yet because the policy signals are not clear enough. We know that cannot last.

“Without a central, long-term policy framework, there is significant uncertainty for investors in all assets – emissions-intensive, emissions- reducing technologies and low-carbon activities alike. The consequence of this is that the cost of private capital for achieving emissions reductions would increase and the cost of achieving those reductions would also increase.”