Bad demand forecasting to foisting higher electricity costs on customers.
Photo: Paul Jones
If any further evidence were needed to demonstrate how the
power companies, both state-owned and private, have been foisting
unnecessary price hikes on their customers, it can be found in the
industry's own energy forecasts.
Forecasts of demand for electricity have a significant impact
on the price of electricity. The higher the forecasts, the more money
earmarked by industry for network upgrades in order to cater for this
supposed increase in demand. In turn, the higher the financial returns
for the industry players.
Ironically, as the transmission and distribution companies
earn a regulated return on their assets, they have a perverse incentive
to
spend for the sake of spending.
Yet the great conundrum of the radical rise in Australian
electricity prices - up 70 per cent in six years and poised to ratchet
another 30 per cent higher this year and the next - is that consumer
demand has actually been falling, and falling for years.
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Actual consumption in the National Electricity Network has
been way out of whack with forecasts. For the past three years, the
industry has had to downgrade its forecasts, and by a considerable
margin. Still, they persist with forecasting large rises in energy
consumption, even in the face of a clear downtrend in actual demand -
and
huge price rises at the retail level to boot.
Not only has the electricity industry failed to recognise a
change of trend in total demand, but in peak summer demand and peak
winter demand too.
These changes have been driven by one over-riding factor:
price. Power bills are too high. Consumers are more mindful these days.
They switch off their lights and their appliances to save energy.
Climate change and green-mindedness play a part - as indeed the carbon
tax has played a minor role in the price rises - but the blunt
instrument of price has done the real work of inhibiting demand.
Forecasts are determined by three things: supply, demand and price.
Price is the key determinant. It is the one variable which is
quickly and easily identified and cannot be argued about. It shapes
consumer behavior.
The importance of energy prices, to the individual, to
business and to general economic growth cannot be overestimated. For the
low income consumer, we have reached the point of “energy starvation”,
to heat or to heat. The following graph from the Energy Users
Association of Australia shows we are leaving the rest of the developed
world for dead.
If the graphic above shows starkly just how prices in NSW
have escalated over the past three years – and other states mirror this
trend – the graphic below is the perfect counterpoint. It shows actual
demand, and just how wildly wrong the forecasts are.
(Source: IPART)
There are two possible conclusions as to how industry has got
it so wrong: one, gross incompetence and, two, wilful blindness. Given
the fundamental flaw in the industry structure, that is, the paradox of
the regulated returns inducing excess spending, the latter explanation
seems more plausible.
There has been some oblique acceptance of this forecasting
failure by industry, but hardly enough in light of the billions in
excess capital spent as a consequence. The Australian Energy Market
Operator (AEMO) gets around to mentioning it on page 23 of an
information paper on National Electricity Forecasting:
Energy price forecasts have also under-forecast rises in
electricity retail prices across the NEM, leading to a compounding
effect, with economic forecasts being too high, leading to electricity
forecasts being much higher than actual demand.
It would have been far more precise to have kicked off the booklet with the heading “National Forecasts Totally Hopeless”.
According to corporate analyst turned farmer, Bruce
Robertson, the power companies have been continually downgrading their
forecasts and haven't come close to getting them right even 12 months
out, let alone for the 10-year view required to efficiently allocate
capital for network upgrades and expansion.
Transgrid is the NSW transmission operator with whom
Robertson and a group of locals on the mid-north coast of NSW have been
having a stoush. As the network provider, it builds the enormous
coat-hangers and has been adding to its asset base big-time amid
speculation it could now be fattened up for sale by the state
government.
It is also proposing to build power lines through the Manning
Valley, a development plan Bruce Robertson says is completely
unnecessary as demand for power in the area is falling.
He points to the 2011 Electricity Statement of Opportunities
(ESOO) where Transgrid had to pull back its forecasts substantially.
“The real picture is that annual energy consumption for
2011–12 is 4.1 per cent lower than 2010–11, and 5.6 per cent lower than
was forecast in this 2011 Electricity Statement of Opportunities
(ESOO),” says Robinson.
“It got the trend wrong one year out. Further forecast annual
energy demand for 2012–13 is expected to fall by 2 per cent, which is
9.7 per cent lower than the 2011 ESOO estimates.”
Indeed average growth in annual energy demand for the
ten-year outlook period is now tipped to be 1.2 per cent, down from the
1.6 per cent forecast in the 2011 paper.
That is a big deal, a 25 per cent reduction in the long-term
growth rate in annual energy for NSW in just one forecasting period. In
only two years Transgrid and the AEMO forecasts for 2020 have been
revised down by 16 per cent.
Robertson further points out that maximum demand forecasts
are also highly flawed. Taking NSW again, key differences between the
2012 forecasts and the Transgrid 2011 summer maximum demand forecasts
are:
- The 2011–12 actual summer maximum demand was 1,690 MW or 12 per cent below Transgrid's forecast
- The 2012–13 forecast summer maximum demand is 2,060 MW or 13 per cent lower than the 2011 forecast
- Average growth in summer maximum demand for the 10-year outlook
period is now forecast to be 1.2 per cent, down from the 2 per cent
forecast in the 2011 ESOO
- The 2020-21 forecast for peak summer demand has been lowered by 18 per cent in 12 months
Neither is peak demand any longer the thorny issue it used to be.
Much has been said about peak summer demand being the problem
as the system cannot cope with the spikes in demand when everybody
switches their air-conditioning on during those blazing hot days.
It is peak demand which has been cited time and time again to justify over investment in the grid.
“This assertion has proven to be false as the industry now
has the same ten year growth rate in NSW for both peak and overall
energy demand,” says Robertson.
“The 10 year growth rate for peak summer demand in NSW is now 1.2 per cent per annum - the same as total energy demand.”
Transgrid no longer does the forecasts for NSW in the
Electricity Statement of Opportunities. The Australian Energy Market
Operator (AEMO) now does them in a similar document called the National
Electricity Forecasting Report.
AEMO is funded 40 per cent by the electricity industry and
its critics charge that, as the industry “planner” it is vulnerable to
regulatory “gaming” by the power companies keen to enhance their
regulated returns.
AEMO has failed to take account of price and the
consequential accelerating downtrend in demand, says Robertson. “They
are still forecasting a radical reversal of the trend.”
He argues the AEMO model does not fully take account of the dramatic and sustained rises in the price of electricity.
“The inputs to the model assume a fixed component to all consumers regardless of price," he said.
“We contest that this has not been the case since 2008 and
has led to forecasts being consistently too high. Forecasts also assume a
low elasticity of demand. This has compounded the error.”
A spokesman for AEMO spokesman said it used real prices in its forecasts as opposed to nominal prices which factored in the CPI.
“Rising electricity prices and low economic growth can
significantly affect electricity demand. This was the specific context
for including electricity prices in AEMO's inaugural National
Electricity Forecasting Report published in June,” said a statement.
“AEMO does assume a consumer response to price in the
National Electricity Forecasting Report published in June 2012. The NEFR
includes price elasticity information by state with each state based on
a particular model.”
As to its public/private structure, AEMO said it was “an
independent organisation working in the long-term interests of
Australian energy consumers by developing markets that offer affordable,
safe and reliable energy supplies.”