Our costly obsession with air-con

Green energy schemes may be the easy targets to blame as the scapegoats for rising electricity prices – but they are the wrong ones.

Two new surveys released last week made this much clear: the rush to install air conditioning to cope with the increasing number of hot days is the biggest single contributor to rising electricity costs in Australia, and green energy schemes play an extremely small role.

But while we are spending billions on network upgrades that we use for only a few days a year, we’re not yet smart enough to spend money on measures that could avoid some of that spending and give us a three fold return on our investment.

The Australia Energy Market Commission’s final report into future electricity price rises out to 2012/13 was released on Friday, and it fingered rising distribution and transmission network costs – a combination of soaring peak demand, ageing infrastructure and higher capital costs – for half of the anticipated 30 per cent increase in average retail electricity prices over the next three years.

AEMC says the increasing use of air conditioners is expected to push peak demand up by more than 3 per cent in most states, forcing distribution and transmissions business to spend billions of dollars expanding the capacity of their networks, even though this may be required for only a few peak periods over the course of a year. The rate of peak demand is growing 50 per cent quicker than the increase in overall energy consumption and customer numbers.

In south-east Queensland, which is experiencing the highest growth in air conditioner installations, maximum demand is forecast to increase by 3.8 per cent on average each year. The capital cost to upgrade and expand the distribution network will be $10.4 billion in that state alone, made worse by rising costs of raw materials such as copper and labour – both aggravated by the impacts of the mining boom.

The investment in distribution networks will add nearly 3c/kWh to the cost of residential electricity costs in that state by 2012/13. By contrast, the state’s solar feed-in tariff, which pays a net 44c/kWh rate, will add just 0.03c/kWh to electricity costs.

AEMC says maximum demand growth is also expanding quickly in south and western Sydney because of “higher and more sustained peak temperatures” and the high uptake of air conditioners across the network. So much so, that the highest peak demand in NSW is shifting from winter to summer.

The upgrade to the NSW distribution network will add 4.32c/kWh to residential retail prices in NSW by 2012/13, nearly two thirds of anticipated price rises. The state’s solar bonus scheme, which has been by far the most generous in the country, and has recently been shut down, will add 0.45c/kWh by 2012/13, AMEC estimates.

In South Australia, AEMC says that more than half of the increased capital expenditure on distribution networks is being caused by anticipated increased demand driven by the growing use of air conditioners during summer heatwaves. SA already has the highest penetration of air conditioners in the country, and peak demand is forecast to grow by another 2.4 per cent per year, despite consumers using less energy, on average, as a result of energy efficiency programs.

Given the huge increase in peak demand and the costs of the networks, it might be expected that Australia is taking some decisive action to mitigate this increase through energy efficiency and demand management programs. But it’s not.

The Australian Alliance to Save Energy last week released its 2010 survey of electricity network demand management in Australia, and found that just $52 million had been spent on energy saving and demand management schemes in 2010.

By contrast, the US had spent more than $3.5 billion in 2010, reducing its peak demand by 4.4 per cent. Australia’s meagre efforts had knocked off just 0.2 per cent from its peak demand from its paltry total.

Given that wholesale electricity prices soar to a peak of $12,500/MWh at these periods, the potential cost benefits of such schemes is clear. The 12 demand management projects that gave details of costs and savings found that total expenditure of $22 million over three years generated savings of $57 million.

The expectation is that $1 of spending in demand management saves $2 in network costs. This is consistent with the experience overseas. The Canadian province of Ontario, for instance, invested about $1.7 billion in conservation programs from 2006 to 2010 that will save ratepayers $3.8 billion in avoided costs. It plans a further $3 billion in investment over the next five years, which it expects will deliver a lifetime saving over future costs of $10 billion.

The alliance says Australia could knock $16 billion off its energy network bills by 2020, and deliver more than $1 billion a year in net economic savings if it took demand management seriously.

“There is no question that energy bills are rising due to increasing spending on electricity networks, much of which is to provide for current growth in energy requirements,” said Mark Lister, the alliance’s executive director. “There is a far greater focus on increasing network size and supplying more electricity. We urgently need to level the playing field for the cheaper, equally effective alternative of reducing energy waste and reducing demand at peak times.“

Green numbers

As for green energy schemes, AEMC puts a bit of perspective on the matter, despite some of the headlines you might have read over the weekend. AEMC says that in nominal terms, residential electricity prices are forecast to increase by 30 per cent over the reporting period, which is an increase of 5.84c/kWh. In real terms, it says, this would equate to an increase of around 19 per cent over the 2009/10 to 2012/13 period.

The renewable energy target – now split into large- and small-scale schemes – will add just under 2 per cent over the reporting period to retail electricity prices, or about 0.66 per cent a year. It says costs from the RET equate to between 2 and 4 per cent of total electricity prices, although it notes that large-scale renewable installations can offset some of these costs because they place “some small, generally downward pressure on wholesale electricity prices.”

It says feed-in tariff scheme costs have been small, comprising around 0.12-2.4 per cent of the total residential electricity price level. They will add, in real terms, around 0.6 per cent to electricity bills over the three years, or 0.2 per cent a year. It notes that the cost of feed in tariffs are likely to fall in coming years.

AEMC noted wholesale energy costs, which comprise around one fifth of the anticipated rise in bills – are increasing due to higher capital costs, rising gas prices, and financing risks caused by uncertainty over carbon pricing.