The Climate Spectator has a pair of articles looking at how Australian utilities are trying to avoid the utility death spiral - partly by resisting change and partly by trying to work out how to adapt to i. The first article looks at AGL, which has been marching backwards lately as it invests heavily in old (but very cheap) coal fired power plants - AGL's tense shift towards energy solutions provider.

Average household customer electricity consumption was down nearly 10 per cent for the year and this comes on top of similar falls in prior years (detailed in the chart below). Part of this year’s fall is attributed to the mild May and June but, nonetheless, “AGL expects average consumer demand to continue to be impacted by energy efficiency, solar and new technologies”.

With less volume AGL finds itself unable to make the kind of margin per customer which it has in the past in the retail end of its business. Earnings per 'customer account' were down 16.7 per cent compared to last year for AGL. At the same time, the reduced energy sales also flow down the line to lower prices and margins in the power generation part of its business as well.

The problem for AGL, and indeed other power companies, is that energy equipment suppliers for buildings – such as solar PV but also other products, such as energy efficient lighting – are cutting their lunch. These equipment suppliers are helping customers to reduce the amount of energy they need from the grid.

AGL’s chief executive Michael Fraser appears acutely aware of this challenge. He suggests that the company needs to transition from a conventional vertically integrated energy supplier which makes money through selling volume of energy, to what they term an integrated energy solutions provider, which they symbolise in the picture below.

Essentially, AGL believes it needs to vertically integrate yet another step beyond the centralised grid and into its customers’ homes. Under such a model the company would make money less by selling electrons from the grid and more by charging for services linked to equipment such as solar PV, batteries and devices which would improve a household’s energy efficiency and shift its electricity demand out of the periods when power is most costly, such as very hot and very cold days.

Boston Consulting Group released a paper recently looking at how this energy solution provision model may arise and the challenges it presents for traditional power utilities. BCG outlines in the diagram below how the revenues available upstream from the customer are likely to erode over time due to solar, cheaper batteries and more efficient and communication-enabled electrical equipment. It shows that while the revenue available to generation and power networks, declines, the available revenue for behind-the-meter equipment and services – as well as metering equipment – rises.

The second article looks at another of the big 3 Australian utility companies - Origin Energy - and how the rapid rise in east coast gas prices (caused by the export of coal seam gas as LNG) is impacting the generation mix - Origin hit by solar and efficiency demand drop.

Origin, like AGL, is also talking up its ability to vertically integrate into the customer-side of the grid to counter the loss of margins through lower grid-based electricity volumes. In its presentation to investors it states it is focusing on development of a “revitalised solar business, smart meter technology, electric vehicles, distributed generation and storage”.

However, Origin does not elaborate on what is meant by its “revitalised strategy in solar”. In its latest results it notes gross profit decreased in its non-energy commodity business dropped by 35 per cent, or $17 million, primarily due to lower demand for rooftop solar PV systems. Origin used to be the largest solar retailer in the country but in the last few years its market share has declined dramatically.

At the same time Origin’s presentation seems to indicate that it is hopeful regulatory changes might alleviate declines in power consumption, such as changes to the Renewable Energy Target and adjusting network charges away from being averaged across energy consumption to more of a fixed nature.

Also, the company notes they’d be looking to limit capital investment in their energy markets division. This seems to suggest they see better opportunities in oil and gas rather than funneling money into provision of innovative energy solution offerings to replace lost grid sales.

Also just like AGL, Origin see prospects for returns to improve in conventional power generation with large price rises possible. They believe that there will be a mass withdrawal of around 15 terrawatt-hours of gas fired generation from the NEM as LNG plants suck in this gas. They also expect some further power plant capacity to be retired.

The utilisation of their mix of power plants (detailed in the table below) underlies the shift we’ll see. Darling Downs and Mortlake are running at quite high capacity factors given their position in the power plant merit order while the coal-fired Eraring operated at less than half its full capacity (45 per cent capacity factor).

One can imagine with gas rising to around $8 per gigajoule these plants will almost drop off the grid while Eraring’s output will increase considerably.

Ross Gittins at the SMH has a look at the strange dynamics being exhibited by the Australian power market - Watts happening? Electricity demand falling as prices continue to rise.

We know the two great certainties in life are death and taxes, but many thought there was a third: the inexorable rise in consumption of electricity. As the population grew and each of us got a little more prosperous each year, we'd use more power. The mighty electricity industry was built on that certainty.

Except that electricity consumption has been falling for the past four years. To say this has taken the industry by surprise is an understatement. For well over a century – even during the Great Depression – the quantity of electricity used in Australia each year was greater than the year before. ...

There are few aspects of the economy – global or national – where change is more significant, more diverse or more interesting than energy supply and demand – where energy covers coal, gas (conventional and unconventional), petroleum, wind, solar and other renewables. Expect to hear more from me on the topic.

But there are few questions more interesting than exactly why the unthinkable, a fall in electricity consumption, has come about. Short answer: a surprisingly large combination of reasons ...

The best attempt to quantify the various factors involved comes from a report prepared by Dr Hugh Saddler, an energy expert with the Pitt and Sherry consultancy, for the Australia Institute. Saddler's modelling covers the years to 2012-13, but we know from reporting this week by Origin Energy and AGL that the fall continued in 2013-14.

Saddler focuses on energy produced and consumed from the National Energy Market, which covers the five eastern states and the ACT, but the decline is occurring also in Western Australia. After peaking in 2008-09, consumption from the national market in 2012-13 was down by almost 8 terawatt hours, or 4.3 per cent.

But that's only half the story. Just as important as why demand has fallen is why it hasn't continued growing, as continued growth in the population and the economy would lead us to expect. Saddler estimates that had demand continued growing from 2004 at its average rate of growth over the previous 20 years (2.5 per cent a year) it would have been 37 terawatt hours more than it actually was in 2012-13. ...

"All of the decline in consumption has been at the expense of coal-fired generators, with the result that many are now barely profitable," Saddler says. ...

So what has caused our power consumption to fall rather than rise? The biggest single reason is the introduction from the late 1990s of regulations to increase the energy efficiency of refrigerators, freezers and many other residential and commercial appliances, and to increase the energy efficiency of new buildings.

Saddler estimates this explains 37 per cent of the 37 terawatt-hour shortfall from what might have been.

The next biggest part of the explanation is structural change in the economy away from electricity-intensive industries. Over the year to September 2012, three major NSW industrial power users – Port Kembla steelworks, Kurri Kurri aluminium smelter and the Clyde oil refinery – were partly or completely shut down. This explains 10 per cent of the 37 terawatt-hour shortfall.

The evidence also suggests that power consumption by other major industrial users has been little changed over the three years to 2012-13. Saddler estimates that this failure to grow explains a further 14 per cent of the shortfall, taking the total contribution from structural change to almost a quarter.

The next most important part of the explanation is the response of electricity users, particularly residential users, to the higher prices they were being charged. Saddler finds that after 2010 there was "an abrupt change in consumer responsiveness to higher prices". ...

He further calculates that the growth in output from rooftop photovoltaic solar and other small, distributed generators accounts for about 13 per cent of the shortfall. This, of course, is a fall in the demand for electricity supplied by the major, mainly coal-fired generators, not a fall in the use of electricity as such.

Saddler notes that for the past three years the annual peak demand has been falling, not increasing, despite the huge investment to cope with ever-rising peaks. When will this additional capacity, which is now built and for which all electricity consumers are paying – and will continue to pay for some years to come – be required, if ever, he asks.

I was talking to a manager from one of the utility companies here at a conference last year and the conversation drifted onto a few topics that I find interesting.

The first item of note was that they have cut back on the amount of data that they are collecting from smart meters, noting that there are a few different customer segments with varying levels of interest in the data that is captured - but even the keenest lose interest in the data once they have optimised their usage patterns. Obviously this would change if pricing was more dynamic but that day seems to be a way off.

I also asked how they were dealing with the problem (from their point of view) of falling demand and his response was that they were looking to increasing uptake of electric vehicles to compensate for this.

This approach is now being promoted by the utilities industry association - Utilities hail electric cars to cut bills, reduce emissions.

A new report has uncovered that the cost of recharging electric cars could be as little as a quarter of the $1.50 a litre it currently costs to fill petrol-run cars.

Analysis by the Energy Supply Association of Australia (ESAA) found that an equivalent litre of electricity, or e-litre, could cost from 37 cents in off peak up to 62 cents in peak prices. It found that electric cars have the equivalent fuel costs of approximately 3 cents per kilometre, compared to 10 cents per kilometre for conventional cars.

The ESAA represents most of the country’s generators and network suppliers. Many of these businesses are being impacted by reduced demand for electricity. Some analysts, and some of its members, suggest that increased electric vehicle ownership could be a solution to those problems.

CEO Matthew Warren says electric cars are not only a “faster, cleaner, quieter and safer driving experience, they are also cheaper to run,” with electric engines being “simpler and far more efficient than the most advanced combustion engines.”

ReNew Economy has a related article on the factors causing the decline in demand - Why is electricity consumption decreasing in Australia?.

All of the decline in consumption has in fact been at the expense of coal fired generators. Many are now barely profitable. Greenhouse gas emissions fell by 9.2 Mt CO2-e, roughly 2% of Australia’s total emissions, in 2012 alone.

To be precise, what the above figures are measuring is not electricity used by final consumers, but electricity supplied to the national grid system by large generators which participate in the (wholesale) National Electricity Market.

It is very difficult to find consolidated data on the quantities of electricity supplied by small distributed generators, such as rooftop photovoltaics and landfill gas plants. But the Australian Energy Market Operator (AEMO) has estimated that in 2012-13. photovoltaics supplied 2.7 TWh and other small generators supplied 3.1 TWh. So, although important and growing, these sources alone do not account for the whole of the 8 TWh reduction from the peak year, let alone the 37 TWh reduction from the long term trend.

Research we have recently completed concludes that the three largest factors contributing to the recent dramatic changes in demand for electricity are:

• the impact of (mainly regulatory) energy efficiency programs
• structural change in the economy away from electricity intensive industries
• since 2010, the response of electricity consumers, especially residential consumers, to higher electricity prices.

Australia’s first mandatory regulatory energy efficiency measures were introduced in the late 1990s. These were Mandatory Energy Performance Standards (MEPS) for refrigerators and freezers.

Since then, these standards have been extended to a very wide range of residential and commercial appliances and equipment. Analogous energy efficiency requirements have been applied to new buildings. We have used data in reviews of the appliance and equipment measures and the building measures to estimate that the increased impact of these measures between 2006 and 2013 has in total reduced annual demand for electricity by 10.5 TWh, or 28% of the total 37 TWh reduction.

Smaller demand reductions have come from increased uptake of solar and heat pump water heaters (supported by various government programs), the Home Insulation Program (the so-called “pink batts scheme”), and the Victorian and NSW retailer energy efficiency obligation schemes. All of these schemes together contribute another 8% of the reduction.

The Conversation has a post on dropping electricity demand in Australia - caused by a combination of rising power prices, the demise of large manufacturing users (courtesy of the dutch disease) and the success of the government's roof insulation program and various rooftop solar PV schemes - Electricity demand: The great de-electricifation of Australia’s grid

One of the certainties in the energy business used to be the regular year-in, year-out rise in demand for electricity [1].

Up until about 6 years ago, demand growth could be counted on with metronomic precision. Across our National Electricity Market – the NEM – electricity demand grew at about 2% annually.

That all stopped in 2008. On the basis of the numbers for June and July this year, we are on the verge of our twelfth straight season where demand has reduced on the year before.

Over the last 3 years, the annualised demand reduction has been about 500 megawatts – or about 2.2%. And since the peak in 2008, average demand has reduced by about 2 gigawatts or about 8%.

On these figures, Australia is clearly undergoing a profound de-electrification. If it continues for a few more years then, by analogy with economics, it will be worthy of the appellation the great de-electrification.