When we had a look at the Australian Energy Regulator’s (AER’s) annual State of the energy market report we decided that the sections that covered the reliability and affordability of our energy warranted a separate article – so here it is!
The report is 310 pages long so to save you the pain, we’ve tried to pick the key points that provide the most relevant information. Most of the below is taken directly from the report.
The current network infrastructure that delivers energy was mostly designed and constructed decades ago. It catered to large, centralised, stable generation assets that flowed evenly in one direction.
Because things have changed substantially, with more intermittent energy being pushed into the system, there are now more moving parts and more variables to take into consideration.
Energy is an essential service
The report acknowledges how important energy is to people’s daily lives, and how crucial it is to strike a balance between reliability and affordability.
At the same time, the AER acknowledges that energy bills can be a significant burden for households. This is true even when energy prices are relatively low, let alone when the cost of living is high and rising, as it has been over the past couple of years.
We think the acknowledgement that energy price increases, combined with poor-energy-performing homes and inadequate income support payments, are causing financial pressure for all – and particularly for low-income households – is something policymakers need to keep in mind.
Reliability and affordability don’t always go hand-in-hand
The report explains that transmission networks are engineered and operated to be extremely reliable.
However, as it also points out, networks are constrained by capability limits. Congestion can occur when electricity flows threaten to overload the system. For example, a surge in electricity demand to meet air conditioning loads on a hot day can push a network service provider to the brink of its secure operating limits.
The balancing act comes because upgrading transmission networks is an expensive exercise. Maintaining or improving reliability may require expensive investment in network assets, which is a cost passed on to electricity customers. Therefore, there is a trade‑off between network reliability and affordability.
Reliability means few interruptions to supply
For distribution networks, the reliability of supply – that is, how effectively the network delivers power to its customers – is the main focus of network performance. Around 95% of the interruptions to supply experienced by electricity customers are due to issues in the local distribution network (rather than the broader transmission networks).
Regardless, as the report explains, it’s inevitable that we’re going to see some interruptions, because “The capital-intensive nature of the networks makes it prohibitively expensive to invest in sufficient capacity to avoid all interruptions”.
Planned interruptions – when a network service provider needs to disconnect supply to undertake maintenance or construction works – can be scheduled for minimal impact.
Unplanned interruptions to supply – such as those resulting from asset overload or damage caused by extreme weather – provide no warning to customers.
Investment is crucial
The report highlights how important it is that there is sufficient investment directed toward the right areas to ensure that our short and long-term energy future is secure, reliable, and affordable (not least by putting this statement in big letters on a single page):
“AEMO’s 2024 Integrated System Plan appeals for urgent investment in generation, storage and transmission to deliver secure, reliable and affordable electricity through the energy transition.”
The energy transition is a consistent theme throughout the report. As it notes “The transition in the energy market has increased the risk of reliability gaps”.
As contribution from weather-dependent generation increases, the power system must respond to increasingly large and sudden changes in output caused by changes in weather conditions and dispatch decisions by plant operators.
Reliability risks are typically highest over summer, particularly at times of peak demand. But they may also emerge at other times in the year, when solar or wind output is low, or there are transmission or plant outages.
In its May 2024 update to the 2023 Electricity Statement of Opportunities, AEMO forecast reliability gaps in all mainland regions across varying time periods over the next 10 years.
Demand is going to keep increasing
In August 2023, Energy Consumers Australia (ECA) wrote that numerous factors indicate that electricity demand is likely to increase over the coming years.
While maximum demand has always varied with the weather, the increased use of air conditioners and solar PV has resulted in higher peaks and lower troughs – in other words, greater variation.
As network demand becomes ‘peakier’, assets installed to meet demand at peak times – which occur for approximately 0.01% of the year – may sit idle (or be underused) for longer periods.
However, while the number of customers connected to the distribution network has steadily increased (by around 1.5% per year) since 2006, the corresponding growth in both maximum and average ‘non‑maximum’ demand has been less than that rate. This is likely due to a combination of efficiencies and a greater contribution from rooftop solar.
The gap between the haves and have-nots is also increasing
While average energy use might be increasing more slowly than customer growth – and might even decline if greater efficiencies are more broadly applied throughout the customer base – not everyone is getting the same benefit.
The report points out that, as energy markets transition to renewable energy, the reported average energy use indicators are likely obscuring a widening gap between households that have the capacity to adopt new technology or modify energy use, and those that do not. This could be due to cost, residential tenancy laws or other barriers.
The former group (the “haves”) is likely experiencing a substantial reduction in electricity use, while electricity use among other households (the “have-nots”) has likely remained relatively consistent over time, and these customers may be spending more on electricity compared with 10 years ago.
The impact of energy efficiency of homes on energy use
The energy efficiency of homes plays a vital role in reducing emissions and the cost of energy bills.
Consumers living in homes with poor thermal efficiency are using more energy and spending more on heating and cooling to stay comfortable.
There is a significant deficit in the average thermal efficiency of existing homes compared with the new 7-star minimum standard. Data from NatHERS research shows that the rating of existing homes is estimated to be less than 2 stars out of 10.
At the same time, 81.7% of new housing is designed to meet only minimum NatHERS requirements and 98.5% of existing housing stock falls below optimum economic and energy performance.
Is there a bottom line?
Having read the 310-page report, we believe that the responsible regulatory and management authorities have a good handle on what’s happening and understand what needs to happen from here on to manage the balance between reliability and affordability.
However, the fact that there are still so many variables – not least the ongoing integration of consumer energy resources, such as rooftop solar and electric vehicles – makes predicting what will happen throughout the energy market over the next decade a bit harder.
We might wish it was clearer and more straightforward, but at least the smart folks at the AER and AEMO (and others) are fully focused and committed to getting the best possible outcomes.
When there are challenges, there are also opportunities. For example, more and more households are installing batteries. This is a contingency against power outages but also enables them to store solar power to use later in the day.
If you are one of the many households heading down that path, you might want to check out “ZEROHERO” our latest energy plan. It turbocharges the payback time of owning a battery. You can find more info here.
By the way, if you’re interested in downloading the report in full, you can do so from the AER website here: State of the energy market 2024.
You can also check out our summary of what we saw as some of the other key points of the report in our previous post: AER reports record low electricity demand in Australia.