This document discusses four problems facing the electricity market: rising energy prices, divergence between demand and energy growth, increasing adoption of distributed energy resources, and declining network load factors. To address these issues, capacity-based pricing is proposed to maintain network revenues and incentivize demand management over energy consumption. While this may reduce incentives for energy efficiency, natural appliance replacement cycles and distributed energy adoption will continue to lower grid usage to some degree.

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Could a Greater Emphasis on Demand
Management Hinder Future Energy Efficiency
Initiatives?
Terry Daly – Practice Leader, Energeia
February 2013
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• Focused on supporting clients tackling the industry’s greatest challenges
and opportunities:
 Australia’s only real-time demand response system (King Island)
 15-20 year Customer, Network and Organisation of the Future visions
 Market outlooks emerging energy technology, e.g. solar PV, microgrids
 Energy services growth and margin strategies
 High margin smart meter enabled products and services
• Proprietary research enabled insights and advisory services
 Electric vehicles, storage, renewables, energy efficiency, demand
response, smart grids, cogeneration (CHP)
Who Are These Guys?
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Overview
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• Australian policy development
• Four key problems facing the electricity market
• Solution being considered
• Impact on energy efficiency
• All is not lost!
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• The key Australian developments over the past 18 months
include:
 The National Energy Savings Initiative (NESI) maps out
2020 energy efficiency target
 Victorian VEEC
 Freedom of Choice Review (DSP3) kicks off AEMC’s
third demand side participation review
 Government investigation of mandating the DRED
standard
 AEMC Power of Choice
 Productivity Commission report
 Senate Committee on Electricity Pricing
Australian Policy Developments
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Energy
Efficiency
Pricing
Demand
Management
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Problem 1
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• Energy price rises are the dominant community energy issue
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Problem 1
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Source: IPART, assuming consumption of 7MWh per year
• 100% increase in NSW network charges over 5 years
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$0
$500
$1,000
$1,500
$2,000
$2,500
2007/08 2012/13
HouseHoldEnergyBill($)
Network Retail Carbon tax Green Energy Schemes Energy charges

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Problem 2
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Source: Ausgrid
• The divergence between demand and energy growth is
expected to continue
7
0%
2%
4%
6%
8%
10%
12%
14%
16%
2004 2005 2006 2007 2008 2009 2010 2011
CumulativeIncreaseince2004
Underlying Energy Weather Corrected Peak Demand

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Problem 3
Confidential © Energeia 2012. All Rights Reserved
Source: Energeia
• Forecast take-up of distributed energy resources (DER) will exacerbate
problem 2
• Depending on pricing, small scale PV and CHP costs are becoming
attractive on an LCOE basis
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0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
$/kWh
PV CHP Mains ToU Peak Mains ToU Off Peak
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
$/kWh
PV CHP Mains ToU Peak Mains ToU Off Peak

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Problem 3
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Source: UBS 2013
• Not unique to Australia
• UBS forecast for the price of retail prices versus DER for residential
customers in Germany
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Problem 4
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Source: Simshauser and Nelson 2012
• DNSP’s load factors continue to decline. For example in SA load
factor declined by 33% from the early 2000’s to 2011.
• As revenues for DNSP’s decline, network charges must rise further
to compensate
• This has been termed “The Energy Market Death Spiral”
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Impact of “The Death Spiral” - Residential
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Source: Energeia 11
• Energeia modelling forecasts for NSW:
 Further take up of DER;
 Further erosion of network revenues;
 Distribution charges increase further to compensate
$0
$10
$20
$30
$40
$50
$60
$70
$80
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
CumulativeAvoidedNetworkRevenue($M)
IBT TOU Capacity

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The Proposed Industry Solution
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• Customers have much less incentive to reduce energy
consumption – only demand !
The impact being
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• Time based pricing is being discussed; but
• Capacity based pricing is rapidly being recognised as the only
sustainable solution to maintain network revenues and stop cross-
subsidies
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All is Not Lost !
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Source: Energeia
• While consumers will face diminishing incentives to reduce energy
• DER penetration will continue to reduce grid supplied energy
• Energeia’s modelling of NSW per annum appliance refresh rates
is also demonstrating some moderate energy efficiency gains.
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0
100
200
300
400
500
600
Fridges Freezers Televisions Washers Dryers Dishwashers Pool Pumps
ApplianceRefreshRate('000)

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Thank You
Energeia
L20 Tower 2, 201 Sussex Street, Sydney NSW 2000, Australia
P +612 9006 1550 F +612 9006 1010 E tdaly@energeia.com.au
W www.energeia.com.au
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