The energy market game-changer, falling demand: Developers and network operators can tear up their business plans. And so can some renewable hopefuls too – the era of solar PV and price-conscious consumers is here.

For decades the greatest virtue of the electricity market was its predictability. All planners had to do was plug in the forecasts for GDP growth, and demand could be expected to respond accordingly. Building new generation and poles and wires in such a regulated environment was comparatively simple, if a little dull.

How that has changed. Now, thanks to new technologies, the factoring of environmental factors, and a dramatic consumer response to rising prices, the electricity market is being turned on its head – or at least it’s head has been turned. A whole range of new factors, mostly the installation of air conditioners and rooftop PV beyond the front door of the home – normally beyond the view and interest of the market operators – has made this a wildly unpredictable market. The electricity industry suddenly got interesting, and difficult to manage.

The best reflection of this is in the ability of industry bodies such as the Australian Energy Market Operator to predict future demand. Since the 1960s, this has been relatively easy, but in the last couple of years, its prediction, and those of the industry’s – have been trashed by the “significant” changes it says are occurring in the market. Today, it released a report that conceded demand for 2011/12 was 5.7 per cent below forecast of just a year ago. Its updated predictions for 2012/13 are now 8.8 per cent below the forecast made 12 months ago.

In some states, such as South Australia, where there has been a greater penetration of rooftop solar PV than any other state, and a much higher pentration of wind, its demand forecasts have been cut by 12.2 per cent. In Queensland, another strong solar PV state, the variation is 10 per cent

This is an extraordinary development for an industry that has been raised on regulated returns and predictable outcomes. AEMO hasn’t completed its statement of opportunities – the complexity of the new market means that for the first time these two exercises have been separated – but AEMO boss Matt Zema says any plans for new generation will need to be deferred. And some generators and network operators may be wondering if recent investments will prove to be wise.

How did this happen? Zema says through changes in technology, manufacturing, and the “social fabric”. This is the third consecutive year of a demand downturn – the first two were blamed on the GFC and floods. “But when we copped a third year, we realized that this is more than just a once off, this is about significant change in our energy demand,” Zema told RenewEconomy in an interview.

“This is the first time we can find that even with strong GDP growth there has not been an increase in energy consumption. We are seeing quite a shift.” And, he says, a lot of that is happening at consumer level. “People are saying yes I can have a good standard of living but do I need four plasma TVs all on standby? People are conscious about how much they are paying for energy.”

According to AEMO, the principal contributing factors in percentage terms to the 5.7 per cent variation in forecasts were a decline in large industrial loads (3 per cent), mild weather (one per cent), consumer response to price rises and energy efficiency measures (one per cent), and the impact of solar PV (0.7 per cent).

This latter – solar PV –will remain, with changes in consumption patterns, the biggest and the most constant swing factor. In 2011/12, AEMO estimates that solar PV contributed 1,702 gigwatt hours, or 0.9 per cent of estimated annual energy production. This is expected to jump nearly 50 per cent to 2,473GWh in 2012/13, or 1.3 per cent of annual energy, and to 7,558GWh, or 3.4 per cent of total energy, under its medium growth scenario, by 2021/12. It could well be much more.

“The forecast increases in rooftop solar photovoltaic system allocations are expected to offset a large amount of electricity that would have otherwise been provided by the NEM,” AEMO says.

And this is the key for generators – both incumbent and aspiring coal and gas generators, and for renewable energy players.

This graph below shows how AEO’s forecasts for 2021/22 have changed in a matter of 12 months. The difference between the high growth forecast of last year and the low growth forecast from this year is 30 per cent. The median changes are well over 10 per cent. The market is not even expected to return to 2009 levels until 2017.

This has considerable implications for incumbent generators. Lower demand has already had a biting impact on wholesale electricity prices, and profit margins, for the largest generators. When Origin Energy ‘s Grant King told RenewEconomy in February there was no need for new baseload before the end of the decade, that was based around Origin Energy’s forecasts of around 250 terrawatt hours.

AEMO’s latest “highest” forecast is for less than 240TWh in 2020, its median forecast is for less than 220TWh and it says it could be as low as 200TWh – a full 20 per cent below Origin’s estimate of just four months ago.

That in turn, will increase the stakes of the review into the Renewable Energy Target being undertaken by the newly created Climate Change Authority later this year. In May, King argued that the RET should reflect actual demand rather than a fixed amount of renewable energy production (a total of 41,000TWh to add to the pre-existing mostly hydro capacity of 15,000TWh).

Even though Origin Energy had previously argued for a fixed target, for the sake of certainty, it now argues that this would represent nearly 25 per cent if including solar PV. That number jumps to nearly 30 per cent under AEMO’s revised forecasts. You can be sure that Origin Energy and others will be arguing their case.

But if it was morphed to an actual percentage, then the new build renewables could fall by more than half – a disaster for the wind and solar industries in this country. You can be sure that the renewables industry will be arguing their case too, if they can manage that with one effective voice.