Don't forget the demand side

Hey Reader, you're receiving this as one of a select group ahead of our launch. Every Wednesday The Energy lets the numbers do the talking, cutting through the noise with data.

This week we explore the often overlooked demand side of the energy transition in the wake of the latest IEA data — Charis Palmer.

The weather effect

The price of energy and the costs behind it have politicians coming unstuck in the energy-led election campaign. But there was one clear data point from the International Energy Agency last week. Heatwaves in China, India and the US were behind an abnormal spike in energy demand.

The chart below shows the fuel mix that met that extra demand. Weather was the cause of around 20 per cent of the increase in electricity and natural gas demand and the entire increase in coal demand.

*Weather's contribution to energy-based emissions growth, 2024, where light grey is the baseline effect and dark grey is the weather effect. Source: IEA*

Going long on cooling

This global trend in cooling demand - not just for homes but growing numbers of data centres around the world - is not lost on capital markets.

Having told its clients 'We now expect a 3°C world', analysts at investment bank Morgan Stanley predict this could more than double the growth rate of the US$235 billion cooling market, from 3 per cent to 7 per cent, every year until 2030, Politico reported.

The cost of preventing blackouts

Australia is no stranger to heatwaves, and heating and cooling can account for 20% to 50% of energy used in Australian homes.

How we've been meeting weather-driven spikes in energy demand is laid out for all to see via the Australian Energy Market Operator's Reliability and Emergency Reserve Trader (RERT) mechanism. The RERT relies on demand response (where big industrial users agree to be paid to reduce demand), and off-market reserves, which also come at a cost.

And in recent years the RERT mechanism has been used more often, including during the November 2024 heatwave.

Demand side warning for Australia

What will a scenario where heatwaves are more common mean for Australia's energy mix? We don't yet know because we don't know what the future energy mix will be, but AEMO's Integrated System Plan forecasts a 2040 future where households largely meet their own electricity needs.

In this world likely shortfalls are reduced by accelerating residential and commercial rooftop solar and batteries, along with energy efficiency. How well this will be delivered is uncertain, while heatwaves seem more certain.

In the shorter-term, the Grattan Institute points out reliability issues are being driven by a lack of coordination between coal generators being closed, replacement renewable capacity being built, and transmission lines being constructed. This is exacerbated by community opposition to transmission lines, and by labour and material shortages.

On that front, the IEA offers some actionable insights that could assist with the tripling of generation required in Australia:

Enhance visibility on future demand
Strengthen industry dialogue
Encourage proactive grid investment - invest for what’s coming
Design effective procurement frameworks - align procurement with national plans
Streamline permitting
Maximise existing grid infrastructure - make what you already have efficient
Promote diverse, resilient and sustainable supply chains - don’t prop up monopolies
Ensure a skilled workforce - start training now for the skills needed in future