Data centres to double usage, costing $16 billion for grid upgrades
Electricity use in parts of Melbourne will double by the end of the decade, driven by a massive increase in energy-hungry data centres, leaving consumers with a $16 billion bill for maintaining, improving and expanding the grid.
But the Australian Energy Regulator (AER) predicts that household bills will not rise enough to cover these network costs because the bills will be spread across a wide range of new customers, including data centres, over the next five years.
The regulator announced its decision on Thursday on how much revenue companies that manage Victoria’s poles and wires can collect from customers for maintenance and upgrades, which are reflected as network charges on bills.
In findings designed to balance overspending concerns against an unprecedented surge in demand, the regulator approved a $4.8 billion increase in revenue to $16 billion over the next five years to help manage a 39 per cent increase in electricity demand across the state.
Demand increases are largely driven by the electrification of homes and the growth of large data centers—buildings full of server racks that store and transmit data for online tasks—that require large amounts of power to run and stay cool.
The biggest increases in annual demand are expected in transmission company Jemena’s region, which covers Melbourne’s north-western suburbs. the center of the city’s data center boomElectricity consumption is expected to increase by more than 112.9 percent by 2030-31.
Private companies that own Victoria’s power poles and cables must submit a business plan to the energy regulator every five years detailing how much they believe they should spend on maintenance, upgrades and expansions at their distribution sites. The energy regulator then sets a limit on how much each company can earn from consumers to cover those costs.
But energy regulator Lynne Gallagher said this was the first time the regulator had had to examine such a large increase in potential demand over a five-year outlook period in Victoria.
The difficult balancing act, he said, is to ensure enough money to ensure the grid remains resilient while preventing consumers from incurring significant extra costs on their bills for over-investing (or “gold-plating”) in infrastructure that proves unnecessary as projected demand increases fail to materialise.
Gallagher said: “So far demand has been driven by a fairly steady rate of growth in customer connections, but what we need to anticipate here is consumers using less gas and more electricity or space heating and hot water. Then you have data center loads connecting first and then increasing.”
“The question is: what do you believe and what is the evidence before you about the pace of change and the pace of demand growth?”
Gallagher added that the energy regulator is subjecting network companies’ demand forecasts to serious scrutiny. “We led the managers, took expert advice and pulled back some of those predictions,” he said.
Grid costs are one of the largest components of household electricity bills, typically accounting for 40 to 50 percent of what consumers pay. Other factors, such as wholesale energy prices and retail margins, also affect costs for homes and small businesses.
Despite the significant spend required on the network, AER suggested households could avoid significant bill shocks passed on to customers. Instead, the network component of people’s bills was expected to decrease by $6 to $38 per year.
This can be achieved due to the large number of new customers using these poles and wires and the costs are spread evenly.
But the regulator warned that these savings depended on distribution companies meeting large demand growth forecasts.
“The expectation is that the network component will decrease every year for the next five years, but there is some uncertainty around that,” Gallagher said.
As an example, if demand on the Citipower network were only 40 percent of what is currently predicted, annual household bills would be $19 higher by 2031.
Melbourne’s north-west suburbs under Jemena are expected to experience the greatest growth in new customers and also the greatest potential savings in network costs.
The regulator has predicted that the average annual residential bill for Jemena customers will fall by $189 by 2031, or an average of $38 per year over a five-year period.
AER attributes this largely to the entry of large new industrial users such as data centers into the network; This causes the fixed costs of the grid to be spread over a much larger volume of energy, reducing the cost to daily households.
The AER’s final decision for the 2026-2031 period allows Jemena to generate $2 billion in revenue from customers, a 45 percent increase over the current period, regardless of how much power is used.
If data center growth does not meet projections and energy demand grows at only 40 percent of the rate Jemena expects, the nominal reduction for the residential consumer will fall from the projected high to just $45 total by the end of the five-year period.
The regulator had previously been skeptical of Jemena’s data center growth forecasts, calling them “speculative” but ultimately accepted its revised methodology.
Gallagher said electricity demand in Jemena’s distribution area had also increased from a low level following the closure of major manufacturing businesses.
“Jemena hasn’t connected large loads recently, but they’ve become a growth corridor now, and to my knowledge they haven’t connected very many data centers yet,” he said. “That’s why we’re seeing this setup from low or no-load growth to major load growth.”
Industry lobby group Data Centers Australia estimates Melbourne has nine gigawatts of capacity under development. The figure represents the equivalent energy needs of at least 6.75 million households, although most projects are in the early planning stages and are not guaranteed to progress.
Chief executive Belinda Dennett said data center operators already pay 100 percent of connectivity costs and network expansions up front.
“We are pleased to see that household tariffs will be reduced as a result of data centres’ investment in energy infrastructure – $10.3 billion by 2030, including $1.1 billion in data center surplus and available for public use,” he said.
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