Electricity usage in parts of Melbourne is set to double by the end of the decade, driven by a huge increase in energy-hungry data centres, leaving consumers with a $16 billion bill to maintain, upgrade and expand the grid.
But the Australian Energy Regulator (AER) expects household bills will not rise to cover these network costs because they will be spread across a broad range of new customers over the next five years, including the data centres.
The regulator released its decision on Thursday on how much revenue the companies that manage Victoria’s poles and wires can collect from customers to pay for maintenance and upgrades, reflected as network charges on bills.
In its findings, designed to balance concerns of overspending against an unprecedented surge in demand, the regulator approved a $4.8 billion increase in revenue over the next five years to $16 billion to help manage a 39 per cent statewide increase in electricity demand.
The demand increases are largely driven by household electrification and the growth of large data centres – buildings filled with racks of servers that store and transmit data for online tasks – that require huge amounts of power to run and keep cool.
The biggest increases to annual demand are tipped for transmission company Jemena’s zone covering Melbourne’s north-western suburbs, the centre of the city’s data centre boom, where electricity consumption is projected to increase by more than 112.9 per cent by 2030-31.
Every five years, the private companies that own Victoria’s power poles and wires must submit a business plan to the energy regulator detailing how much they believe they will need to spend on maintenance, upgrades and expansions in their distribution areas. The energy regulator then sets a cap on how much each company can earn from consumers to cover those costs.
However, energy regulator board member Lynne Gallagher said this was the first time the regulator has had to scrutinise such a large increase in potential demand over a five-year outlook period in Victoria.
The difficult balancing act, she said, was guaranteeing enough money to ensure the grid remained resilient, while avoiding saddling consumers with significant extra costs on their bills for overinvesting – or “gold-plating” – in infrastructure that turned out to be unnecessary because projected demand rises did not materialise.
Gallagher said: “Demand up until now has been driven by a fairly steady pace of growth in customer connections, but what we are having to anticipate here is consumers are using less gas and more electricity or space heating and hot water. Then you’ve got data centre loads that connect first and ramp up later.”
“The challenge is: what do you believe and what is the evidence in front of you about the pace of change and the pace of demand growth?”
The energy regulator had placed the network companies’ demand forecasts under significant scrutiny, Gallagher added. “We’ve run the rulers, had expert advice, and pulled some of those forecasts back,” she said.
Network costs are one of the largest components of household electricity bills, typically making up 40 to 50 per cent of what consumers pay. Other factors such as wholesale energy prices and retail margins also influence the costs worn by homes and small businesses.
Despite the significant spending needed to on the network, the AER suggested households could avoid significant bill shock being passed on to customers. Instead, it expected the network component of people’s bills would come down by between $6 and $38 a year.
This would be achieved because there would be so many new customers using these poles and wires that the costs would be evenly spread.
However, the regulator has warned these savings rely on the distribution companies meeting their huge demand growth forecasts.
“The expectation is that the network component will reduce each year for the next five years, but there is some uncertainty about that,” Gallagher said.
As an example, if demand on the Citipower network was only 40 per cent of what is currently forecast, annual household bills would be $19 higher by 2031.
In the north-western suburbs of Melbourne, covered by Jemena, the biggest growth in new customers is expected and also the largest potential savings in network costs.
The regulator estimated that the average annual residential bill for Jemena customers was set to drop by $189 by 2031, or an average fall of $38 a year over the five-year period.
The AER largely attributes this to huge new industrial users such as data centres entering the network, resulting in the fixed costs of the grid being spread across a much larger volume of energy, diluting the cost for everyday households.
The AER’s final decision for the 2026 to 2031 period allows Jemena to recover $2 billion in revenue from its customers, a 45 per cent increase from the current period, regardless of how much power is used.
If data centre growth does not meet projections and energy demand grows at only 40 per cent of the rate Jemena expects, the nominal reduction for a residential consumer would shrink from the projected high to a total of just $45 by the end of the five-year period.
The regulator had previously cast doubt on Jemena’s data centre growth projections, labelling them “speculative”, but ultimately accepted its revised methodology.
Gallagher said electricity demand in Jemena’s distribution area was also growing from a low baseline following the closure of large manufacturing businesses.
“Jemena has not really been connecting large loads in recent history, but they are now a growth corridor, and to my knowledge they haven’t yet connected many data centres,” she said. “So that’s why we are seeing that set-up from low or no load growth to large load growth.”
Industry lobby group Data Centres Australia estimates Melbourne has a nine-gigawatt pipeline of capacity in development. While most projects are in the early planning stages and not guaranteed to proceed, the figure represents the equivalent energy needs of at least 6.75 million households.
Chief executive Belinda Dennett said data centre operators already paid 100 per cent of their connection costs and network augmentations upfront.
“We are pleased to see that household tariffs will be reduced as a result of the investment data centres make in energy infrastructure – $10.3 billion to 2030, including $1.1 billion that is surplus to data centre needs and available for public use,” she said.
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Daniella White is a state political reporter for The Age. Contact her at da.white@nine.com.auConnect via X or email.
Nick Toscano is a business reporter for The Age and Sydney Morning Herald.Connect via X or email.
