Energy efficiency and demand management provide dramatic opportunities for the transition to a low-carbon economy. To date, most efforts in the electricity sector have revolved around building additional capacity to produce ever more energy to meet whatever demand emerges, with all the resulting emission and grid transmission costs this entails. We consider the market for managing the demand side of the electricity system to be a more promising and cost-effective proposition.
The predominantly renewables-based electricity system of the future needs to be flexible, to allow peak demand to emerge when peak supply is available – i.e. when the sun is shining and the wind blowing – and to be flexible enough to reduce demand when supply is constrained. In virtually any other product, the price signal is the mechanism to facilitate this. In electricity, the price signal to consumers is currently ineffective, and this problem is compounded by the inability to cost-effectively store electricity. Technological innovation has provided a cost-effective solution – demand response management (DRM).
Peak demand puts enormous strains on the electricity market on a few days each year. The average wholesale price of electricity in Australia in 2011/12 was around $A30/MWh, yet the peak wholesale price is capped at $12,500/MWh – an extreme variability. Given the average Australian retail consumer pays the same peak electricity price irrespective of whether the power they are using is costing the wholesale system $30/MWh or $12,500/MWh, this is a massive mismatch. The absence of a critical peak price signal means customers are unaware and unresponsive to cost of supply, even though customers ultimately carry the cost in terms of higher average prices.
DRM enables a rapid, short-term reduction in electricity demand when the system is overloaded. It is designed to source this demand reduction from a whole range of customers in a way that has minimal impact or visibility. A basic example is pre-cooling a well-insulated office building at 4am (when there is excess supply) rather than at 10am (when there is excess demand), or turning the baseline temperature of the building up 1 degree on hot days (each 1 degree increase reduces electricity demand by 10 per cent, but would be unnoticeable to the tenants).
DRM involves a careful study of the standard energy usage patterns of the consumer, and then maps out an agreed range of curtailment options that are implemented for a short duration during a critical supply event, e.g. very hot temperatures or where a storm has taken out transmission capacity. The grid operator pays for this reserve DRM capacity, and the DRM operator shares the gain with the customer. The whole aim is that the end customer will probably have no awareness of a DRM event, except that they will get a reduced electricity bill as a result.
DRM is a proven technology alternative to managing electricity demand at peak times. DRM is a low-capital cost alternative to building additional fossil fuel based peaking generation capacity. DRM is also an important tool to assist in the building up the flexibility inevitably needed for the intermittent renewables electricity system of the future low-carbon economy. It is positive to note that as of 2011/12, Australasia represents one of the major growth markets for DRM globally.
One of the debates about DRM is whether or not it is a function that should sit within each electricity utility, given the utility has the best knowledge of their own systems and customers. However, electricity utilities are extremely capital-intensive businesses that are rewarded for production of electricity; the more they sell, the higher their revenues. It is hard for a regulator to reward a utility to sell less, particularly where the key principle of the National Electricity Market is that “Supply must meet demand at all times.” Having an independent DRM service provider specialising in this field can best leverage this discrete function across a multitude of utilities.
EnerNOC is the largest specialist DRM operator globally. Listed in America since 2007, EnerNOC has steadily built up its service offer to now cover 5,800 customers across 13,500 commercial and industrial sites with an aggregate of 8,500 MW of demand annually. Over the 2012 North American summer, EnerNOC delivered a record 85GWh of demand response. This service is provided to over 100 different utilities across North America, Australasia and the UK. Given the extensive analysis and daily monitoring of a customer’s ongoing energy usage, EnerNOC is ideally positioned to provide wider energy efficiency services to permanently reduce electricity demand.
In July 2011 EnerNOC acquired a Western Australian firm, Energy Response, for $30 million from the Australian venture capital firm, Starfish Ventures. Energy Response had 100 MW of DRM capacity in Western Australia, but said at the time this was expected to rise to 240 MW by 2012/13. At the time, Energy Response stated that some 25 per cent of the $24 billion estimated retail cost of electricity in the National Electricity Market was caused by peak events that occur for a total of less than 40 hours per year (0.05 per cent of the year).
In October 2012 EnerNOC won a material new contract with TransGrid, the NSW transmission network operator. This will see EnerNOC providing 35 MW of DRM capacity in Sydney. TransGrid stated “By having the ability to shift the power consumption of some of Sydney’s major energy users outside peak periods, TransGrid will be in the best position to respond to pressure on its existing transmission network during peak periods. In addition, EnerNOC’s software will allow some of Sydney’s largest energy users to understand how their sites consume energy and how they can reduce consumption at peak times.”
EnerNOC also delivers demand response in New Zealand’s Interruptible Load Programme on the North Island, which operates in the country’s Instantaneous Reserve Market. To provide 100 MW of reserve capacity, EnerNOC contracts with a diverse portfolio of energy users from industries such as manufacturing, food processing, and cold storage. These users are paid based upon the load reduction they can provide, and when an under-frequency dispatch is triggered, this load will be instantaneously removed from the grid.
New Zealand is a perfect electricity market to illustrate the value of DRM, given more than 70 per cent of energy in 2011 came from renewable resources, primarily hydro and geothermal. With an increasing share of wind and geothermal capacity coming online this decade, New Zealand is on track to achieve its 90 per cent renewables target by 2025. DRM is valuable for managing peak demand, but also assists where the intermittency of supply of electricity from renewables is a system constraint.
In August 2012 EnerNOC announced a new contract to supply 20MW of DRM capacity to Genesis Energy, a leading North Island of New Zealand electricity utility. This builds on a March 2012 contract for EnerNOC to provide DRM to Genesis in the South Island.
Air conditioning – an alternative solution in hibernation?
So DRM manages critical peak demand events when everyone turns on air conditioners from 2pm-8pm on 40+ degrees days – say five to 10 days annually on average across Australia, with this extreme peak demand lasting less than 40 hours per annum. Are there easier alternatives? Analysing the use of air conditioners in Australia could be a good start, particularly in terms of their energy efficiency.
Over 1985-2000, the penetration of air conditioners in Australia was static around 32 per cent, but then in the space of the five years to 2005, penetration doubled to 60 per cent, and has continued to rise thereafter. Although electricity prices (in real terms) have been falling over the 2000-2010 period, for every air conditioner installed in Australia, the electricity system (generation plus grid transmission) needed to invest $7,000 of capital.
Is our focus on air conditioning too narrow? Origin Energy estimates that 40-50 per cent of all commercial office energy consumption relates to heating, ventilation and air conditioning (HVAC).
The expanded Greenhouse and Energy Minimum Standards (GEMS) Act 2012 came into effect on 1 October 2012. The GEMS legislation creates further enhancements to the way residential and commercial equipment energy efficiency is regulated in Australia. The main policy tools used to achieve reductions in energy use from these products are mandatory Minimum Energy Performance Standards (MEPS) and Energy Rating Labels (ERLs) – the familiar star labels that have compared a range of electrical goods for the last 25 years.
The GEMS website lists over 1300 air conditioning products that are in operation in Australia. Mitsubishi Heavy Industries produces the only six star rated unit, while LG produces the only 5.5 star alternative. By comparison, the energy efficiency of these two products is double that of the long list of 1 and 1.5 star products currently on offer.
A dramatic tightening of the GEMS definition of the MEPS for air conditioners to ban the sale of units below a minimum 4 or 5 star rating would immediately start to address critical peak periods of energy demand. Currently, low efficiency air conditioners are being dramatically subsidised by all electricity users and tax payers (given we indirectly own most electricity generators, via our state governments), particularly the poor who can’t afford one of their own, through the increased requirement for critical peak period capacity. An immediate and dramatic tightening of the MEPS to allow the installation of only extremely energy-efficient air conditioners could close off the growth in this subsidy and the demand for electricity critical peak periods.
Given the average air conditioner lasts for 12-18 years, a “cash for clunkers” trade-in deal could prove a capital efficient remedy – although any owner of a peaking gas-fired power station would vehemently oppose such a move! Better residential building codes requiring dramatically increased consideration of heating and cooling requirements would have a similar effect (e.g. double glazing of windows and, dare I say, roof insulation) – albeit with 150,000 new houses built annually vs housing stock well over 8 million, the positive impact would be very slow to emerge. The MEPS and ERL initiatives could save the State governments and hence electricity consumers the need to fund billions of dollars in peaking generation and transmission capacity in relatively short order.
Tim Buckley is managing director and portfolio manager at Arkx Investment Management
Note: This article is provided to detail clean energy industry developments that have relevance in the Australian context and should not in any way be taken as investment advice. Arkx is a Sydney based investment management company that invests in the leading, listed international clean energy companies.