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Lights Out! The dark side of demand management

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Source: Pixabay

Source: Pixabay

Another week and another government announcement.  But before we get into the latest political fudge on the National Energy Guarantee, just a quick recap on last week’s key events in the ever changing spiral of national energy debate and policy.

Amongst the orgy of hand wringing and political finger pointing that was last week’s AFR Energy Summit, you could be excused for missing one of the most self serving and tactless comments from a pride of CEOs who seem collectively to have agreed it was all someone else’s fault.

Admittedly when you’re struggling at slot 26 on the speaking roster, you need to say something that might relieve the torpor and rouse the post lunch snoozers on day 2. But the self serving and misleading comments from the CEO of one of the country’s iconic energy businesses need to be held up as a shining example of how this talk fest forgot about one key person: the customer.

Paul Broad is a veteran of the energy markets and CEO of Snowy Hydro, one of the country’s iconic energy businesses. His comments illustrate why the industry leadership is still far too inwardly focused on preserving its status quo, rather than embracing new, disruptive technology which will deliver a more reliable and lower cost product to its customers.

“Mr Broad said the energy industry should be aiming to meet all demand, and that “demand response” measures were little better than cutting customers off that would prefer to be using power.

“You know what demand management really is? Blackouts. That’s what happens – you turn it off,” Mr Broad said.

This is simply incorrect. Demand management is what sophisticated energy industries of the 21st century do to best optimise their business model from a cost, reliability and sustainability perspective.  It’s also what, later in the week, AEMO and ARENA sensibly committed over $25 million to, in order to avoid extreme peak demand this summer.

There is a significant global industry in demand management. Very smart mathematicians and software engineers have developed algorithms which use real time demand management at a C&I customer level to “firm up” intermittent renewables generation.

At a very basic level here in Australia retailers have for years been paying large industrial users to dial back consumption on peak demand days.  In fact, this has become an important source of recurring revenue for the nation’s large aluminium smelters.

So why would someone so knowledgeable about the electricity markets make such a statement about an established practice which relieves peak energy demand constraints and contributes to lower customer energy costs?

Well, the answer lies in those customer costs.  Snowy Hydro has one of the largest portfolios of generation in the NEM.  But this isn’t 24 hour, baseload generation like Loy Yang or Bayswater, it’s peaking generation.  As a peak generator Snowy has two key sources of revenue.

It makes a bit of money from selling generation during times of peak demand, but it makes a whole lot more from selling insurance.

Insurance is sold to electricity retailers in the form of price caps, which guarantee a maximum price which retailers need to pay for their generation on the wholesale market. Not surprisingly, this cost gets passed on to the customer.

If you are a small retailer with no generation – as rod Sims has reminded us, the “Big 3” control the majority of our generation – you are horribly exposed to the risk of high electricity wholesale prices. These prices can soar to $15,000 per MWh in times of peak demand, while your retail customers are paying you less than $100.

If you had to buy this generation on the open market, you would go out of business pretty quickly.  Here’s where Snowy comes in, with a “cap contract” that insures you pay no more than $300 per MWh for your energy.

The reason Snowy can sell these price cap products – and they make a lot of money from selling them – is that they effectively control the peak prices.  Like many markets, the wholesale electricity market is based on supply and demand.

When demand is high, suppliers can push up prices. Snowy has the largest portfolio of rapid start generation which can provide supply at peak times and therefore push down electricity prices.  This allows them to manage the underlying price risk behind the cap contracts they sell.

It’s a very efficient market which, over the past 20 years, has led to low wholesale prices and widespread availability of low cost price caps.  However, over the past year there have been some key events which have distorted this market in favour of Snowy.

The withdrawal of so much baseload capacity, combined with chronic gas shortage and a capital strike on new, non-renewable generation, has moved the market significantly in favour of suppliers.  Prices have soared and price volatility has dramatically increased, both of which play in to the hands of a portfolio and business model like Snowy Hydro.

With little hope of any clear, near term government policy to stimulate new generation this looks like a winning hand for Snowy, at least for the next decade until more generation comes on line, conveniently in the form of Snowy 2.0.

That is unless some annoying new technology arrives to upset the apple cart by restoring the supply-demand balance and reducing wholesale prices.  Demand management is the disruptive technology which threatens to do just that.

Overseas markets have been able to reduce customer demand through energy saving technology and government sponsored energy efficiency programs.

Low cost, smart technology which automatically switches off appliances or automatically regulates the flow of power to ensure you use the minimum necessary to run your appliances is available now.  Australia needs to embrace this technology, not vilify it.

Demand management is not the blackouts Mr Broad suggests.  It’s the smart way for customers to protect themselves from the increasing energy prices which are providing such a boon to Snowy’s shareholders (who incidentally comprise the Federal, NSW and Victorian governments).

We have big problems in our domestic energy industry and it’s great to talk about these things, but there was too much self pity at last week’s AFR Energy Summit.  Misery loves company, but to be fair, this train left the station almost a decade ago.  If you haven’t prepared for the current environment, someone should be asking questions.

I took a walk through the All Energy conference in Melbourne last week and saw a host of tried and tested technologies, both international and Australian designed, which are available now to help you manage your own peak demand and reduce your energy costs.

They weren’t for sale at the Snowy Hydro stand, but they will save you a lot of money, while helping to lower overall energy costs across the country.

Richard McIndoe is the head of Edge Electrons, and a former head of EnergyAustralia.  

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  • Chris Fraser

    Naturally they don’t want the punters to turn it off.They see their bottom line profit in every kWh consumed.Must be bitterness that the ordinary folk are doing the job that he and his ilk couldn’t manage after ten years of transition.

  • RobertO

    Hi All, Joe Hockey is another whom open his mouth to change feet. He told the CEO of Goldwing (WTG Company) that he drives past those ugly things (WTG) on his way past Lake George go Canberra every day. We have such high standards in Australia.

    • Joe

      Yes, the Hockey and the Abbott were on the anti Wind Turbine unity ticket. Presumably they both enjoy much better the view passing all those open cut coal pits in The Hunter Valley, driving along windows fully would down as the breeze shoots through and they suck into their lungs all that beautiful pristine ……coal dust. Black Lung over RE…always a winner for the Hockey and the Abbott.

  • Andy Saunders

    Demand management has quite a few flavours in other countries. There’s direct control, where the grid has direct connections into industrial SCADA systems to drop consumption – companies get a monthly retainer plus a per-kwh payment when activated. Then there’s voluntary manual curtailment (sometimes direct, sometimes via aggregators) of industrials where named equipment gets shut down on a forecast basis (often day-ahead) or on an emergency basis (with extensive alerting networks to get it done.

    Then on the consumer side there are similar aggregated manual curtailment and (increasingly) automated curtailment via home controllers of various hues. And the old-style off-peak hot water systems and the like.

    This is a very fertile area for development, especially in automation and aggregation. If the rules allow it…

  • Steve Silich

    Re: comments from Mr Broad. Why cant some of these senior business leaders look at what happens elsewhere in the world?
    New Zealand has used demand management in every household and cowshed for at least 60 yrs. A simple carrier wave relay switches hot water and space heating off during peak periods under control of the Utility (retailer) and the customer pays less than half for the off-peak power. This was done many decades before computers, electronics and internet. All done reliably and at no inconvenience to the customer. Certainly no “lights out”.

    • Joe

      The Broad….there are no words. I read his comments in The AFR as they covered the Energy Summit. Is the Broad another hand puppet of Two Tongues Turnbull. Joshie F is the right hand puppet and the Broad…the left hand puppet?

  • Ian

    When you stuff a snake in a bag it’s sure to bite you

  • Peter G

    Broad’s position is a derivative of the old chestnut that electricity demand is inelastic. High prices have shown that demand is infact very elastic in absolute terms. The absence of a consumer price signal is what creates these super peak wholesale pricing events
    Demand management is good for both suppressing the peak pricing events as well as improving security options – but some consumer pricing signals at the margin might also reduce the requirement.
    The NEG plays into the same intellectual dishonesty as Broad’s – that demand is inelastic. If the AER/AEC were acting in the consumer interest they would pull their figure out and allow real-time pricing in retail on an opt-in basis (abundant intermittent generation and un-congested grid ought be priced accordingly and let the gold plating be paid for by those who use it) – this might have saved us billions.
    Consumers should have the option opt out of the expensive regulated ‘reliability’ that they don’t need and may not want.

  • According to Wikipedia, Snowy Hydro is jointly owned by the New South Wales (58%), Victorian (29%), and Commonwealth (13%) governments.
    Why is the hell are they gaming the system? Surely Government owned organisations should be serving the public, or am I too naive?
    I don’t really know about how they utilise the hydro component of their business, but surely it makes sense for them just to run as a low cost peaker?
    They’re got something like 3.7GW capacity, ie 4,500 GWh/year, so that should be pretty good for a fair chunk of the peaks.
    (Just saying – hopefully someone knows more than me 🙂 )

    • MaxG

      Too naive 🙂
      I currently work for the government… and it is all about arse covering. The system I am implementing can be had for 20 grant and commissioned in 2 months. But by the time it is implemented it will have cost the tax payer 2m$ and taken 2 years.

  • Farmer Dave

    Broad’s comments are reminiscent of the Marketing Division of the Sirius Cybernetics Corporation, but with one small change, and apologies to the late Douglas Adams: “a bunch of mindless jerks whose backs were first to the wall when the death spiral came”

  • Les Johnston

    This means Snowy hydro is in competition with battery storage and renewables and is attempting to frighten politicians to ban renewables.

  • RobertO

    Hi All, remember the COALition wants the Fed Gov to own all the Snowy Hydro so they cannot want to game the market (and anyway us Tax payers have to pay for the upgrade).
    See this story for more http://reneweconomy.com.au/the-no-name-policy-with-little-chance-of-reducing-power-prices-64948/

  • MaxG

    Which world are you living in? Who cares about the customer? Corporations will evade regulations, lie through their teeth and avoid paying taxes; lobby politicians to their benefit and screw the last Cent out of the public… it has been this way for decades… and in similar form for millennia 🙂

    • RobertO

      Hi MaxG, I believe you are correct, it more about business profits and top dog wage (CEO) than the customer so long as the customer is paying (just enough to keep him/her poor). Maybe we should ask the Fed Gov to limit CEO pay packets to 25 times the lowest paid full time worker in the company? (BUCKLIES and NONE)