The Australian Energy Market Commission (AEMC) has delayed a decision on the introduction of a wholesale demand response mechanism into the National Electricity Market but has conceded that both small and large energy users should be able to take part in a ‘two-way’ market.
The long awaited final decision – nearly two decades after the idea was first raised – had been due on Thursday, but the AEMC advised it was putting it on hold after receiving new advise from other regulators about the development of a demand response mechanism, and to consider its impact on flagged reforms to the overall market design.
It is understood that the AEMC is likely to support the introduction of a wholesale demand response mechanism, and has issued a draft determination supporting its introduction, which would provide greater opportunities for energy users to be financially rewarded for reducing their energy consumption during peak demand periods.
The AEMC had initially thought that a wholesale demand response mechanism could be implemented by mid-2022 at the earliest, but while delaying a final decision on the rule change, the AEMC now believes a mechanism could be implemented by mid-2021.
The AEMC has received advice from the Australian Energy Market Operator (AEMO) that the mechanism could be implemented a year earlier than first thought, and that the cost of implementing a wholesale demand response mechanism would be in the range of $40 to $95 million.
However, AEMO also advised that there is some concern that the investment necessary to implement a wholesale demand response mechanism may become redundant if the National Electricity Market is later transformed into a ‘two-sided’ market as part of a post-2025 design upheaval.
AEMO pointed to the comprehensive work being undertaken by regulatory bodies as part of the post-2025 design of the National Electricity Market review, that is currently lead by the Energy Security Board. The post-2025 design work is actively looking into how a ‘two-sided’ energy market, that sees equal participation of generators and energy users, could be established.
“We are taking this additional information from AEMO to look at how we can broaden participation in demand response and bring forward the cost effective and enduring creation of a truly two-sided market,” AEMC chairman John Pierce.
“With this additional information, we will undertake further work with AEMO and other stakeholders to develop and consider a mechanism for wholesale demand response that could minimise costs and be implemented earlier than the mechanism currently proposed,” the AEMC added in a statement.
“Preliminary work with AEMO indicates that implementation of a such a mechanism could be brought forward to mid-2021 rather than the previously planned mid-2022. This would be an interim measure ahead of a move to a two-sided market.”
The chair of the Energy Security Board, Kerry Schott, acknowledged it was important that changes to the National Electricity Market rules should be undertaken with consideration to wider market reforms.
“The ESB welcomes the work the market bodies will be undertaking on a two-sided and ahead market. Those changes, like demand response that require major system changes, should be coordinated and done cost-effectively across the market,” Schott said.
The rule change request, which sought to allow the establishment of a wholesale demand response mechanism, was originally submitted to the AEMC by the Public Interest Advocacy Centre, The Australia Institute and the Total Environment Centre.
While the groups welcomed the indication from the AEMC that it would look to introduce a demand response mechanism as early as 2021, they expressed concern that households and businesses would remain locked out of the mechanism, and would be reliant on their electricity retailers to be able to participate.
“Household demand drives high energy prices and households are eager to participate in demand response,” the Total Environment Centre’s Mark Byrne said. “Indefinitely excluding them from the mechanism reduces its effectiveness and is unfair for those who want to be paid to lower their energy use.”
“Demand response has been on the reform agenda for 17 years and households shouldn’t have to wait another five years for access to it, which is a risk if it gets mired in other reform processes.”
Head of energy policy at the Public Interest Advocacy Centre, Craig Memery, said that demand response could provide an opportunity to provide a better signal to guide energy use during periods of peak demand and energy prices, that could lead to lower energy prices for all consumers.
“As summer peak demand grows and aging coal plants such as Liddell close, demand response will be critical for keeping the lights on. Introducing it in 2021 shows the Commission is serious about keeping down energy prices and preventing blackouts in coming summers,” Memery said.
The Australia Institute’s energy policy and regulatory lead, Dan Cass, said that the proposed demand response mechanism was popular amongst the public.
“Australia’s electricity market needs comprehensive regulatory reform like demand response to deliver reliable, affordable and renewable energy,’ Cass said.
“This is a popular reform. Polling commissioned by The Australia Institute in September 2017 found that two-thirds of Australians would prefer to see peak demand managed through demand response rather than building new generators and higher capacity networks.”
The groups recognise the Commission’s push to align the wholesale demand mechanism with the design of a two-sided energy market is likely to be sensible and may produce a better whole-of-system outcome.
“A two-sided energy market is a worthy aspiration and demand response has an important role in its development,” said Mr Memery. “Aligning the mechanism with designs for the two-sided market should help in the long term.”
The AEMC will continue to engage in further consultation around the demand response mechanism.
“We will continue to provide stakeholders with an opportunity to provide input on this important reform as we progress towards a final determination in 2020,” AEMC chairman John Pierce said.
