AEMC flags plan to lower costs, improve efficiency of demand response

Australia’s energy market rule maker has acknowledged the vital and growing role demand response has to play in the smooth running of the national grid, but says it is also vital to lower costs and clarify the role of the emergency supply service.

In a draft determination published on Thursday, the Australian Energy Market Commission recommended a “range of enhancements” to the reliability and emergency reserve trader (RERT) mechanism – a safety net used by AEMO to procure ‘out of market’ generation or demand response at times of peak power demand and shortages of supply.

The draft ruling – which also pushes out the date for a final determination to May* – acknowledges the importance of demand response as a tool for the grid operator, but says changes need to be made to lower procurement costs and improve transparency.

In a statement released alongside the ruling, the AEMC outlines a number of these enhancements, including the improvement of incentives for demand response, including via retailers encouraging customers to reduce energy use during heatwaves.

It also proposes “encouraging a lower-cost competitive market response,” by only letting providers enter into contracts for emergency reserves if they have not been in the market for the past 12 months, and thus preventing the development of a ‘RERT-only market.’

AEMC says rule changes would also clarify the conditions of when the RERT can be triggered, as “when AEMO forecasts a breach of the reliability standard which requires enough generation to service 99.998% of consumer demand.” And they would increase the lead time to buy reserves from nine to 12 months.

“With a longer lead time, AEMO can get better deals from a larger pool of providers, including demand response providers. This would ultimately lead to lower costs for consumers,” the ruling says.

The AEMC draft document also proposes providing a price guide for emergency reserves, noting that “price should typically be less than the cost of load shedding.”

And it says that it would have AEMO provide regular updates on how the RERT is procured and how much emergency reserves cost, to increase transparency and awareness of options in case of emergency.

As the AEMC ruling notes, the very nature of the RERT as an expensive, last-ditch emergency measure – through which AEMO can direct network businesses to interrupt supply to some customers to help avoid a system-wide blackout – means it has been used on “only a few occasions” in the last decade.

One of those occasions, however, was just last month in Victoria, when extended heatwave conditions and significant coal plant failures meant that the state experienced a shortage of supply even with emergency reserves.

AEMC chair John Pierce said in a statement that emergency reserves were “just that – for emergencies.”

“Price signals through the spot and contract markets, along with forecasts and notices from AEMO, give the market incentives and information to supply longer-term generation and demand response when and where it is needed,” he said.

“Emergency reserves are more expensive, which is why we need to keep them to a minimum. That’s why we also need a well-functioning market with clear price signals and information, backed up by policy certainty from governments, with tools like the retailer reliability obligation which is being developed by the Energy Security Board right now.

“Today’s draft rule is designed to minimise the cost of emergency reserves. It also directly links the level of strategic reserves to the reliability standard, which is set by an independent panel of experts including large energy users, consumer groups and industry,” Pierce said.

Consumer advocate group the  Energy Users Association of Australia said in a statement on Thursday that its initial review of the draft rule indicated some welcome changes, including increased transparency, and methods to recover RERT costs.

It also noted the “important reference to the Retailer Reliability Obligation” – which if approved by COAG could be in place as early as mid-year – as an important mechanism to ensure the market efficiently meets the Reliability Standard without the need to call on RERT.

“Importantly, the draft determination proposes more flexibility be given to AEMO in how it forecasts RERT requirements which takes into account ongoing changes in the generation mix to more intermittent renewables,” said EUAA CEO Andrew Richards.

“The best outcome for our electricity market and consumers is that it operates efficiently, utilising a range of tools to incentivise both supply and demand response so that we rarely require the use of the RERT,” he said.

Mark Byrne, energy market advocate from Total Environment Centre, said the draft determination, and the delay of the final ruling, showed the AEMO were determined to introduce a substantial reform.

Byrne – who co-authored this piece on the potential for demand response in the wholesale market, with Craig Memery – said the AEMC needed time to work through some of the technical details to make it work.

Submissions on the AEMC’s RERT draft determination are due by 21 March 2019.

*CORRECTION: The AEMC’s final determination on the RERT is due to be delivered in May of this year. An earlier version of this article incorrectly stated that this date had been pushed out to November.