Demand response is saving money, but is still a tiny fraction of the 1GW market it could and should be

The wholesale demand response market is still undercooked, with only 146 megawatts (MW) of registered capacity – a fraction of what many energy say the grid could and should support.

Currently, there is 140MW of capacity registered with market leader Enel X, and another 6MW registered with a company called Viotas, according to the Australian Energy Market Operator (AEMO).

The benefits of the market have been underlined in a new report from the Australian Energy Market Commission, the rule maker for the grid, which notes that demand response is clipping $30/MWh off the cost of electricity on the rare occasions it is deployed.

There has long been a call for Australia’s grid operators, regulators, and rule makers to focus more on demand response, particularly as a “two-grid” emerges with households sending solar power back to the grid and the emergence of battery storage as a significant player.

But so far its deployment has been limited, and while the AEMC says it is working well, it’s only intending limited tweaks to the main market mechanism, despite forceful arguments for it to loosen the “overly cautious design settings” that Enel X has been chafing against since 2022.

The AEMC review into the four-year-old wholesale demand response mechanism sets two worries to rest: It says it should be kept in place, and says it’s now setting to work on loosening the rules to allow sites which have more than one connection point into the grid to participate.

But with registrations still far below the 1 gigawatt (GW) that Enel X believes is willing to jump in — under the right conditions — it may need to take more action.

Demand response registrations effectively plateaued between April 2022 and the end of 2024, bouncing between about 60MW to 70MW of registered capacity, according to data from Watt Clarity.

That is until June this year when the volume of registered capacity jumped to 92MW. In an April submission to the AEMC review, Enel X said it would “soon have over 200MW” of demand response registered with the market operator.

“As the pace of business and technological change supporting the renewable energy transition accelerates there is a need for the Commission to embrace a shift focusing on the ease, simplicity, and durability of market mechanisms so business invest in making this a success,” the submission said.

It listed its proposed design changes:

1. Enabling sites served by multiple connection points.
2. Removing the DNSP aggregation endorsement requirement.
3. Streamlining of baseline method development.
4. Introduction of baselines incorporating automatic ‘low load’ exclusion days in eligibility tests.
5. Baseline eligibility tests at an aggregated portfolio level.

AEMO’s ongoing efforts to streamline the mechanism and expand eligibility are helping to lower barriers to entry, Enel X’s Carl Hutchinson told Renew Economy.

“It’s encouraging to see that the Wholesale Demand Response Mechanism (WDRM) is now on track to become a permanent fixture in the market. This sends a strong signal to energy users, giving them confidence to invest in participation, driving greater uptake over time,” he said.

“Wholesale demand response is proving to deliver real benefits. When large energy users respond to price signals, they help reduce pressure on the grid at peak times, bringing down wholesale prices and delivering meaningful savings to all energy users. 

“The proposed rule change to allow participation across multiple connection points will make it easier for more large energy users to get involved, such as data centres. These users represent a significant source of untapped demand flexibility that can be unlocked through these reforms.”

Getting the demand response system this far wasn’t simple, as the AEMC faced intense opposition from big energy suppliers who benefit from selling their output into electricity price spikes, and didn’t want to see those profit-boosting activities dampened in any way.

Renew Economy reported in 2022 that incumbent utilities such as government-owned Snowy Hydro, which makes a lot of money from cashing in at periods of high prices, once dismissed it as “enforced blackouts.”

Money talks

If Enel X’s vision of a 1GW demand response market emerges, that would equate to millions of dollars in savings as factories, data centres, refrigeration services and other big energy users are brought in to dampen National Energy Market (NEM) price surges.

In the last four years, an average of 234 MWh of demand response was deployed from an average of 66MW of registered capacity.

The AEMC says that’s yielded about $1 million in savings each year, or $4.32 million in total. When looked at from a wholesale price point of view, demand response is shaving $30/MWh off peak prices when it’s being used or a total of $219.3 million.

Ramp that up by 15 times to reach Enel X’s vision, and that would be a powerful way to reduce the use of, and emission from, expensive gas peaking when electricity demand surges.

One new sector to be brought in is commercial refrigeration, Hutchinson says.

“We’re working with a Tier 1 grocery chain as well as Lineage Logistics to aggregate over 20 MW of flexible load across hundreds of stores and 13 refrigerated warehouses, proving that smaller businesses can play a critical role in grid stability and the energy transition,” he says.

Already the small amount of demand response in the Australian market has created $38,000 worth of emissions reductions and “efficiency benefits” over and above how much it costs to operate of $350,000 – $500,000 per year.

Currently, the amount of demand flexed over the last year is equivalent to a mid-sized utility-scale battery, according to AEMO.

The 20 participating entities were paid between $3,746/MWh to $5,890/MWh during periods of price volatility in New South Wales (NSW), Victoria and Queensland. That’s down from a peak of $7,162/MWh the year before.

For example, the July 2024 demand response spike shown below occurred when a rare NEM-wide price surge saw wholesale electricity prices soar past $1000/MWh. The mechanism kicked in for August to provide some grid stability. 

The first time demand response was unleashed was in January 2022 when a heatwave sent demand and prices rocketing upwards. 

The first and biggest aggregator, Enel X, deployed two different units totalling 10MW – likely big energy users that were contracted, and paid handsomely, to dial back their electricity consumption.

More changes on the way

The AEMC has been tasked with developing the rules around what’s called a two-sided market, where both electricity supply and reducing demand are used to set prices. 

It’s introducing changes that suck consumer energy resources into the NEM and allow them and other dispatchable energy sources to compete with big generators, starting in 2026 and 2027 respectively. 

But these aren’t appropriate for some energy users which have limited flexibility or aren’t sophisticated enough to be exposed to the spot market.

The former is focused on consumer resources such as electric vehicle chargers, rooftop solar, home batteries, hot water systems and other programmable devices in the home.

The latter introduces “dispatch mode”. It allows actual consumption and generation controlled via virtual power plants (VPP), community batteries, flexible large loads and other price-responsive small resources to be seen by and be used in the NEM.

But this system doesn’t work for, say, an industrial site whose business isn’t electricity but which can turn down chillers or furnaces, for example, if asked.

This, and the fact that these two rules aren’t coming in for another 18-24 months, is why maintaining a dedicated wholesale is useful for Australia’s emerging two-sided market, says AEMC chair Anna Collyer.

“The AEMC’s work through integrating price responsive resources means that there are new opportunities for both energy suppliers and users to participate in ways that weren’t possible before,” she said in a statement. 

“The [the wholesale demand response mechanism] continues to have a useful role alongside these broader market reforms, allowing certain types of demand response to participate in the wholesale market.”

The AEMC also believes the emerging and energy-hungry data centre industry are “well suited” to play a role in the demand response market and provides an opportunity for it to grow. 

However, data centre representatives have already suggested that they may not play ball with the role being defined for them by the energy sector, as their first priority is not to support the grid – but to their customers.