Demand response market may make room for new big players, but still no joy for small consumers

The Australian energy market rule maker says it will consider changes to the Wholesale Demand Response Mechanism (WDRM) to make room for a new breed of large loads, including energy sucking data centres, but has drawn the line at small customer participation.

In a final report on the WDRM this week, the Australian Energy Market Commission (AEMC) says the mechanism should continue its role on the National Electricity Market (NEM), paying large electricity users to reduce their consumption when the grid is under stress.

“The WDRM enables some electricity users to effectively incorporate their demand response participation into market outcomes, which benefits all electricity consumers,” AEMC chair Anna Collyer said in a statement published on Thursday.

“This is currently the only market mechanism in the NEM wholesale market that facilitates payment for reducing load against a baseline. It’s also the only mechanism that allows non-financially responsible market participants to participate in the electricity market.”

The report is the final step in the AEMC’s review of the WDRM, a mechanism established in June 2020 and launched in October 2021 off the back of a push to make demand-side energy – or “negawatts” – a key part of a flexible and efficient renewables dominated grid.

The plan was to remunerate large commercial and industrial businesses for smarter energy use – thus also reducing the need for investment into other more expensive generation and storage resources.

And once the WDRM was up and running smoothly with big C&I customers, there might be scope for smaller businesses and households to get involved too. But things didn’t exactly pan out that way.

For a start, participation in the scheme fell well below expectations. When the review began, the WDRM had just 74 megawatts (MW) of registered capacity – an outcome that key players like Enel X blamed on “overly cautious design settings.”

And while the AEMC reports that this number has since doubled, with another 76 MW taking participation to a total of 150 MW, it also concedes there remains room for improvement.

“The AEMC’s second recommendation is that the pending [Enel X] rule change request, Expanding eligibility under the WDRM, should be initiated to assess whether sites with multiple connection points should be allowed to participate in the mechanism,” the commission says in its final report on Thursday.

“This has the potential to increase participation in the WDRM and deliver additional benefits. We anticipate initiating this rule change in the first half of 2026.”

One of the biggest potential beneficiaries of the proposed rule change would be notoriously energy hungry data centres, large numbers of which – the report notes – are lining up to connect to the national grid within the coming two years.

“AusNet alone has a total pipeline of more than 10 GW of new transmission-level data centre connections (including projects in early-stage development),” the report says.

The Commission report notes that Enel X’s rule change request estimated 300MW of flexible demand is currently restricted from WDRM participation, and that subsequent committed developments and projected growth of data centre loads are likely to see this potential resource expand by hundreds of megawatts.

The AEMC’s primary recommendation, meanwhiel, is that the establishment of the WDRM has been a worthwhile exercise, and should carry on operating in the national electricity market (NEM).

The final report finds that the WDRM has resulted in $5.75 million in benefits to date, which is greater than its operational costs – and $1 million higher than the draft report, with the analysis extended to June 2025, capturing 237 MWh of additional dispatch.

“While the WDRM has had somewhat limited participation to date, it may still grow in participation over time and provide greater benefits,” the report says.

“Noting this, the Commission considers that the WDRM should continue to be part of the NEM and provide opportunities to large customers.

“The Commission sees no reason to recommend the WDRM’s phase-out.”

And while this may sound like faint praise to some, to Enel X managing director of Australia-New Zealand, Carl Hutchinson, it’s a “great confirmation” of the important and rapidly evolving role that the WDRM plays.

“One of the things that’s been hobbling the scheme in the past is that AEMC didn’t give it a full-throated approval,” Hutchinson told Renew Economy on Thursday.

With concerns that the scheme could be scrapped now “put to bed,” Hutchinson says it can continue to evolve, including through the initiation of the requested rule change process.

“The problem really was that the scheme was designed in a very restrictive way to start with,” Hutchinson says. “[Research has shown] we’ve restricted the baseline methods so you can only get about 20% of loads in.

“And so when you have four out of five loads that couldn’t participate at first, then obviously that significantly hampers the efforts for anyone to invest in it.

“AEMO [the Australian Energy Market Operator] has done good work on expanding baseline eligibility and the AEMC has now come out and said it’s essentially an enduring feature of the market, and so that allows some investment certainty as well.

“So all these types of things – and there’s a suite of work that AEMO is still doing that will… improve eligibility … over time – will lead to better uptake.

“It’s already showing benefits beyond its costs, even with those restrictions having been in place,” Hutchinson adds. “So I think we’ll see a bit more momentum behind it now.”

Crucially, the AEMC finds that expanding the WDRM to sites with multiple connection points looks like it could be done without adding too much more cost or complexity.

“As currently understood, this option does not propose material changes to the dispatch or retailer billing systems, it minimises potential costs and complexities in its implementation,” the report says.

But the Commission argues that the same cannot be said for rule changes to allow small customer participation in the WDRM – another reform that has been high on the agenda of critics of scheme.

“The Commission considers that further work to facilitate small customer participation in the WDRM should not be prioritised,” the report says.

“This is because there are substantial complexities that need to be addressed in order to facilitate small customers in the WDRM which may outweigh the limited benefits of the WDRM to date.

Instead, the Commission argues that small customer participation in the wholesale market can be facilitated through the Voluntary Scheduled Resource (VSR) framework, from both customer CER and demand response.

This part of the AEMC’s determinations, says Hutchinson – the continued exclusion of residential and small to medium enterprises – is likely to disappoint some.

“So that’s probably the one piece that [the AEMC] could do that they’ve decided not to do … [because] it’s just not the right time, now, or the cost benefit, I’m not sure.”

A separate AEMC rule change is designed to allow virtual power plants, community batteries, flexible industrial loads and price-responsive small resources to compete directly with coal and gas power plants and big batteries.

But as Renew Economy explains here, the final design of this new “dispatch mode” is likewise being criticised for not being nimble enough to unlock the full potential of consumer energy resources, including VPPs or other aggregations at the smaller end of the capacity scale.

“I guess we still don’t have as much flexible demand participating in the market as we should… but we’re trending in the right direction, and there’s good support from the industry as a whole, and from AEMO and AEMC,” Hutchinson says.

“I still see a lot of work to do from everyone, in reality, but [this decision on the WDRM] is good news and good signs.”