“Eye glasses for the grid:” New rules pave way for consumer energy to compete with coal and gas

Virtual power plants, community batteries, flexible industrial loads and price-responsive small resources can now compete directly with coal and gas power plants and big batteries, in a rule change being billed as “pivotal” to Australia’s energy market evolution.

The rule change, published by the Australian Energy Market Commission on Thursday, means “unscheduled price-responsive resources” – ranging from household-based virtual power plants (VPPs) to community batteries and data centres – can participate directly in the electricity market.

Using a new framework called “dispatch mode” these non-traditional resources will be able to bid into the spot market, set prices, receive dispatch instructions and earn revenue in markets that require scheduling, such as regulation Frequency Control Ancillary Services.

“Whether it’s data centres shifting computing load, manufacturers using backup generators, commercial chillers, or household batteries aggregated as virtual power plants, retailers can now bid these resources into our wholesale market,” AEMC chair Anna Collyer said on Thursday.

“This reform is like giving the electricity system a pair of glasses – suddenly, it can see and respond to retailers’ and customers’ actions that were previously invisible.

“We are enhancing market efficiency by creating new opportunities for both energy suppliers and users to participate in ways that weren’t possible before,” Collyer said.

The rule is good news for Australian consumers seeking to get the most out of investments in rooftop solar, batteries and efficient electric appliances like heat pump hot water systems – and happy to join a virtual power plant to do so.

And the AEMC argues that if a bunch of previously unscheduled resources are integrated well, the power system will operate more smoothly, giving all consumers the benefits of cheaper supply.

“Importantly, consumers without CER will also benefit from the lower system costs resulting from effectively integrating price-responsive resources,” the final determination says.

According to modelling commissioned by the Commission, the well managed participation of these resources in the electricity market could deliver $834 million in cost savings between 2027 and 2050 through more efficient operation.

Successful integration of smaller-scale and consumer owned energy resources would also mean fewer large-scale infrastructure projects needing to be built to keep the system running, the determination says.

“This would contribute to the achievement of a net zero system, as existing lower emitting resources would be used rather than building new resources.”

Dispatch mode also opens up new opportunities for demand response, the commission says, because it will smoothly facilitate large customers, or third parties (including retailers) on behalf of large customers, bidding in their load.

“This could include data centres, irrigation and pumping loads, commercial and industrial heating, cooling and chilling loads and a range of future technologies,” the AEMC says.

“Most participation in dispatch mode is likely to occur through aggregating resources, but individual resources above certain sizes could also participate.”

But not everyone is convinced that the final design of “dispatch mode” is nimble enough to really unlock the full potential of consumer energy resources, including VPPs or other aggregations at the smaller end of the capacity scale.

According to the final determination, the minimum bidding amount to participate in dispatch mode is 1 megawatt (MW).

“For resources that are smaller than 1 MW, this rules out their participation,” the Commission says. “For resources that are greater than 1MW but still not significant, it limits how much they can participate during different periods depending on the current status and capability.”

Gabrielle Kuiper, an expert in CER who is currently helping to shape the federal government’s National CER Roadmap, says that a comparable US regulation – introduced back in 2021 – allows participating aggregations to be as small as 100 kilowatts (kW).

Kuiper says Australia’s much higher minimum of 1,000 kW (1 MW) is likely due to the existing limitations of Australia’s market – and how it is managed by AEMO. But she is concerned that the larger the bid size, the less competitive this important new market is likely to be.

To this end, the determination notes that while much of the focus of dispatch mode has been on household-based VPPs, the AEMC is expecting the “earliest entrants” to be aggregated mid-size batteries, such as those that are being installed on distribution networks to soak up excess solar – many of them by network companies.

Another concern is around the long wait for the implementation of the rule change, which in the final determination has been pushed out to May 2027.

Baran Yildiz, a senior lecturer at the University of New South Wales who is currently heading up an Arena-backed research project on CER integration, says that while the introduction of “dispatch mode” is a promising step in the right direction, the devil will be in the detail.

“There are questions on the exact implementation of this mechanism by the aggregators and retailers. We know that there have been mixed consumer experiences regarding VPP operations in the past,” he told Renew Economy.

“We need to implement mechanisms that will ensure short-term operational benefits are shared fairly amongst the stakeholders including consumers as they own the CER assets.

“The size and scale of aggregation will make CER and demand response a price-maker in the wholesale market which creates lot of new opportunities for the participants.”

Others in the industry have questions around the incentives being offered to support the framework. This refers to the $50 million included in the reforms to help encourage early participation in dispatch mode and overcome any “early barriers.”

The AEMC says shares of the $50 million will be made available from April 2026 through a tendering mechanism run by the Australian Energy Market Operator (AEMO), which will pay participants to enter dispatch mode in the first five years.

To ensure consumers benefit from this paid participation, payments will be capped at the estimated benefits per megawatt (MW) of participation. In the longer term, the commission says it expects that market and network access should provide incentives for participation.

“While there are costs to encourage early participation, the long-term benefits for consumers far outweigh these initial investments,” the AEMC’s Collyer said on Thursday. “It’s a win-win that doesn’t require changing behaviour, just smarter market operation.”