How can network incentives be aligned for an age of consumer energy resources?

Australia’s electricity system is quitting coal and needs to transform to support high levels of variable renewable energy (VRE) generation at both the large and the small scale.

The current plan is to build large scale clean energy projects and connected by a super grid. With delays related to supply chain, labour and planning there is a risk that 2030 emission and renewable energy targets will not be met.

The only way to cost effectively deliver on our targets is to utilise Australia’s enthusiasm for low-cost rooftop solar into a plan for ‘electrification’, as well as deliver large-scale renewables and storage. However, this will require government leadership in ensuring that the National Electricity Market is rebalanced towards the demand side.

With the growing enthusiasm by Australians to install rooftop solar, and increasingly batteries and EVs. These Distributed Energy Resources (DERs) combined with smart technologies it no longer makes sense to not maximise the opportunity they present.

Rewiring Australia is talking with governments, consumers and technology companies about how to quickly reform electricity market to value locally generated electricity and locally produced demand flexibility.

The distribution networks are the key to this puzzle. However, without certainty and reliability around the delivery of the services DERs can provide, where and when they are required, the network operators will resist demand flexibility trading and regulators will opt for solar “Switch-off”.

Economic reform of distribution networks needs to a new vision and the efficient carrots and sticks to drive this electrification revolution.

Under the current rules, there is a perverse incentive for DNSPs as the distribution network operator, to invest big in their network assets rather than smart utilisation of assets owned by consumers.

The intervention options available to the DNSPs under current regulations are limited. The DNSP can only intervene as the regulatory environment allows and their business model incentivises.

The options available to the DNSP include investment in network augmentation or incentivising end consumers to participate in demand flexibility trading via network control tariffs.

They choose network augmentation over demand flexibility because that is what they are incentivised to do. The perverse incentive is delivering expensive network augmentation options over cheaper, faster non-network options such as demand flexibility. The perverse incentive is contributing to the energy affordability problem.

Change the rules and the regulatory environment, and DNSPs could be incentivised to procure demand flexibility instead. Change the rules and even higher levels of DERs could be hosted on the grid and ultimately it would allow the coal fired power stations to exit.

Even if network regulators were inclined to review the regulatory incentive toward network augmentation, it could be up to five years before the regulatory reset would allow.

Achieving trade in demand flexibility at scale is vitally important to the transition of electricity systems. It is a challenge that electricity system regulators internationally are grappling with. Without resolution, the distribution level impacts from DERs, investment and transition to high levels of renewable energy will be less than optimal.

A key challenge of achieving scale is the complexity of reform, and the barriers for the end consumer. Another challenge is how to establish a market when the systems to support technology deployment don’t exist; when the business models don’t exist, or the profit margin is slim in the case of Virtual Power Plants.

It is these challenges that inform the way forward. This is why the creation of investment environments that support technology and business model innovation is so important.

Currently, Australian DNSPs lack experience in demand flexibility trading, resulting in a lack of confidence in the DER services product. Unless opportunities are created to develop confidence in the product, along with the alignment of penalties and incentives, these factors will remain barriers to demand flexibility trading.

The UK solved this through regulatory design as a driver in the trade of DER services and combined with innovation support. The approach in the UK was to introduce incentives for the DNSP to tender for non-network services and start from a low-risk and low-volume base.

That is incentivise the DNSP to purchase demand flexibility and thereby creating an investment environment for technology and businesses to address the barriers to participation by the end consumer. By creating a regulated demand for demand flexibility resulted in improved the reliability of DER services delivery.

The UK approach has incentivised the trade of demand flexibility, and it has resulted in DNSPs tendering directly with end consumers (or their aggregators, traders, and agents).

This approach has seen the trade rise to 3,700 MW of DER services delivered through tender, an increase of 31 per cent in 2021 and a 76 per cent increase since 2020.

Since the first year of tendering in 2018, DNOs have gone from receiving insufficient offers to receiving offers that exceed the demand flexibility procurement requirements.

The UK Power Network (UKPN), Western Power and Scottish Power Energy Networks are leading in this process.

The three remaining DNOs, currently opting for network reinforcement or Active Network Management (ANM). To date, providers of demand flexibility services have been from gas standby generation, Battery storage, commercial and industrial end consumers and EV fleets.

As demand flexibility can deliver an estimated £10b per annum savings, the RIIO-ED is supported by the ‘Smart System & Flexibility Plan 2.0’.

The UK ‘Department of Business, Energy and Industrial Strategy’, ‘Innovate UK’ and the independent energy regulator of Great Britain ‘The Office of Gas and Energy Markets’ (Ofgem), have responsibility for the implementation.

The objective is to coordinate, align and optimise the trade of power system flexibility across distribution, transmission, and wholesale electricity markets. It is designed for the delivery of a smart and flexible electricity system with a focus on ‘Smart Local Energy Systems’, ‘Homes as Power Stations’, and ‘Active Buildings’.

There is £100 million for priority areas of energy storage, flexibility resource development and trading, plus £450m available through Ofgem’s RIIO-ED2 price control as funding for network and energy security innovation.

RIIO-ED is short for ‘Revenue = Incentives + Innovation + Outputs’ electricity distribution (ED) price control determination. The RIIO-ED determines the business and revenue model of the Distribution Network Operators (DNO), the Australian equivalent of DNSPs.

In considering a UK flexibility plan and RIIO-2 type approach for Australian DNSPs to develop their confidence in DER Services product, additional opportunities exist. Such as:

1. Roll out of Dynamic Operating Envelopes (DOEs) as a key innovation.
2. Better utilise the Demand Management Innovation Scheme.
3. Allocate DNSP revenue that is appropriate for a dynamic system and on a biannual basis, by reducing the reset period reduce from 5 years to 2 years.
4. Balance the equivalent investment and focus that is applied to Renewable Energy Zones to ‘Community Energy Zones’ (CEZ).
5. Support and activate CEZs, to promote trust in action, manage expectations and consumer protections.

Vikki McLeod is Rewiring Australia’s energy market reform adviser and PhD candidate