“Huge milestone” as AEMO switches on demand response in major market reform

Australia’s National Electricity Market marked a major milestone this week, with the launch of the Wholesale Demand Response Mechanism, or WDRM, that allows large commercial and industrial businesses to bid and schedule a reduction in electricity consumption in return for payment.

The WDRM commenced operation on the NEM on Sunday, several months after the Australian Energy Market Commission gave its final approval for what amounts to one of the biggest energy market reforms in decades.

The mechanism works to encourage a reduction in consumption at critical peak times, rather than the usual “supply-side” response that has typically involved coal and gas generators burning more carbon intensive fuel. It will be particularly important in summer, and should lower prices for all.

“Today marks a huge milestone,” said Enel X of the occasion on Sunday. The smart energy management offshoot of Italian giant Enel was first off the blocks to take part in the new market, after registering as the NEM’s first demand response service provider, last Thursday.

“[It’s] an opportunity for businesses to earn a significant new revenue stream while supporting Australia’s most affordable path to decarbonisation.”

In Australia, Enel also owns the 220MW Bungala solar farm in South Australia and the small 34MW Cohuna solar farm in Victoria, and has voiced plans to grow its Australian portfolio by another 1,000MW of generation capacity in the coming five years.

Enel X, meanwhile, has been busy establishing a commercial and industrial virtual power plant that today manages 350MW of capacity in total, across businesses ranging from mining and resources sites through to grocery stores, water utilities, hospitals, food manufacturers and IT facilities.

To date, Enel X’s VPP has registered in excess of 250MW for participation in the frequency control ancillary services markets, since it started out in that market in 2017. Enel X now intends to replicate its FCAS success in the WDRM.

“We’re building our WDRM portfolio on the back of our frequency control ancillary services markets success,” said Jeff Renaud, Enel X’s head of Asia and Oceania in an interview with RenewEconomy on Tuesday.

“We were the first VPP to enter the FCAS markets in 2017, and we grew our offer to 150MW of new resource in the first 12 months.

“AEMO has cited our contribution as having a positive impact on pricing outcomes. Today, about 15% of cleared FCAS reserves come from our VPP. We will work to produce a similar success story in the WDRM.”

Renaud says that in terms of the WDRM, Enel X’s potential offering of “negawatts” – or avoided consumption – is significant. The company’s early goal is to offer more than 100MW of capacity into the WDRM in 2022.

“We’ve had a lot of interest from existing and new customers. It’s early days, we’re growing our portfolio… We’re also working with AEMO on ways to expand eligibility, for example by adding new measurement methodologies. This will mean more loads will be eligible to participate.”

As Renaud explains it, Enel X will offer its “negawatts” to the WDRM in much the same way that a scheduled or semi-scheduled generator would offer megawatts, to provide a certain quantity of demand response at a certain price.

Enel Xwill do this by monitoring the market conditions and prices 24/7 through its VPP platform and making a bid when the conditions are right – such as when spot prices are high due to a tight supply/demand balance, which typically occurs in the evening hours of summer.

“If our offer is cleared by AEMO’s dispatch engine, we’ll send a signal to our customers to reduce load. When the event is over, we’ll notify the customer that they can restore their load, and they’ll be paid for their participation,” he told RenewEconomy.

As Renaud points out, not only does this mechanism work to remunerate C&I businesses for smarter energy use, but each megawatt of demand response in the WDRM reduces the need for investment into other more expensive resources.

“We’re using lots of industrial equipment that already exists, for secondary purposes, which is inherently very economically efficient,” he said.

“The nice thing, and a critical element of the WDRM … is that businesses can do this outside of their retail power supply contract. They can use any retailer they like, and can then separately participate in the WDRM, and get paid for doing it.

“A customer that can respond in five minutes can earn more value than the customer that can respond in 10 or 15 minutes, but each can participate.

“We explain the economic spectrum of participation and then work with the customer to explore the options and approach that they’re comfortable with, that works with their IT systems and their operational policies,” Renaud added.

“Progressive organisations recognise the importance of developing demand response capabilities to support their sustainability objectives and are seizing this opportunity. The market urgently needs new, flexible resources to balance renewables and replace retiring coal generation.”

And once the C&I-based WDRM is up and running smoothly on the NEM, there is the potential for smaller businesses and households to get involved too – a development the AEMC has not ruled out, but only as part of a “sensible, stepped approach to a two-sided market.”

“We think that all energy users, whether large or small, should have the opportunity to provide wholesale demand response, so we support the mechanism being extended to households as well as small businesses,” said Renaud on that subject.

“To make this a reality, there will need to be further work on metering, measurement and market access approaches that scale down to these smaller loads.

“We hope the WDRM will show the valuable role of demand response, and how opening markets to flexible demand allows us to find a point of maximum efficiency as we look to reshape grid,” Renaud said.