New demand management plan could match “half a Hazelwood”

The Australian Energy Regulator has released proposed new rules that would encourage the country’s network operators to introduce demand management technologies that could deliver flexible capacity equivalent to half the now closed Hazelwood power generator, and savings to consumers.

The proposal, released on Monday by the AER, is part of a suite of new initiatives being pursued by energy institutions to find a smarter way of dealing with peak demand than simply building new peaking fossil fuel plants.

These initiatives include battery storage, of the type being built in Jamestown (the Tesla big battery), and the 30MW storage facility near Dalrymple, also in South Australia, and the demand management incentives being sponsored by ARENA and the Australian Energy Market Operator.

These DM incentives – which include ideas such as energy efficiency and load management – could provide 170MW of flexible capacity in Victoria, South Australia and NSW this summer, a critical amount given the potential of shortfalls in heatwaves and when other plants fail or are not generating.

Those initiatives have created a huge amount of interest in the DM industry, and may obviate the need to build new emergency gas generators in South Australia.

The AER initiative is designed to create a market, or a series of incentives, for networks to provide DM services beyond the ARENA/AEMO and state government trial, and make it a permanent part of the energy infrastructure, as happens in other countries (see table top).

The initiative has been welcomed by energy experts who have long pushed for such programs to be introduced, often fighting the fossil fuel lobby, which has argued against such measures because it might reduce the sector’s ability to make profits from peak power events.

“This is a very significant reform which means that for the first time in Australia, electricity DM may be able to deliver on its potential to cut energy bills,” says Chris Dunstan, from the Institute for Sustainable Futures.

“The AER deserves credit for developing what is likely to be the most important DM reform since the establishment of the National Electricity Market in the 1990’s. Demand Management has been recognised as key to delivering affordable and reliable electricity ever since the National Electricity Market was created.

“But as shown in our recent ISF research report, Demand Management Incentives Review, the current regulatory system creates barrier to cost effective DM.

“This  draft DM Incentives Scheme should mean that for the first time,network businesses will have clear regulatory incentives to undertake DM wherever it is a lower cost option than network investment. ”

Dunstan estimates that if DM can be supplied at the same cost as that targeted by the current AEMO/ARENA initiative – 160MW for $37m – then the DMIS could offer up to 800MW per annum of DM capacity, or roughly equivalent to half a Hazelwood power station of capacity per year.

“This is exactly the sort of flexible demand that we need as existing coal-fired power stations gradually reach the end of their economic life and we move to a greater reliance on variable output renewable energy like wind and solar,” Dunstan says.

“And the best part is that the DMIS will deliver this flexible capacity while lowering  customers’ energy bills in the process. That is, as the network business need to demonstrate that the DM is lower cost than network solutions, it will deliver this capacity at a net negative cost to consumers.”

The proposed DMIS will operate under three caps.  Firstly, the network providers will need to demonstrate that DM is lower cost than the network investment alternative, which analysts say shouldn’t be hard.

Secondly,  the network business will only be allowed to recover up to 50 per cent of the cost of the DM measures implemented, and thirdly, the total cost of the DM incentive recovered from customers must be lower than one per cent of the DNSPs Maximum Allowable Revenue.

The Maximum Allowable Revenue for the DNSPs is about $9.6 billion per annum.  So this puts a cap on network DM cost recovery of $96 million per annum.

“Given network businesses will only be allowed to recover up to 50 per cent of the costs, the total DM spend by the network businesses could reach up to twice this, or $192 million per annum,” Dunstan says. “While in practice, it will likely take time to ramp up to this sort of level, the potential impact should not be underestimated.”

The AER says once finalised it will push for the rule changes to be accepted by the Australian Energy Market Commission, which has also been given a tight deadline by the recent COAG meeting, where minister have been frustrated by the slow response to new technologies and innovations.

“There has been an increasing recognition that electricity networks need to better consider the demand-side of the equation in addressing network constraints,” AER hard member Jim Cox said in a statement.

“We are committed to driving this change in focus. We believe our demand management incentive scheme will be an important part of the solution.”