Other states should follow NSW demand reduction scheme with PERCs and DREDs

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NSW’s demand reduction scheme offers sensible and practical policies to deal with rising peak demand – an approach that should be embraced by other state governments.

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Finally! We have some sensible and practical policies to deal with rising peak demand thanks to the NSW government announcement last week that it will introduce a demand reduction scheme. Let’s consider the need for such a scheme and how it might work in practice.

If properly implemented this will be a sensible and practical policy that addresses some of the failings of our electricity market. It builds on the successful energy savings schemes in NSW, Victoria, SA and the ACT and supports the transition to a future-focussed energy market which will be increasingly based on low cost variable generation.

State-based energy savings schemes across Australia have been successful in reducing energy use. They have delivered an average annual reduction of total electricity consumption of more than five percent, based on Energy Savings Industry Association (ESIA) estimates up to the end of 2018. These schemes have transformed the market in the provision of energy services and have overcome some of the barriers that were leading to chronic under investment in energy efficiency.

PERCs and DREDs

When considering the scope for a demand reduction scheme, simply put, current energy savings scheme methodologies to measure and quantify the energy savings from a range of upgrade types (eg lighting, air-conditioning, refrigeration, motors and pool pumps) could be modified to recognise and value demand reduction over the 5.00 to 9.00 pm peak demand period over summer. (See more detail on the shifting peak later in this article.)

Currently NSW Energy Savings Certificates (ESCs) measure energy savings (in MWh terms) converted at an assumed emissions factor (currently 1.06 tonnes per MWh). Potentially, under a peak reduction scheme, Peak Energy Reduction Certificates (PERCs) would be created based on the expected reduction in peak demand (measured in Watts – say 1 PERC = 10 Watts).*

For example, the decommissioning of an inefficient air-conditioner that is replaced with a more efficient air conditioner with a built-in Demand Response Enabled Response Device (DRED) could hypothetically result in a 1kW reduction in peak demand and so could be eligible to produce 100 PERCs.

Further, to support more efficient investment based on location (eg for very high demand or network constrained areas) specified postcodes could attract additional support to reflect avoided network investment.

Consultation over coming months will consider a range of issues.

NSW initiative timely

The NSW Government pipped its Victorian counterpart at the post with its announcement on the morning of the COAG Energy Council meeting last week: that it will extend and expand the NSW ESS and complement it with a second demand reduction certificate scheme that will support demand reduction with activities and technologies including batteries. The schemes will become the Energy Security Safeguard. The energy efficiency scheme annual targets will increase from 8.5% up to 13% by 2030 and run until 2050 in line with NSW’s net zero emissions target to 2050.

Any day now, Victoria will release its Regulatory Impact Statement regarding its Victorian Energy Upgrades (VEU) energy savings scheme targets from 2021-2025 and any new components. We are hoping for something at least as compelling given that Victoria has the largest energy savings scheme and has asserted an appetite for a robust peak demand reduction initiative. In some ways, a demand reduction scheme may be even more compelling for Victoria given the involuntary load shedding in that state last summer.

Both South Australia and the ACT are considering incorporating demand reduction into their energy savings schemes, with more flesh to come on the bones of those scheme reviews and commitments before the end of 2020.

Demand reduction schemes have been in play overseas for a few years, such as California, other US states and EU countries. It is fair to say that it has been more straightforward than in Australia where integrated energy systems make it easier to recognise and value the benefits provided by distributed energy resources. But Australia has disaggregated its electricity sector with the benefits of distributed energy more almost impossible to harness until now.

Our electricity market is going through unprecedented changes whereby the cheapest forms of power generation are variable solar and wind power generators that are replacing ageing dispatchable fossil fuel generators. This is not something that needs to be feared as there are also many technological developments that will see more cost-effective solutions on the customer side of the electricity meter. (Refer to E3 Consultation Paper: ‘Smart’ demand response capabilities for selected appliances, ANZ Governments, August 2019).

That paper proposes that all air-conditioners, electric storage water heaters, pool pump controllers and electric vehicle charges that are sold will need to comply with a full range of demand response (ie DRED) modes. Under a high activation scenario, the demand reduction available was estimated to be 5,190 MW in Australia by 2035 with net benefits of $4.3 billion.

Rooftop solar shifting the peak

A key opportunity is the growth in roof-top solar. While this is reducing peak demand, it is also resulting in peak demand occurring later in the day when solar output falls. The challenging period is the time between 5.00 pm and 9.00pm on hot days in summer when air conditioners are still going flat out.

Consider the NSW peak demand scenario last summer 2019. It occurred, as metered by AEMO, on 31 January when demand reached 13,756 MW at 4.30 pm, driven by air-conditioning load as the maximum temperature reached 39.6 degrees Celsius. At this time roof-top solar was estimated to be contributing 526 MW so the gross demand would have been 14,282 MW. (Refer to Figure 1)

NSW electricity demand and rooftop solar PV contribution
Figure 1 – NSW electricity demand and rooftop solar PV contribution (31 Jan 2019): Source AEMO

Notably, Sydney only had a single day (31 January) with a maximum temperature over 35 degrees Celsius (30 January and 1 February were both below 30 degrees Celsius). In the event of a run of very hot days in a row, meeting resultant air-conditioning-driven peak demand over the 5.00pm to 9.00pm period will be a critical challenge.

When we consider the expected level of future roof-top solar installations in NSW, based on estimates, we can consider that by 2027/28 metered demand will reduce considerably during the day, however, peak demand will remain very high over the 5.00pm to 9.00pm period.

With climate change making extreme hot weather more likely, the peak demand critical challenge will increase.

NEM law failing, demand in the dark

To date policy makers have tended to focus only on the supply side of the market and have not effectively engaged with the demand side. As a result, there has been extensive over-investment in the supply of electricity and under-investment in demand side opportunities.

The National Electricity Objective as stated in the National Electricity Law includes: ‘to promote efficient investment in and use of electricity services’: to date the opposite has occurred. The Productivity Commission in its 2013 report concluded that ‘growth in peak electricity demand is likely to be inducing (or bringing forward) a sizable stream of otherwise unnecessary investment, for which consumers ultimately pay. And the widening gap between peak and average demand is contributing to reduced productivity in the electricity sector.’

Failure to address market failures that have limited the efficient investment in and use of electricity services has been acknowledged. In the E3 Consultation Paper, p10, provided to the Australian Government, there was recognition that the market has failed consumers: ‘The low incidence of time-of-use (TOU) signals in electricity pricing is a regulatory failure that needs to be addressed through the actions of governments, electricity regulators and consumers. However, it is compounded by a market failure in the provision of services and technologies that can contribute to more economically efficient load management, irrespective of the pricing regime’.

Energy customers make decisions very differently to energy and network businesses and apply much higher hurdle rates to investments. Customers also respond very differently to price signals and we can’t just treat these investments in the same way as supply side options, which has tended to be the approach to date.

In the absence of a coherent national energy and climate policy (and considering National Electricity Market (NEM) design grinding its supply focussed way through change, which may not have meaningful demand side focus for years and years), a demand reduction scheme is an approach that should be embraced and emulated by other state governments.

Two key challenges have been obvious to seasoned industry participants for some time: the need to decarbonise our electricity market as ageing coal-fired generators become less reliable and exit the market while addressing escalating climate change. Climate change is increasing the incidence of very hot days that increase peak demand, putting our electricity system under pressure. The time for decisive demand reduction intervention is now.

*CORRECTION: A previous version of this article mistakenly said that “measured in kWs, 1 PERC = 100kW.”  

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