Schott says “two-sided” market turning energy sector on its head

Australia’s energy regulators say demand response and distributed energy will play a critical and equal role in the new “two-sided” energy market, which they now concede will complete re-shape the National Electricity Market in the most fundamental reform since its creation more than two decades ago.

Kerry Schott, the chair of the Energy Security Board which is leading a wholesale review of the market that could be in place by 2025, says the industry is being “turned on its head” by the growth of rooftop solar and battery storage, and the growing acceptance of demand-side technologies.

Contrasting the way the National Energy Market operated when the current set of market rules were designed in the 1990s, Schott said that emerging technologies and changing consumer expectations necessitated reforms.

“We’ve always had demand response to the system but it was largely reflected in two ways: First of all, by load-shedding which is your ultimate demand response,” Schott told a forum hosted by the Energy Efficiency Council on Monday.

“So you just don’t satisfy [demand]. You turn the switch off. That works to keep the system stable, but it’s clearly not very desirable. And the second way in which it was observable was through clauses in contracts of very large companies,” Schott said.

“We’re now in a very different world, where demand is basically following supply. So the whole way in which the world works is turned on its head.”

Schott said greater supply-side participation in the National Electricity Market is likely to feature in the ESB’s proposed post-2025 market design. This will require greater visibility and control of distributed energy resources, such as rooftop solar installations and battery storage.

Most energy experts say that the combination of distributed resources and demand response – which can provide load or supply – could account for nearly half of all grid demand within a few decades. Rooftop solar is already reducing “operating” demand to record lows, requiring a shift in the way that regulators think about the grid.

Australian Energy Market Operator chief Audrey Zibelman has been pushing for a greater focus on demand side response since taking on her role more than two years ago, as have advocates such as the EEC. Now, even the conservative rule-maker, the Australian Energy Market Commission, has come on board.

“I know that the AEMC was talking to you today about supply and demand, and one of the things that the ESB is very focused on is trying to make sure that each side of the market is the same,” Schott said.

“So for every megawatt of demand that you respond to, you should get rewarded in the same way that the supply side gets rewarded. And if we can get that change in the market and make it quite transparent, will find that people on the demand side will product with capacity and get properly rewarded for it.”

Earlier, the acting CEO of the AEMC Suzanne Falvi said that the emergence of a ‘two-sided’ electricity market is almost certain to become a key feature of a future energy market.

“20 years ago, consumers had a lot less dynamic load. We didn’t have smart appliances that allowed you to change it quickly. And at the time, it was assumed that most prices would be really inelastic, unresponsive to prices,” Falvi said.

“And so 20 years ago, it all made it very uneconomic to impose obligations on demand. The approach that we took in setting up the NEM was that we would alter supply to meet expected demand based on forecasts.

“But this concept of digitalisation that we keep talking about changes how we get to think about that provides an opportunity to think about our market design differently.”

Currently, the NEM primarily operates as a ‘supply’ market. Electricity generators bid generation capacity into the market, as an offer to contribute to meeting demand at a particular point in time.

This structure makes it very difficult for energy users to reconsider their level of consumption based on the level of demand at a particular point in time, or in response to spikes in the wholesale electricity price.

The AEMC recently released a discussion paper on the impact that emerging technologies, including those driving the ‘digitisation’ of the electricity grid, would have on the emergence of a ‘two-sided’ energy market.

“Not only does a two-sided market actually allow for more participation, which will put a downward pressure on wholesale prices, it means retailers again have to rethink how it is that they actually do business,” Falvi added.

“It will facilitate new business models, like aggregators that are going to work in the best interests of customers and be rewarded for doing so.

“It means actually knowing how much demand that we need is going to get more accurate which means we can all make better decisions around what it is that we want to invest in,” Falvi said.

Government funded trials have begun exploring ways in which demand response can be integrated into the NEM, many of them under the auspices of the Australian Renewable Energy Agency, whose CEO Darren Miller also spoke at the forum.

Miller said the increased volume of flexible demand made it essential there was a new market structure.

“The way we use demand response today, it’s really quite invisible relative to the supply side,” Miller said. “It’s not the same bidding methodology;  you don’t schedule your load, the way that the generators schedule their supply.

“What that points to is that what works at the margins, in a very small scale, will not actually work at scale, once there’s a larger share of demand that can get into the market.”

Miller recognised that there is a fundamental problem with the current energy market design, where the incentives for a consumer to reduce demand can have the perverse effect of reducing wholesale electricity prices for all other consumers who do not reduce their demand while delivering little benefit to those participating in a demand response event.

“We need to look at a different market design where demand is valued as an equal participant relative to supply, and that’s certainly a theme that might come out of the future market design that the Energy Security Board is looking at,” Miller said.

The Energy Security Board is expected to deliver its findings on a post-2025 National Electricity Market design to the COAG Energy Council by the end of 2022.