The Tesla big battery and demand response projects may well have delivered spectacular savings in the grid stability market last summer, but they face a wall of resistance from incumbent utilities over further access to the energy market.
Tesla, EnerNOC and others are pushing to make technologies like “virtual power plants” and demand response more widely available in Australia’s wholesale energy markets.
They argue, after their success in South Australia and across the National Energy Market, that they could deliver increases in competition and significant savings to consumers.
But Australia’s incumbent generators, led by Snowy Hydro and the main lobby group, are fighting back, having seen the gas cartel’s earnings smashed by the presence of the Tesla big battery in South Australia and EnerNOC’s demand response activities.
It has set the scene for another battle royale between the incumbents and the new technology developers – similar to the one that was fought over the introduction of the 5-minute settlement rule, which will be introduced, albeit with a 5 year delay.
This is a battle that is being fought between new and old technologies, new and old business models, and the push to shift from a centralised largely fossil fuel grid to a distributed, largely renewable based one.
As we reported last week, an analysis by the Australian Energy Market Operator found that the Tesla big battery and aggregated demand response delivered by EnerNOC delivered savings of more than 57 per cent over summer.
This was supposed by analysis from McKinsey and Co that prices in South Australia’s FCAS market over the first four months of operation from the Tesla big battery, known as the Hornsdale Power Reserve, were 90 per cent below their previous peaks.
The changes being considered by the AEMC would allow ‘aggregators’ like Tesla and EnerNOC to take their success in the FCAS markets, and replicate it in the energy market.
They want to offer “virtual power plants” – which aggregate distribute energy products including battery storage and demand response (such as voluntarily turning appliances or equipment down or off) – independently, without needing to work through retailers, and force customers to join those retailers.
This would remove the barriers to uptake and increase the focus on “demand side” solutions, rather than switching on a power plant and burning fuel whenever there is a pricing or supply issue.
In the case of Tesla, which is already proposing a 250MW virtual power plant in South Australia, it could mean playing directly in the market themselves.
However, generators such as Snowy Hydro are terrified at the prospect of these smart technologies and the potential of “eating their lunch”.
Its CEO Paul Broad has previously compared “demand response” to enforced blackouts, but his antipathy may be largely based on what it would do to his company’s revenues.
While much focus has been placed on the apparent threat of a new coal generator on the business case for Snowy 2.0 pumped hydro scheme, the bigger threat may be in allowing demand response in the wholesale market.
That’s because Snowy hydro is basing its case for Snowy 2.0 largely on its ability to sell “market caps”, which are effectively insurance products sold by peaking resources to help retailers hedge against high prices.
This strategy largely assumes that customers will continue to seek protection against price spikes of as high as $14,000/MWh, and Snowy’s website says these insurance products form the basis for around 40 per cent of revenues underlying the Snowy 2.0 business case.
But demand response and battery storage has the potential to kill those price spikes, or at the least diminish them, undermining a key part of the business case proposed by Snowy Hydro for its $6.5 billion plus pumped hydro scheme.
“Snowy Hydro is increasingly concerned by claims that any action that reduces short term high spot prices must be in the overall interest of consumers,” it says in its submission to the market rule maker, the Australian Energy Markets Commission.
“The introduction of the DRM would further distort and dampen high spot price signals. Longer term customer outcomes are best protected by undistorted pricing signals that provide the investment signal for ongoing investment in new assets.
It then points to the complexity and other pitfalls of the proposed demand response mechanism (DRM). “Snowy Hydro strongly believes that the DRM is a complex solution looking for a problem that simply does not exist.”
Tesla, EnerNOC, and other would-be aggregators and VPP operators such as Zen Ecosystems have a strong ally, however, in AEMO, which is proposing to extend the recent trial of demand response in providing emergency back-up into the wholesale markets.
This has the potential to set up another contest of ideas between AEMO, whose CEO Audrey Zibelman is a strong advocate of demand response, and AEMC, whose chairman John Pierce is blamed by the industry for the rule-makers slow embrace of this idea.
The position taking is revealed in newly published submissions to an AEMC directions paper, of which wholesale demand response is one of four topics under consideration, but appears to be the most contentious.
Stakeholders appear to be polarised into two camps – on the one hand new energy technologies companies like Tesla, EnerNOC, and Zen Ecosystems, who want access to compete directly against generators in the wholesale market.
They are supported by consumer groups including the Major Energy Users Group, The Public Interest Advocacy Centre, and the Energy Efficiency Council.
On the other side of the debate there is the “old guard” generators and retailers determined to resist wholesale market competition from new entrants, and retain their ability to remain in control of a customer’s demand response access.
For a bit of history, a rule change to allow a wholesale demand response mechanism was proposed by COAG energy minister in 2015 but the AEMC knocked it on the head in 2016, following opposition from incumbents.
But after the Finkel Review came out in support of further reforms for demand response, and AEMO declared its enthusiasm for the technology, the AEMC is looking at the idea again through its Reliability Frameworks Review.
The new mechanism would allow aggregators like EnerNOC and Tesla to operate “multi retailer VPPs”, whereas today, a VPP in the energy market must be operated through a single retailer.
This means that Tesla could potentially be the market-facing operator of the VPP, rather than choosing a retailer partner to operate the VPP, and forcing consumers to churn onto those retailers in order to participate.
“Introducing a demand response mechanism will better enable distributed energy resources to provide energy market services and be properly compensated for the market benefits they provide,” Tesla argues in its submission.
“It overcomes several of the barriers to wholesale energy market participation faced under the small generation aggregator (SGA) classification.”
The AEMC has also canvassed a proposed mechanism that would mean demand response is bid into the market, is fully visible to AEMO and other market participants, and therefore will compete directly with generators.
And compete they will: The initial report from AEMO and the Australian Renewable Energy Agency into trials held over summer suggests that demand response is six times cheaper than diesel generators, for instance, which are normally switched on to deal with (and profit from) market peaks.
The Australian Energy Council – which represents most of the biggest generation and retail companies – opposes the idea, saying it would “muddy” the customers relationship with the energy market.
“The Directions Paper appears to pre-suppose that the existing market arrangements have exploited demand side response below the efficient level,” it says. “This is yet to be empirically demonstrated.”
AGL is also against the idea: “Ultimately, AGL considers that retailers are best placed to draw on demand response.”