The fall and rise of demand response, and the power of “negawatts”

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In the crazy world of Australian climate and energy policy, if you wait long enough, an idea killed off by one government eventually comes back and saves the day.

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Whether you see it as evidence of resurrection, karma or zombies, in the crazy world of Australian climate and energy policy, if you wait long enough then an idea killed off by one government eventually comes back to life and saves the day.

Demand response is a case in point. The concept is simple enough. Instead of endlessly expanding supply to meet peak demand and paying a premium in the process, the market pays households and businesses to reduce their demand during market peaks, which saves money for all consumers.

By international standards Australia’s National Electricity Market (NEM) has a very low level of demand response.

That is mostly because at present it can only happen at the whim of energy retailers. And most of them do not like demand response or other forms of energy efficiency, because they make more money, the more energy we use and at a higher wholesale price. 

Currently, aggregators like EnerNOC contract with big businesses to voluntarily curtail their load when the wholesale price is high, saving them money on their bills. Sometimes the load is shed, but more often it is shifted to when power prices are lower.

Since 2012 there have been efforts to introduce a demand response mechanism into the wholesale market. This would allow aggregators to offer demand response as an alternative to high-priced peaking generation, taking it out of a niche market into the much larger spot market.

The COAG Energy Council proposed a change to the national electricity rules in in 2015 that would have allowed this to happen.

The Australian Energy Market Commission (AEMC) knocked it back in 2016 on the grounds that “the benefits associated with the proposed mechanism can be achieved without the need for a regulatory mechanism in the wholesale market”.

The big retailers had run the line, which was unproven, that wholesale demand response would impose a “considerable cost to all consumers”, to upgrade billing systems.

Since then, lots has changed. The AEMC has noted that technological change makes the whole demand side of the NEM a vast opportunity for improving security, consumer choice and reducing costs.

A wholesale demand response mechanism has recently been called for by the Finkel Review, the ACCC, the Energy Security Board and the market operator, AEMO.

The AEMC revisited the idea in its Reliability Frameworks Review, recommending in July that “Demand response providers should be able to be recognised on equal footing with generators in the wholesale market and so be able to more readily offer wholesale demand response in a transparent manner to AEMO.”

Last Friday, the Total Environment Centre, Public Interest Advocacy Centre and The Australia Institute lodged a rule change request with the AEMC to introduce a wholesale demand response (WDR) mechanism into the NEM, based on the AEMC’s own design—which differs in some important respects from the previously rejected design. Here’s how it would work (a demand response service provider, DRSP, is essentially a third party aggregator):

 And here is a visualisation from the AEMC:

Some of the finer points, such as the baseline methodology and the nature of the scheduling of the demand response, still need to be worked out in detail.

That’s what the AEMC’s six-month consultation period will help to sort out. We’re also expecting that the AEMO/ARENA 2017/2020 summer emergency (RERT) demand response trials will provide valuable clues, especially around the baselining methodology.

On the other hand, the purported $100 million plus implementation cost to retailers is unlikely to be so problematic this time around. This is thanks in large part to the need for retailers to already upgrade their billing systems to implement the five minute settlement rule change which will come into operation in 2021.

But in our view this was always ambit claim by retailers—unsupported by evidence and intended to stymie a reform that might lower their volumes and profits.

For the proponents, this is about more than power prices, though. Over the long term, WDR can be one of the key enablers of the orderly retirement of coal-fired generation, because it provides rapid dispatch of “negawatts” of avoided consumption to help manage the rise in distributed, variable, renewable generation.

WDR can contribute to remediating the energy trilemma identified by the Finkel Review, as it would “simultaneously provide a high level of energy security and reliability, universal access to affordable energy services, and reduced emissions”.

We also hope that this overdue market reform will create another value stream for distributed energy resources (DER), especially via the output of virtual power plants and other aggregated solar and battery energy when they can be used to meet demand locally, offering the negawatts of load reduction as WDR during wholesale market spikes.

 Mark Byrne is energy market advocate at the Total Environment Centre.

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