Yesterday the Australian Energy Market Commission (AEMC) released its long awaited ‘Reliability Frameworks Review’.
The AEMC proposed a raft of changes that will make it easier for consumers to get paid for delivering capacity to the electricity market – whether that capacity is megawatts from solar PV and batteries, or ‘Negawatts’ from reduced demand.
If the AEMC’s proposed reforms are fully implemented, it will mean huge benefits for the owners of emerging technologies like rooftop PV and batteries. However, the original driver of these reforms was the need for a proven, old-school technology: ‘demand response’.
Demand response can be defined as consumers altering their consumption of electricity temporarily, including reducing consumption during periods of peak demand, or increasing demand during periods of excess supply.
Historically manufacturers and commercial energy users could offer the most demand response capacity, although the increase in home batteries could see households eventually play an even bigger role in reducing grid-facing demand.
When electricity is in short supply households can use their battery to meet their own energy needs – to the grid, this looks like the household has dramatically cut their power use.
For individual consumers that reduce their demand during periods when energy is in short supply (and thereby expensive), it can dramatically cut their bills. However, there are also huge benefits for the grid and other consumers.
For example, if a manufacturer is prepared to reduce its demand when the electricity spot price reaches $200 per MWh, this means that we don’t need to switch on peaking generators that cost much more to run, and this keeps power prices lower.
Even better – with enough demand response in the system, fewer peaking generators need to be built in the first place.
However, the real benefit is that demand response massively increases competition in the electricity market, reducing the potential for generators to exploit their market power.
Demand response makes up about 10 per cent of the capacity in thePennsylvania-New Jersey-Maryland Interconnection market (PJM), the world’s largest electricity market.
Recent estimates from the regulator there found that including demand response in their capacity market has reduced costs for consumers by a whopping USD $12 billion in just a single year.
This might explain why the most vocal advocate against demand response is Snowy Hydro – a company that can make a killing when it is the last available capacity in the market.
Unfortunately, all the available evidence suggests that the level of demand response in the National Electricity Market (NEM) is well below both the economically optimal level and the level seen in overseas markets like the PJM.
The low level of demand-side participation is caused by barriers that have been identified in multiple reviews, including:
- The 2002 COAG Energy Market Reviewled by Warkwick Parer AM;
- The 2012Power of Choice Reviewundertaken by the AEMC; and
- The 2017 Independent Review into the Future Security of National Electricity Marketled by Dr Alan Finkel AO.
- The 2018 ACCC Retail Electricity Pricing Inquiry
The Parer Review’s conclusion from 2002 is still one of the most succinct explanations of the problem:
“The Panel found that there is a relatively low demand side involvement in the NEM because:the NEM systems are supply side focused;the demand side cannot gain the full value of what it brings to the market; andresidential consumers do not face price signals.”
Since the Energy Efficiency Council was formed in 2009 we have been advocating for the NEM’s market bodies to fix these problems. In 2012 the AEMC agreed that Australia should introduce a demand response mechanism, and COAG signed off on it.
However, in 2016 the AEMC decided not to introduce the mechanism that it had proposed itself.
The main reason was that there was excess capacity in the electricity market in 2015, and the modelling that the AEMC commissioned predicted that this situation would continue for many years. When there’s excess dispatchable capacity in the market, there’s not much reason for demand response.
However, Blind Freddy could see that large coal fired generators were about to close and increased penetrations of solar PV and wind generation would benefit from increased levels of demand response. In 2015 we predicted that the market was going to change rapidly, but it’ s exceeded even our expectations!
The latest predictions from Green Energy Markets are remarkable – in just two years NSW’s generation will be almost 20 per cent renewable, Victoria’s generation will be almost 40 per cent renewable, and South Australia’s generation will be a whopping 70 per cent renewable.
This rapid change in the market is why Finkel, the Energy Security Board, AEMO, ACCC and now AEMC have decided that we need to urgently introduce a mechanism to allow consumers to sell capacity into the wholesale market.
Batteries are great but capacity is not cheap – if we can support batteries by adjusting demand to better match patterns of supply it will lower electricity bills for everyone.
The AEMC has taken the sensible approach of recommending a package of measures to address the barriers to demand response, which includes:
- Demand response aggregators and providers should be able to be recognised on equal footing with generators in the wholesale market and so offer wholesale
- Consumers should be allowed to engage multiple retailers / aggregators at the same connection point (multiple trading relationships). This will promote competition between retailers, supporting new business models for demand response and providing consumers with greater opportunities to engage in wholesale demand response with parties other than their incumbent retailer.
- A voluntary, contracts-based short-term forward market be implemented that would allow participant-to-participant trading of financial contracts closer to real time. this will provide the demand side with more opportunities to lock in price certainty, making it easier for large demand side consumers to engage in the wholesale market and demand respond (i.e. reduce consumption) in response to expected wholesale prices.
If these changes are fully implemented, it means that consumers will have much more control over the energy market, and dramatically reduce the potential for generators to exploit their market power.
This is a huge win.
However, we shouldn’t count or chickens yet – the AEMC proposed a mechanism back in 2012, but it was never implemented.
We’re working with a broad range of consumer groups to keep the pressure up for reform. To quote Winston Churchill – This is not the end of the reform process. It’s not even the beginning of the end. But it is, perhaps, the end of the beginning.