Feb 02 2023

Demanding a response?

Concerns about the unfulfilled potential of Demand Response markets in the National Electricity Market has triggered periodic interest in this subject over the past three decades.  This has led to the enactment of institutions and coordination mechanisms that have created three Demand Response markets in Australia; the Wholesale Demand Response Mechanism (WDRM), the Reliability and Emergency Reserve Trader (RERT) and the Frequency Control Ancillary Services (FCAS).

The governance of each of the WDRM, RERT and FCAS integrates them into the national market.  This provides opportunities to respond to price signals from the wholesale energy market (WDRM), and to contract with AEMO to participate in the RERT mechanism, and to participate in frequency control for financial reward.  There is no apparent shortage of markets or potential opportunity in the current governance structures, so what else would influence performance or participation?  Is Australia lagging on demand side action?

The AEMC has been considering this over time, and in 2022 published its Updated International Review of Demand Response Mechanisms in Wholesale Markets prepared by the Brattle Group.  The Review examined how demand response participates in electricity markets in six jurisdictions outside of Australia to potentially draw on the lessons learnt from other jurisdictions.  The Brattle Group broadly found that in these six jurisdictions that, just like in the National Electricity Market (NEM), that demand response participation is driven by a price signal to consume less when the price is high.  This would explain why the volumes of energy provided from demand response are trivial in normal periods, since energy prices will usually be below the willingness-to-pay of almost all loads.  This seems like economic theory working in practice. 

When it comes to growing the size of the demand side market, Retailers can help their customers expand their demand response capability and value.  The ‘low hanging fruit’ in any demand side response has always been considered as industrial type loads, and several examples of retail products that benefit both businesses and their suppliers have emerged.  For example, AGL’s Commercial and Industrial Demand Response product provides a range of options for businesses with at least 250 kW of curtailable load and/or 250 kW of back up generation.  And Energy Australia’s ResponsePro enables is customers to derive a revenue stream from actions such as operational curtailment, or by switching on the customers own generation assets or simply by behavioural change.  Other more recent entrants such as Flow Power are actively pursuing customers and are participating in the South Australian Government’s Demand Management Trials Program.  In each of these examples, and there are many more, the interface with the energy market is via these providers. 

As a result of a 2016 rule change unbundling demand response from the retail function businesses can also directly participate in energy markets by responding to signals from wholesale energy market via the WDRM,  but in practice this appears to be a much less preferred approach for Commercial and Industrial customers. 

At a small business and residential customer level the question of coordination mechanisms and institutional responsibilities is well and truly alive, and important work is currently underway.  To ensure that policy responses are at least able to be evidence based there is the AEMO/Mondo/Ausnet Project EDGE, and Western Power’s Project Symphony, and Evoenergy’s Project Converge and Ausgrid’s Project Edith.  When talking about DER/CER integration and its implications for WDRM, RERT or FCAS participation, the most recently released EDGE paper does provide some useful insights and grapples with some important questions.  Perhaps the most important of these questions is the pathway towards either a centralised or decentralised hub for data exchange and the ownership, governance and cost recovery that will facilitate efficient and scalable data exchange between industry actors.  While a small number of individual users at small scale still exist, it is possible to let things evolve further in the decentralised model and observe the outcomes. 

So, is Australia is really lagging behind on demand-side action?  This proposition has a questionable cause, however one factor could be that energy prices in Australia will usually be below the willingness-to-pay of almost all loads.  There is also trial evidence to suggest that the cost of incentive payments for residential DR to drive a response is high when compared with wholesale market spot prices.  Internationally, higher demand side action appears to correlate best with higher overall energy prices. 

Overall, any setting of targets that drive demand side action requires that the method chosen does not interfere with the lowest cost of achieving Australia’s net zero target.  Demand side response is another low emissions technology and the foundation mechanisms for its participation already exist within the market.   Policy tweaks strengthening the role of demand-side considerations in energy system planning should be developed upon these understandings. 

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