AEMC rules on demand response wholesale mechanism

A new rule change is set to make it easier for industrial and commercial energy users to be paid to provide demand response, following ARENA’s trial with AEMO and the NSW Government.

By: ARENA

The reform has been proposed by the Australian Energy Market Commission (AEMC) to ease pressure on the network when supplies are stretched during extreme weather events or unexpected generation outages.

The wholesale demand response mechanism would open up a demand response market to new players, and would also allow demand response – or so called “negawatts” – to be bid into the National Energy Market in a similar way to generation.

The proposed rule change will allow demand response to be provided by businesses through demand response providers – such as demand response aggregators like Enel X (formerly known as EnerNoc) – as well as electricity retailers.

The rule change to introduce a wholesale demand response mechanism comes more than a decade after it was first proposed, and follows the success of ARENA and AEMO’s three year $35 million trial to deliver 200 MW of demand response as emergency reserves, in partnership with the NSW Government.

The principles of demand response are simple – energy users are incentivised to be available or on standby to curb their electricity consumption in circumstances such as when demand is high, wholesale prices spike or there is a shortfall of supply. By reducing their demand during peak periods, the saved power can be sold back into the grid.

Under ARENA’s trial, 10 pilot projects are trialling different technologies and business methods to provide demand response across Victoria, NSW and South Australia during extreme peaks in demand, such as a summer heatwave, when emergency reserves are needed. Participation is voluntary, and participants are offered incentives to subscribe to these projects and if activated are also paid to dispatch as part of AEMO’s short notice RERT program.

As part of the trial, several of these projects – such as those led by energy retailers like AGL and EnergyAustralia – involve both businesses and residential consumers. Powershop’s trial calls on households to deliver behavioural demand response. South Australian metal foundry Intercast & Forge is delivering demand response directly while Melbourne energy distributor United Energy are trialling delivering their demand response by dialling down the voltage across their entire network.

AEMC Chairman John Pierce said that improving the way we manage demand makes sense as a strategy to deliver reliable energy at the lowest cost.

“Taking demand pressure off the power system is a substitute for generation and helps tackle rising wholesale prices at peak times reducing electricity costs for everyone,” John Pierce said.

“Most simply, demand response is a consumer choice to turn down or turn off their electricity use in response to a signal to do so. So if wholesale prices are higher, there is more incentive for demand response. It makes sense to manage demand for electricity if we are going to deliver reliable energy at the least possible cost.”

As temperatures soared in late January this year, the Alcoa aluminium smelter in Western Victoria powered down for an hour and forty minutes, freeing up about 400 megawatts of electricity supply. In early 2017 a NSW a similar event relied on a smelter and paper mill shutting down to avoid load shedding.

While the savings helped to reduce the impact of energy shortages during these events, the AEMC is aiming to create a more flexible system underpinned by transparent price signals. They say that helping consumers to see how much electricity costs at different times will help them to make informed decisions about how and when they use electricity.

The changes are set to come into effect in 2022 and do not extend to households for the time being, with the AEMC choosing to limit the reform to industrial and commercial energy users. They have however said that including small energy consumers could be considered in the future.

Australian Competition and Consumer Commission chairman Rod Sims welcomed the AEMC’s proposed rule change as a vital reform to the energy market that would help bring power prices down. The introduction of a demand response program was recommended in the ACCC’s 2018 Retail Electricity Pricing Report and Chief Scientist Dr Alan Finkel’s 2017 review into the future security of the NEM.

At the time the report was released, Mr Sims said, “The National Electricity Market is largely broken and needs to be reset. Previous approaches to policy, regulatory design and competition in this sector over at least the past decade have resulted in a serious electricity affordability problem for consumers and businesses”.

Mr Sims welcomed the release of the AEMC draft rule, saying “This is a vital development in the reform of the national electricity market, and will help to bring electricity prices down.

“A demand response measure allows the electricity system to be more efficient, limiting the need for additional generation and, importantly, constraining the power of generation businesses, both leading to lower prices for consumers,” he said.

Energy Minister Angus Taylor also welcomed the draft rule, saying that it would put demand response on a more even footing with generation in the wholesale market, increasing competition leading to lower prices for everyone.

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