Demand management Incentives Review findings explained

Moving towards smarter electricity network regulation would improve reliability, reduce emissions and cut power bills for energy users, a new study finds.

The Demand Management Incentives Review, by the Institute for Sustainable Futures at the University of Technology Sydney, found that the current regulatory framework favours investing in network infrastructure, such as new poles and wires, over demand management involving energy providers helping consumers to reduce their power demand and bills.

The study, which emerged from the Australian Renewable Energy Agency’s innovative grid integration A-Lab initiative , found that building new grid infrastructure was often more profitable for network businesses than introducing demand management solutions, even when the demand management would reduce costs to consumers.

What is demand management?

Electricity Demand Management (DM) is deliberate action by power utilities to encourage consumers to reduce or shift their electricity use as an alternative to providing new electricity supply.

DM includes offering incentives to help customers save energy and cut costs through smarter, more efficient equipment, voluntarily shifting energy use from peak periods and local generation and energy storage.

The absence of balanced incentives for efficient DM has been a major gap in Australia’s National Electricity Market (NEM) since its establishment in 1998. The cost to energy consumers of this gap has likely run to hundreds of millions dollars or more, due to unnecessarily high electricity bills and excessive generation and network infrastructure spending.

So what has changed?

Following a change to the National Electricity Rules in 2015, the Australian Energy Regulator (AER) is required to develop a Demand Management Incentive Scheme (DMIS). The study is intended to assist the AER in developing the scheme. This crucial reform represents the best chance in the history of the Australian electricity supply system to facilitate widespread, efficient and cost-effective DM by distribution network businesses.

How customers are missing out

The study found a clear and quantifiable bias in the present regulatory incentives in favour of building network infrastructure over DM which would offer a better deal for customers. Intelligently reducing electricity demand can be just as useful as increasing supply, and is often cheaper and quicker to achieve.

To illustrate, if the National Electricity Market had access to the same proportion of DM as the average for states of the USA, it would have about 3000MW of DM. This is almost twice the total capacity of the recently retired 1600 MW Hazelwood coal fired power station, and is more than the total combined generation capacity proposed in the recent announcements by the South Australian Government, Our Energy Plan (up to 350 MW) and the proposed Snowy 2.0 (estimated 2000 MW).

ARENA Chief Executive Officer Ivor Frischknecht welcomed the study as an important contribution to understanding how to support the reliable and affordable integration of variable renewable energy into the electricity grid.

“Having more variable renewable energy in our electricity system means we will also need more flexible resources to balance the system,” said Mr Frischknecht.

“Batteries can help provide this flexibility but in many cases it may be simpler, cleaner and cheaper for electricity networks to work with customers to reduce or shift power demand,” he said.

“Demand management also allows more efficient use of our existing network assets and reduces the need for network investment”, Mr Frischknecht said.