Wholesale demand response mechanism draft determination published for consultation
Comment by John Pierce AO, Chairman AEMC
The financial year that has just ended underlined a seismic shift in Australia’s energy markets. In Victoria alone, the amount of energy being generated is now 30% less than it was a decade ago.
The closure of the Hazelwood power station in 2016-2017 was behind a large amount of that decline, but it’s also worth noting that demand for electricity in Victoria had started falling long before that happened. This structural change is still continuing apace as older industries make way for less energy-intense ones.
The situation in Victoria is a very simple example of why we shouldn’t be looking at electricity supply in isolation of the demand it is there to meet.
Today we have published an historic draft rule on opening up the wholesale electricity market for competitive demand response – it’s potentially an important turning point in helping to reduce wholesale prices, as well as making the system more reliable and keeping the lights on.
There are particular periods of time where the value some consumers obtain from using electricity during that period is less than the efficient costs of supplying it.
In these circumstances it is much more cost effective to offer these consumers a price to reduce demand than to add to supply.
And for the first time, that is exactly what we are proposing through this new draft rule.
Demand response has been around since we first started work on the power of choice reforms a decade ago. Today, consumers can access time of use pricing or allow their network to directly control their equipment and be rewarded for reducing their demand at peak times.
There is also emergency demand response, when big consumers ‘power down’ through the reliability and reserve trader (RERT) mechanism to maintain system reliability, and be paid for doing so.
Today’s proposed rule change is another innovation that capitalises on technological change. It is different in that it puts demand response directly into the wholesale market to effectively ‘compete’ with generation to meet unserved demand. All day, every day, as long as consumers want to offer it up at a price they value.
Put simply, it means that if large energy users decide to sell their ‘demand’ into the market, they will be able to more easily and are likely to rewarded more handsomely as new aggregators start to compete with retailers.
This puts demand response on equal footing to generated supply for the first time.
And because we are allowing demand response to set prices in the wholesale market – this means more expensive generation would be pushed to the back of the queue.
Demand response as an alternative to peak, high cost generation, should mean lower peak wholesale prices (which have been the biggest driver cost increases in the past couple of years). That benefits every energy consumer in the national electricity market.
Just as with the closure of Hazelwood, this change is largely the result of supply and demand. Supply in terms of new technology which now makes the proposed changes not only possible, but relatively uncomplicated - and demand in terms of growing numbers of large consumers indicating their desire to participate.
We expect both these trends to grow over the next several years to the point where a true two-sided market – one in which consumer demand interacts directly with supply to set real-time prices – is possible.
Technology isn’t there yet, but it won’t be long before households and businesses may be able to use digitally enabled devices to optimise consumption on all of their appliances.
This would allow thousands of very small changes in consumption to be aggregated in a way that significantly reduces the amount of generation and networks required to maintain a reliable and secure system. Such a future could result in significantly lower prices for consumers.
How much demand response enters the market will be a function of how attractive it is for consumers to participate, and the type of new technology they embrace.
But in a world where such options now exist, it simply makes sense for those consumers that can to actively manage their demand and thereby assist in delivering reliable energy at the least possible cost.
18 July 2019
AEMC Communication Director, Prudence Anderson 0404 821 935 or
(02) 8296 7817