Power of Choice Review - giving electricity consumers options

28 Sep 2012Archived News Climate Change Matters

This review has been underway since March 2011 and is intended to canvas ideas that will contribute to the take up of what is known as ‘Demand Side Management or Participation’ (DSM).  DSM is a broad concept based on encouraging end users to take more control over their consumption of electricity, which in turn should contribute to its more efficient use and delivery.  The key is to provide the means and incentives to reward end users for their actions.

The review is being undertaken by the Australian Energy Markets Commission (AEMC) with its recommendations being made to the Standing Council on Energy and Resources (previously the Ministerial Council on Energy).

The value of demand side management

DSM has been one of the slower aspects of the electricity supply market to develop.  It encourages consumers to change their electricity usage, which is dependent on information,the availability of incentives and technology.  This in turn requires parties on the supply side, such as network operators and retailers, to provide the means and the incentives to entice this consumer response. 

Because all these elements need to ‘come together’, DSM has been a challenging proposition in the past.  However, with technological advancements, rising energy and infrastructure costs, the potential value of DSM is becoming increasingly apparent.

Historically, the most recognised form of DSM has been the traditional off-peak electric water heating – that switches this load to run overnight - in non-peak times.  Perhaps DSM’s greatest potential, at present, lies in addressing the current predicament facing the industry – planning and managing the infrastructure required to meet peak demand. “Industry has estimated that around $11 billion of electricity infrastructure is used for only 100 hours a year.”[i]  This infrastructure, although idle for most of the time, is needed to meet demand spikes. 

The potential value of DSM is best summarised by the following, “Ausgrid estimates that for each additional megawatt (MW) delivered by the electricity system, around $3.3 million worth of investment in assets is required. This comprises distribution costs of $1.5 million, transmission costs of $0.8 million and generation costs of $1 million.”[ii]

Better utilisation of electricity infrastructure, as the traditional off peak water heating example provides, may reduce the need for this network investment in the first place, by smoothing out consumption – which is at the heart of DSM.  Ultimately, these cost savings can be passed through to the end-user.

DSM also incorporates the concept of distributed generation, which describes generation within the local network,  reducing the need for additional network augmentation.  The review makes a number of recommendations.  Firstly by giving the owners of distributed generation additional options to sell the electricity they produce, other than through a retailer.  The proposal is to give these owners direct access to the wholesale market. By introducing another class of market participant there should be a faster and more efficient response to wholesale price spikes - increasing its value and ultimately its acceptance. The other aspect of distributed generation is the network value placed upon its utilisation, and ensuring that this value is recognised by network businesses through tariff settings. 

Recommendations from the review and their value to users

The draft report recognises that enticing more demand side involvement will ‘require changes to some aspects of how the supply side of the electricity market operates and through greater empowerment of consumers’.  

Although the report contains a number of recommendations, perhaps the most far reaching and potentially offering the highest value for large users, is a proposal to allow direct participation in the wholesale market.  Under such a mechanism, large users can offer to curtail a proportion of their load and in return would receive the spot price (the prevailing NEM wholesale price), for this load.  The principle is to engage the demand side (consumption) with the supply side (generation) to interact in the wholesale market.

The amount of demand response delivered to the market would be measured by the difference between a consumer’s actual metered consumption (net of their curtailed load) and their baseline consumption.   The baseline consumption is an estimate of what consumption would have been, without the reduction.  This curtailed load would be settled against the spot price, less their existing retail tariff price. The funding would come from the retailer, who will be required to pay the wholesale market spot price according to their customers’ estimated baseline consumption. 

Although some of the detail still needs to developed, a couple of key assumptions underlie the proposal. These include, end users who provide a demand response must have an electricity supply agreement with a retailer (as opposed to being a direct market participant) and they must register their participation with the Australian Energy Market Operator (AEMO).   The method for calculating a consumers’ baseline or estimated consumption, is yet to be developed.

It is envisaged that this mechanism could be rolled out to smaller consumers through the creation of ‘aggregators” – as smaller users may not have the capacity or the desire, to register directly with the AEMO.  Aggregators accumulate and combine smaller load curtailment parcels and offer them directly to the wholesale market.

Other initiatives 

What should become apparent is that DSM encompasses many facets and has multiple applications.  Other proposals include: 

  • The phasing in of time varying network tariffs, which touches upon the introduction of time varying prices for the network tariff component of consumer bills. The intention is to provide an incentive for end-users to shift consumption times;
  • Improving an end-user’s ability to access consumption data and information about their electricity use, enabling informed consumption choices, delivered through enhanced metering technology;
  • Distribution network incentives, thereby making demand side management part of the network planning and investing process; and
  • Establishing formal consultation in the setting of network tariffs, requiring distribution network businesses to engage with retailers and consumers when setting their tariffs.

What’s next?

These are only draft proposals prepared for the consideration of the Standing Council on Energy and Resources, which  are now open for consultation.  The next stage, if approved, will be to implement these proposals through the necessary rule changes and other regulatory mechanisms.

Energetics can provide further advice on the implications of these proposals for your business, or assist in assessing the application of these reforms to your business.

[i] AEMO, website, http://www.aemc.gov.au/news/announcements/connecting-consumers-to-more-cost-effective-electricity.html

[ii] AEMO,  Power of choice - giving consumers options in the way they use electricity ,September 2012, Page 14. 


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