An AEMO rule change that allows energy users to act independently from retailers in offering demand response is an important step towards a two-sided market, a Spark Club event heard.
Business operations pay for the energy they use. When demand for electricity soars, however, they can also be paid for the energy they don’t use. This flexibility to participate in the energy market by adjusting load in response to supply restrictions – and requests from the market operator – is called demand response, and an AEMO rule change on October 24 will see it expanded from a limited list of large energy users to the broader commercial and industrial sectors.
As renewable generators slowly replace dispatchable coal, the ability to shape demand to match less-predictable sources of supply will be an important element in managing the National Electricity Market. In April, the EnergyLab’s Spark Club hosted Energy Synapse CEO Marija Petkovic to hear her predictions for how the rule change will enable a “two-sided market”.
Speaking with Spark Club co-founder (and Enosi Australia co-founder) Grant McDowell, Petkovic started with an anecdote from her time working in the United States market, where she learned “just how integrated demand response is in the market”.
Petkovic recalls a US capacity auction in 2016-17 where demand response made about 4% of the bids. Her 14MW demand response bid of about $US70 ended up being the clearing price in the market, where the next price was $US100. The result was that consumers saved almost $US700 million, a 30% reduction in the annual capacity cost. The flipside is that generators can complain they lost 30% expected revenue. “When you think of it in those terms you can see why demand response has been traditionally opposed in Australia,” she said.
When you see an opportunity
Demand response comes in many forms: in an emergency situation, where AEMO’s Reliability and Emergency Reserve Trader mechanism calls on a list of large energy users to cut load; as an opportunistic action in the wholesale market, either in the spot market or via a contract with a retailer than includes an option of demand response participation (an option generally only offered by retailers to very large energy users); frequency control ancillary services (FCAS), and; providing demand response to a network provider.
“It can make sense for a network provider to secure demand response instead of augmenting the network,” said Petkovic, a member of the EcoGeneration editorial board. “You could be helping them to manage peak load, congestion or voltage.” Such deals are very opaque and hard to negotiate, however, and a lack of transparency is creating more complexity than is needed. “I would just like to see cost-reflective network tariffs,” she said, to nods of agreement among the audience. “Something like critical peak pricing is probably a simpler solution than creating markets for network services.”
The opportunity to use demand response to trade the FCAS markets was opened up in 2017, after which aggregators got serious about pitching to industrial and commercial energy users. Today, demand response makes up about 20% of FCAS markets, she said. “A huge increase, basically from nothing.”
The rule change on October 24 will allow demand response service providers to act independently from retailers with the ability to trade a client’s load in the wholesale market, a similar shift to 2017 but “now you are not limited to your retailer in terms of how you access demand response”.
A big benefit of the change that is somewhat overlooked thus far is that demand response will be guaranteed at least at the price bid in the market. “This is a significant point,” she said. One of the biggest challenges industrials have is they provide demand response without knowing the price they will receive. “They’re hoping the price will be, say, $10,000/MWh, but they might curtail and find the spike they were expecting didn’t eventuate and it’s only $300 or $150. Or the flipside is they think the price isn’t going to spike so they hold back – and the price spikes, then they’ve missed out.”
There is a lot of opportunity, she said, for bids between $500-$14,000/MWh. “It can really cut the price in the market – and that’s the opportunity we are chasing.” Energy Synapse is a Sydney-based energy advisory firm. The rule change targets operations that use a minimum 100-160MWh of electricity a year.
This time it’s different
Many have tried their hand in demand response, Petkovic said, but the failure rate has been regrettably high. It’s very difficult to forecast a market where generators have a natural advantage. After all, they know when they dispatch they will at least get their bid price. The demand response rule change, which guarantees at least the price bid in the market, goes some way towards levelling the playing field. The shift to five-minute settlement on October 1 tips the advantage to bigger, more sophisticated energy users, who are likelier more automated and nimble than smaller or older industrial operations. Demand response especially suits flat loads, she said.
“Some people will be nervous … [after the five-minute rule change is effected on October 1] they will have 24 days of experience with five-minute settlement before they are potentially in a wholesale demand response mechanism,” said Petkovic, who predicted the rule change will encourage energy software companies to offer aggregator services to tempt revenue away from retailers. And make no mistake, international players are watching this market, “although I don’t think gigawatts of demand response will enter the market overnight”.
The shift to renewables will see the market “lose control of supply”, she said. Large-scale batteries and demand response both will play an important role, so long as regulators change the rules so that batteries are not hit with network charges that discourage them from indulging their full, flexible potential. “That’s going to have to be resolved.”