There is vast potential for many energy users and all consumers to benefit as demand response is understood and better utilised, writes Marija Petkovic.
Demand response could be a key source of flexibility in the grid as the uptake of clean, but variable energy continues to grow in the National Electricity Market (NEM).
The concept of energy users responding to market signals is not new. Large energy users in particular have been providing demand response since the commencement of the NEM.
However, the characteristics of this response have been notoriously opaque. This is because demand response has traditionally been implemented via confidential bilateral contracts between energy users and electricity retailers and network providers, rather than an open market mechanism.
As part of the post-2025 market design program the Energy Security Board, Australian Energy Market Commission (AEMC) and the Australian Energy Market Operator (AEMO) are investigating potential design options for a two-sided market that could allow demand response to be harnessed more efficiently as we continue the transition to clean energy.
Energy Synapse recently completed a landmark report for the AEMC which shed light on the availability and key characteristics of demand response across residential, commercial and industrial sectors. This article summarises some of our findings. (The full report is available for download on the Energy Synapse website.)
A broad approach
Energy Synapse conducted an extensive industry consultation to uncover how demand response is being implemented in practice. We also examined the data in AEMO’s Demand Side Participation Information (DSPI) portal.
The portal data shows there is a huge amount of potential response (4.3GW) already in the NEM. This is equivalent to the peak power of more than two Liddell coal-fired power stations. Note that this is an estimate of the theoretical demand flexibility that exists in the NEM; it does not necessarily reflect how much demand response has been physically activated.
Our industry consultation found that retailers and aggregators are utilising a wide variety of demand-side resources in their demand-side portfolios. The sources of flexibility include industrial process interruptions, embedded generation, air-conditioning, hot water, battery storage, pool pumps, electric vehicles and more.
Market reform efforts would benefit from taking a broad view of demand flexibility in order to better harness the full potential of demand-side participation.
Our analysis of demand response programs also found that retailers and aggregators strongly believed in offering customers choice over what resources are controlled and the ability to manually override an intended response if needed. The voluntary nature of how demand response works in practice needs to be emphasised as there can be a misconception that demand response is “forced” on energy users.
Lower energy prices for all
Energy users that provide demand response typically receive a financial reward for doing so. But the benefits of demand response extend much further than this.
Energy Synapse analysed the generator bidding behaviour in each region of the NEM to gauge the sensitivity of prices under different conditions. This sheds light on the potential price suppression role of demand-side participation in the NEM.
Generator bid stacks tend to follow a “hockey stick” shape, where high volumes are generally offered at low prices (<$100/MWh). However, there is little volume that is offered at mid-level prices, before breaching the $10,000/MWh bid band. The steeper the bid stack, the greater the opportunity for demand response to put downward pressure on prices, because a relatively small volume can have a large price impact.
Over the past three financial years NSW has had the steepest bid stack out of any region in the NEM. When the dispatch price was between $200/MWh and the market cap in NSW, a median volume of 0MW was offered at bid prices between $500 and 10,000/MWh (see chart below).
Analysis of both the DSPI data and the results of our industry consultation indicate a willingness to trigger demand response in the $300-$1,500/MWh range. This suggests that demand response could provide valuable competition to the market in times of scarcity.
This has potential to put downward pressure on prices for all consumers, if the market were to clear at a lower price as a result of demand response bids.
Despite regulatory progress there are still barriers to unlocking the full potential of demand response.
Energy Synapse asked retailers and aggregators what they supposed were the major obstacles in deploying demand response across residential, commercial and industrial sectors. They told us the biggest barriers across all sectors related to building a bankable investment case.
The financial payment not being attractive enough – combined with low revenue certainty, technology costs and a low understanding of demand response – made the investment decision more challenging for energy users.
Some aggregators suggested that a rebate for installing hardware/control equipment would make the investment decision easier for customers to understand. Other respondents indicated that capacity-style payments could help firm up investment cases by overcoming the uncertainty of payments in the spot market. Interestingly, ahead notice/markets were not seen as something that would help the business case materially.
Another recurring theme was the challenge of getting energy users interested in demand response. This suggests that further adoption of demand response will require greater consumer education on what demand response is and how energy users can benefit. This barrier also reflects the views of some energy users (particularly those from the industrial sector) who prefer not to be interruptible because energy trading is not their core business.
It is also important to note that “aggregators not being able to provide demand response directly to the wholesale market” ranked highly among concerns for the residential sector. This will be an ongoing barrier for the residential sector, as it is excluded from the wholesale demand response mechanism coming into effect this year.
Marija Petkovic is the managing director of Energy Synapse.