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National demand reduction scheme could follow NSW

With a federal election looming and voters seeking decarbonisation of the grid, both parties should follow NSW’s lead and support energy savings and demand reduction schemes, writes Ric Brazzale.

What bipartisan measures can the federal government and Opposition commit to leading into an election in 2022? A national energy savings scheme and peak demand reduction scheme would logically follow NSW’s lead.

It’s a safe bet, especially now the NSW government has legislated and passed the relevant regulations to give effect to a national-first peak demand reduction scheme (PDRS) in September 2021. This neatly aligns with and supports the NSW net-zero emissions target by 2050.

The PDRS is part of the NSW Energy Security Safeguard framework, the primary objective of which is to improve affordability, reliability and sustainability of energy by incentivising the rollout of cost-effective energy savings measures. The framework also includes the existing energy savings scheme (ESS) operating since 2009.

The ESS has been extended to 2050 with a target to reduce energy consumption by 13% by 2030: increasing 0.5% annually from 2022, then remaining at 13% until the end of 2050. The PDRS target will start at 0.5% for the 2022-23 compliance period and gradually increase to 10% by 2029-30, then continue at that level up to and including the 2049-50 compliance period (see figure 1).

Figure 1: NSW Safeguard targets from 2022 to 2050

Households and businesses participating in both schemes are expected to save an additional $3.6 billion on their bills from 2022 to 2040, with $2.4 billion from the ESS and $1.2 billion from the PDRS.

A net economic benefit of the safeguard framework for NSW is predicted to be $1.2 billion by 2040, with the ESS and PDRS contributing respectively $1.063 billion and $154 million with benefit-cost ratios of 3.5 and 1.7 (see figure 2).

Eligible upgrade types

Figure 2: NSW ESS and PDRS summary of cost-benefit analysis

The NSW PDRS will deliver discounts to households and businesses, via installers, when they buy or install appliances and equipment that use less energy during peak times. The program will commence in the 2022-23 summer, initially targeting activities that are currently covered under the ESS such as efficient air-conditioners, efficient pool pumps and other appliances.

Batteries and fuel switching activities will be added later. The program will be a highly targeted lever to reduce peak demand on the electricity and gas networks.

These PDRS upgrade opportunities will evolve alongside major energy savings activities under the ESS, such as commercial heating ventilation and air-conditioning (HVAC), home energy management systems and improved industrial process and motor system upgrades. (Government modelling shows that switching to using pool pumps outside of peak periods could save up to 450MW, more than the capacity of a generating unit at Liddell coal-fired power station.)

Key ESS changes ahead include reducing commercial lighting upgrade incentives from 2022 as technology efficiencies, significantly catalysed by the scheme, have resulted in high-efficiency LED installations becoming business as usual in NSW. There are also changes to fuel-switching activities: incentives will be removed for switching from electricity to non-renewable gas such as natural gas and LPG; and new fuel-switching activities will embrace both grid- and non-grid connected energy.

Liable parties

Like the NSW ESS, there will be liable parties under the PDRS. These will include energy retailers, generators directly suppling customers and large energy users. They will buy peak reduction credits/certificates, called PRCs (pronounced “perks”), from the businesses that do the installations and create the PRCs (called accredited certificate providers) and surrender them to meet their PDRS targets.

Their targets are based on their contribution to actual peak demand on high demand days less any exempt load supplied by the participant during the same period. (Some emissions-intensive trade-exposed energy users will be exempt, as is the case under the ESS.) Liability targets will be adjusted annually. The PDRS compliance period will be from November 1 to March 31, acknowledging that hot summers drive peak demand. (The ESS compliance year is by calendar year.)

Penalty rates must be paid if liable parties don’t meet their targets. These rates provide the guardrails to ensure schemes deliver on net economic benefit by establishing a ceiling for certificate prices and ensuring certificate purchase and surrender by liable parties. The PDRS penalty rate will be $2.26. (The ESS penalty rate for 2022 will be retained at $29.02 per notional MWh.)

What’s a PRC?

According to the safeguard position paper, a PRC will reflect the scheme’s main focus on reliability. A PRC will represent 0.1kW of peak demand reduction capacity averaged over one hour. To create certificates, activities will have to be available to reduce peak demand during a defined peak period.

Certificates will be identified with the compliance period in which the capacity is available. ACPs will create certificates from activities using calculations that consider capacity, duration and the likelihood that the capacity is available when needed (“firmness”).

Certificate creation will require evidence that capacity is available during the defined peak period. To allow for compliance period identification, evidence requirements and validity limits, certificates will have a status of one of: dormant, pending, active, surrendered or expired.

Where’s the peak?

Figure 3: Defining the peak period for PDRS

The NSW government uses AEMO’s 2030 forecast system maximum demand by half-hour interval to calculate the fixed period during which activities must be available as demand is forecast to exceed the targeted reduction (see figure 3). This period will need to be during the hot summer, currently set from November 1 to March 31 between 2.30pm and 8.30pm AEST (see figure 3).

Details of how the scheme certificate target for a compliance period will be calculated are shown in the position paper and demonstrate the magnitude of PRCs that will be available.

While it’s a lot to absorb at first take, once participant systems are up and running, the PDRS promises to be a highly targeted instrument to drive installations of highest peak demand impact. The market will adapt to deliver these benefits at lowest cost, including the ability to aggregate PRCs from multiple small customers such as households.

This will be one of the additional benefits of the PDRS as it will enable small customers to access incentives, which they can’t currently do in the way that large energy customers can purchase electricity at cheaper wholesale rates under existing national mechanisms.

Just to keep it interesting, as the scheme progresses, activities will be eligible to be rewarded to not only provide peak demand savings, but also peak demand response and peak demand shifting.

Value stacking incentives

NSW customers’ installations may attract both ESCs and PRCs, and even STCs or LGCs (under the Commonwealth Renewable Energy Target) and so increase incentive value stacking, making more energy-efficient choices more attractive. The NSW schemes are also designed to complement the Commonwealth emissions reduction fund, providing a different pathway to accessing incentives for energy saving projects – but a project won’t be able to claim both ESCs and Australian carbon credit units.

All this synergy in design is endeavouring to keep incentives levels up for energy efficiency technologies as these various incentive ebb and flow. The schemes in Victoria (Victorian Energy Upgrades) and South Australia (Retailer Energy Productivity Scheme) have taken similar positions, which industry and energy customers across the nation will one day benefit from if a national approach is launched.

Digital platform uptick

To support this brave new world, the NSW government is beefing up its digital technology capabilities and engaging with industry to streamline how the schemes’ developments will flow more easily online. For example, better supporting back-end data processing and compliance provision capabilities and requirements. Under consideration are a new registry digital platform, supply of rules and regulations in computer code and access to real-time data that augments existing business processes. These developments show promise for concept rollout beyond NSW.

To support a net zero emissions reduction target by 2050, and any increase in interim ambition beyond 26-28% on 2005 levels, the federal government could rollout nationally:

  • a NESS and PDRS with a NSW kind of legislative framework to achieve many times the net economic benefit for Australia;
  • strengthen the Safeguard Mechanism and the Climate Solutions Fund, and;
  • King review recommendations including ways to improve the Emissions Reduction Fund methods that would support broader energy efficiency improvements.

These considerations have been held under the microscope by the NSW government and it shows in the fine print of the safeguard framework position paper just released.

Ric Brazzale is on the board of the Energy Savings Industry Association.

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