If energy users are offered the right incentive to dial down loads the combined effect could be a massive boon to the electricity network.
Energy users who sometimes wonder if they are enslaved to generator giants that hike charges without discrimination should welcome the buzz that’s building around demand response, which is a proven and powerful tool to lower power costs. “You can halve your power costs with an effective demand response strategy,” says Marija Petkovic, managing director of Sydney-based consultancy Energy Synapse.
Petkovic has seen demand response in action while working in energy management for large industrials in Australia and the United States, including gas company Linde Group.
“In [the industrial gas] industry electricity is 70% of your product cost, so that industry is very on-the-ball in terms of what it is doing about energy,” she says.
Australian companies are starting to find out what they can do to manage their energy bills, too, even if electricity makes up less than 10% of product cost. “Everyone’s under pressure from board level to do something about power prices.”
Harder than it looks
The challenge, of course, is that management won’t understand the complexities of energy systems. People who don’t deal with energy on a daily basis may have a very limited and simplified understanding of the possibilities and obstacles. The most naive energy user will renew energy contracts without much thought to how it is structured or when the optimum timing is in the market. The more sophisticated manufacturers tend to treat energy management as an operations function, where it is viewed alongside supply chain and product management, rather than a procurement function.
“If you can get a really good demand-response deal you might be prepared to go with someone who’s offered you a higher price, but you might be getting millions [of dollars] from the demand response deal,” Petkovic says.
Business owners who hope to negotiate demand response inclusions in a contract after its terms have been agreed usually have left it too late. At that stage their position is weakened because they have no other retailer options. “That’s a trap I’ve seen a lot of people fall into,” Petkovic says.
Demand response is on the radar. The Australia Institute says demand management will be worth $36 billion by 2025 and increase from 39GW to 144GW, and the International Energy Agency reckons a good benchmark for demand response is about 15% of peak demand. In Australia it is far lower.
In March, demand response giant EnerNOC committed to providing 100MW to South Australia by December, if the market is open by then. Energy technology company GreenSync says it can deliver 300MW of “negawatts” (demand response) across the National Electricity Market and ARENA is funding a project with AEMO aimed at delivering 160MW of demand response by this summer. Tenders for the trial proposed 1,938MW of capacity could be delivered by December 2018.
Walk don’t run
As buzz builds about demand response, energy generators and retailers are being more cautious about making deals, Petkovic says. Whereas savings and revenue split between consumer and retailer were clearly set out, with energy users getting the majority of the benefit, nowadays she says retailers are weighing deals towards their own favour. “A lot of the deals now are convoluted,” she says. Take the example of an offer to curtail a number of times over summer, which sets out the benefit to the consumer but not the supplier. “From an energy user’s perspective that might be great; ‘I’m getting $100,000!’ But if the size of the pie is $1 million and [the retailer is] keeping $900,000 that’s a pretty raw deal.”
As energy users search for any lever they can grasp to control electricity costs, the last thing the energy market needs is for strategies that can ease costs and relax supply constraints to become unbalanced. Petkovic is hopeful that a “proper” demand response market will evolve in Australia rather than the opaque “secret squirrel deals” where there is no standardisation. If participants could bid straight into the dispatch market, competing directly with generation, there will be much less requirement to draw on expensive peaker plants.
“That’s one of the challenges AEMO has when they are running their system because they don’t really have any visibility over what is happening in demand response in Australia, and there are thousands of megawatts of demand response in Australia already.”
Part of the working day
There is a misconception that demand response is a tool that can be used only in peak demand events, she says. At Linde, Petkovic says she would sometimes bid into the market when it paying a low $US25/MWh because her stock levels were high and production needed to shutdown anyway, so it made no sense to wait and risk the price dropping towards $US10/MWh. “There is opportunity to optimise your energy costs year round – it’s not just about avoiding blackouts.”
The distinction between “economic demand response” as described above and emergency demand response is pretty easy to understand, but for any demand response to work there needs to be a proper market. If one takes the view demand response is a form of generation, then a functioning and flexible market would benefit the market by injecting more competition into a system that desperately needs it.
The scale of network demand and supply would require that energy users at the smaller end of the market, including residential consumers, would need to bid through aggregators.
Economic demand response may be struggling to get traction in Australia but one welcome development has been the opening up of the frequency control ancillary services market to large-scale energy users where once it was the exclusive domain of centralised generators. Energy users have been able to enter the market through their retailer, but where the retailer also owns a generating fleet it has been in the retailer’s interest to keep revenue from this market for itself.
Weigh the odds
The demand response market is not like observing a flock of sheep; everyone participates pretty much when it suits them best, and that may also happen to be during a peak event. Sometimes it may be worth running through a $14,000/MWh period to avoid incurring a $10 million bill for failing to supply customers. It is an individual decision just as it is for generators when they are bidding into the market.
Petkovic recalls an instance where her bid into the mid-continental US market ended up being the marginal bid and saved all users about $US700 million, about 30% of capacity costs. “That’s the power of demand response,” she says. “It doesn’t need to be a huge portion of the grid to have a very significant price impact.”
In a report released in October Energy Synapse showed that in NSW although small-scale solar PV contributed about 2% capacity to the grid, prices would have been 30-50% higher without it. The dramatic leverage of rooftop PV to bring down wholesale costs for all users is thanks to a similar dynamic as the example of Petkovic’s marginal bid. When demand reaches high levels wholesale costs can increase very quickly towards the $14,000/MWh cap. On those days and at those times, generation from small-scale solar was seen to reduce overall demand so that wholesale rates were between $29 and $44/MWh lower than they would have been if supply was coming only from centralised generators.
“When you’ve got the solar resource that private customers have paid for coming into the grid at $0 you don’t necessarily need those very high-cost generators,” she says. “At critical periods on the grid when you’ve got very high demand or when there are a lot of generator outages, if you can reduce just a little bit of demand level on the grid it has a very big impact on pricing.”
Store it or use it
The more flexible you are the more opportunity there is. Systems that include battery storage may afford owners greater flexibility but they also make decisions about demand response far more tricky. Batteries cannot be charged and discharged on a whim and working out the best times to utilise them is super hard. “It’s something people have underestimated because they have all been focused on the chemistry of the battery and the software in the battery and not taking into account the market at all.”
As more renewables are added to the market Petkovic’s prediction is the average price of electricity will drop but volatility will increase. When most electricity comes from renewables for most of the year prices will be “incredibly low” but pricing will be extreme for peak days and the $14,000MW/h price cap will need to be lifted considerably, she says. “Generators that rely on those couple of days will have to get all their revenue during that handful of days rather than being able to get a little bit throughout the year because at other times it’s going to be at zero or very close to zero.”