The Energy Security Board has highlighted industrial load flexibility as an important potential contributor to grid stability. Is it a target we can hit? EcoGeneration asks a panel of experts to light the way forward.

The panel:

  • Dani Alexander, research principal, Institute for Sustainable Futures
  • Alex Leemon, demand response lead, Flow Power
  • Marija Petkovic, managing director, Energy Synapse
  • Claire Richards, manager of industry engagement and regulatory affairs, Enel X

The Energy Security Board’s Post 2025 Market Design Consultation Paper set out a wishlist for reform which was received by the clean energy crowd with a big thumbs up. So far so good. In its section on two-sided markets, the board set down some design initiatives it feels will allow consumers to participate in the wholesale market and reward the value provided by flexible demand and supply. Traders will only participate in dispatch once barriers are removed and incentives put in place, the board wrote in the consultation paper.

The board makes the problem sound very simple. “To the extent customers can shift their demand to periods when power is cheapest … and away from more expensive periods, there is value to be made for all consumers through the resulting cost savings in network buildout and smoothing of peak demand and reducing generating capacity to meet peak demand,” the authors wrote.

But nothing is going to be quite so straightforward as Australia’s energy system is gradually reconfigured, so EcoGeneration asked a panel of practitioners and researchers in the demand response field for their take on the situation.

“There are some really interesting developing areas of market innovation, such as inverse DR and improvements in the way distribution networks procure DR to delay significant upgrade costs.”
Alex Leemon, Flow Power

What are the current barriers to load flexibility and what are some effective ways incentives can be offered so that demand response is encouraged?

Claire Richards, Enel X: While more opportunities are opening up to demand response, there are still barriers. Some of the regulatory barriers, such as retailers controlling the relationship with the customer, are gradually being addressed by policymakers. This includes the introduction of the wholesale demand response mechanism in October 2021 and more substantive reforms being explored by the Energy Security Board to introduce a two-sided market.

Dani Alexander, Institute for Sustainable Futures: Our ARENA-funded study Renewable Energy and Load Management for Industry highlighted that “existing tariffs generally do not provide an effective incentive for sites to use or develop load flexibility”. Some of the necessary incentives could be offered in the current market – such as distribution networks taking advantage of the Demand Management Incentive Scheme – and some will require market reform.

Alex Leemon, Flow Power: As technology and platforms mature, automation and ease of load curtailment is becoming much simpler. There are some really interesting developing areas of market innovation, such as inverse DR – increasing load in response to negative prices, or “minimum demand” – and improvements in the way distribution networks procure DR to delay significant upgrade costs.

There are still challenges, such as the complexity of registration and administration, and barriers based on load size that lead to most customers participating via a third-party. There is also a cultural challenge – the mindset required to think of energy usage as a flexible resource, as well as organisational incentives for managers being asked to reduce load but risk missing production KPIs.

Marija Petkovic, Energy Synapse: Demand response not being able to participate directly in wholesale markets is a big one. The wholesale demand response mechanism coming into effect next year will partially overcome this, but there is a need to simplify participation requirements and to include smaller energy users.

Overcoming misconceptions about demand response is another important but often overlooked barrier. Demand response is voluntary, rather than something that is forced upon consumers. More work needs to be done to educate consumers so they can understand what demand response is and how they can benefit from it.

“Customers are also more engaged and energy literate, demanding access to the market and fair compensation for their contribution.”
Dani Alexander, Institute for Sustainable Futures

How does the evolution of an efficient two-sided market tie in with incorporation of higher levels of distributed energy resources in the NEM?

Alexander, ISF: The increased uptake of DER in partnership with advances in energy monitoring and control is shifting power back into the hands of customers. The two work hand in hand. While the demand-side resource was always there, and arguably overlooked, it is now more easily accessible to the market with advanced inverters and metering installed alongside solar and batteries. Customers are also more engaged and energy literate, demanding access to the market and fair compensation for their contribution.

Leemon, Flow Power: To unlock the greatest benefit from these assets we need a significant market redesign. What we need to see are market mechanisms that can not only accommodate and incentivise participation of DERs, but the right types of DERs in the right locations.

As an example, South Australia is rapidly approaching minimum demand – the concept that during the middle of a sunny day the grid demand will be zero because all the demand is being met by rooftop solar panels. This is amazing but it has serious consequences from a system security perspective. One solution would be to encourage customers to consume more energy during these periods by increasing demand, including charging batteries, or temporarily disconnecting solar panels. But there’s no current way to incentivise customers to do any of this efficiently.

Petkovic, Energy Synapse: An efficient two-sided market is one of the most effective ways we could manage the growing uptake of distributed solar. Having appropriate price signals and market access will provide an incentive for storage and load control to act as a “solar sponge”, thereby helping to maintain system security, reduce the quantity of solar that is curtailed and allow for more solar to be installed.

“Both demand response and batteries are well-positioned to provide additional capacity due to their fast-response capabilities, as well as provide critical grid support services.”
Claire Richards, Enel X

Is the demand response market going to be upset by the influx of massive storage projects slowly making their way into the grid?

Richards, Enel X: Demand response can, and should, sit alongside investment in battery storage. With variable renewable energy resources making up a greater proportion of the generation mix and traditional coal-fired power plants retiring, there’s a need for more capacity on the grid – particularly dispatchable capacity. Both demand response and batteries are well-positioned to provide additional capacity due to their fast-response capabilities, as well as provide critical grid support services.

Alexander, ISF: This is likely. For example, Mueller and Moest (2018) have shown that there is a direct competition between energy storage and load shifting – in particular, pumped hydro plants. Large-scale storage is far less efficient than demand response – “the cheapest energy is energy we don’t use” – so, from a systems perspective, load flexibility should be preferenced as much as possible.

Leemon, Flow Power: I don’t believe so. In many regards the DR market in the NEM is very immature. The market is deep enough for DR and storage to coexist. One of the most common areas of DR in the NEM currently is the Reliability and Emergency Reserve Trader. The mechanism is not specific to DR, but it is currently dominated by DR portfolios. It is designed to be an out-of-market mechanism, so assets that typically operate in the market are broadly limited from operating in the RERT. Based on the current market designs the most value can be achieved from registering storage assets as market participants.

Petkovic, Energy Synapse: We see an important role for both demand response and utility-scale storage. As we transition away from controllable fossil fuels to variable renewable energy, the need for flexible resources will grow significantly. Consumers will benefit greatly from a market where a portfolio of technologies are competing to provide different forms of flexibility and grid services.

“There are several gigawatts of existing assets whose flexibility has been largely untapped.”
Marija Petkovic, Energy Synapse

How much latent capacity do you suspect there is in the demand response market in Australia?

Richards, Enel X: We estimate there is over 2.5GW of latent capacity that can be activated to provide DR across a number of commercial and industrial sectors. This includes the capability in backup generators, pumps, chillers and compressors.

Alexander, ISF: This is a great question, to which we don’t have a conclusive answer. While different groups are seeking to answer this question, access to energy end-use data continues to be a problem. This is particularly problematic for estimating energy use for the commercial and industrial sectors and for deployed capacity of behind-the-meter battery storage. Programs such as Australia’s National Energy Analytics Research Program are bringing together existing data sources, but it is still a work in progress.

Leemon, Flow Power: This is a tough one. AEMO estimates the price-responsive DR to be in the range of 200-500MW. On the other hand there’s already about 1GW of DR load participating in the emergency RERT mechanism. A 2014 ClimateWorks study puts the estimate of latent industrial DR as high as 3.8GW, which represents about 12% of the peak load.

The key challenge is not only incentivising the participation of more types of DR but realising that much of this latent potential will not be accessible simultaneously – much like generation DR has a “capacity factor”. Even if 3GW or more of DR could be incentivised to participate, only a portion will ever respond simultaneously due to differing production schedules, power demands and regional variations.

Petkovic, Energy Synapse: We suspect there are several gigawatts of existing assets whose flexibility has been largely untapped to date. We are completing a project on a similar topic and will have more to say when this work is published.

“Demand response is not only needed when there isn’t enough supply to meet demand.”
Claire Richards, Enel X

Will demand response still be an important stabiliser of the grid if large-scale energy users such as aluminium smelters exited the economy?

Richards, Enel X: If large energy users exited and demand was reduced, demand response would still be needed to provide critical grid-balancing services year-round. The grid requires demand response services to support the integration of renewables as well as the retirement of coal-fired power stations. Climatic events also threaten the grid’s stability and can impact interconnector transmission lines between states. Some electricity networks have ageing infrastructure that can also be supported with demand response. In short, demand response is not only needed when there isn’t enough supply to meet demand.

Alexander, ISF: Yes, for two reasons. First, load shedding by energy intensive industries is only effective if their load is contributing to the constraint. With no load, the grid is in the same position as it would be if they responded to an FCAS request. Second, network constraints are inherently locational, and large-scale energy users cannot always help. For example, during heatwaves where air-conditioners are running high as rooftop solar drops. Residential and commercial demand response is largely an untapped resource to address this issue.

Leemon, Flow Power: Absolutely. The aluminum smelters are the largest single energy users in the country and represent the most basic form of demand response. However, we’ve already seen strong examples of grid-stabilising demand response through the RERT mechanism. For example, when the RERT was activated in January 2019 about 200-300MW were provided.

Another consideration to the potential “smexit” is that it would lead to reduced grid demand, particularly base load, which may accelerate the retirement timelines for the older coal-fired power stations. These stations currently provide a significant amount of dispatchable capacity during grid peaks, so a high level of coal closures may lead to a requirement for even more demand response.

Petkovic, Energy Synapse: Aluminium smelters have been a significant provider of demand response for a long time. If these and other large energy users were to exit the economy, that would create an even bigger need for demand response from other energy users.

As we transition to more renewable energy, we are losing control of the supply side of the equation. Transitioning to clean energy will be much more difficult than it needs to be if we don’t get better at harnessing demand side resources.

“For customers who pay the wholesale price the five-minute change opens up opportunity to respond to price spikes.”
Alex Leemon, Flow Power

How will five-minute settlement and the introduction of the wholesale demand response mechanism from October 2021 affect the market for demand response?

Richards, Enel X: Five-minute settlement is an important reform that will deliver improved price signals to the market. One of the benefits of more granular price signals is more efficient investment in fast start, flexible technologies such as demand response, which can take advantage of the five-minute spot price.

While five-minute settlement provides the incentive, the wholesale demand response mechanism provides the means for demand response to participate. The mechanism allows demand response providers like us to sell wholesale demand response into the spot market. It will open up opportunities for investment in demand response and help activate the significant amount of latent demand response capability in the NEM.

Leemon, Flow Power: These two rule changes are arguably two of the most significant rule changes to occur in a decade. In practical terms the five-minute settlement change is unlikely to have a significant impact to most customers (who pay fixed retail rates), but for customers who pay the wholesale price the five-minute change opens up opportunity to respond to price spikes.

The WDRM will open up a new avenue for customers to receive the benefit of doing DR in response to spot prices. At its heart it will not require customers to be spot-exposed. Customers will bid into the market, submitting a price to the market at which they would be willing to do DR. If the market price exceeds this threshold then the customer will be expected to perform DR and will receive a payment. Sophisticated customers could bid into multiple price bands.

Petkovic, Energy Synapse: In terms of five-minute settlement there will be winners and losers. Fast-responding assets such as batteries will benefit greatly. In contrast, other types of energy users may find it more difficult to respond within a shorter time frame.

“Many large industrial customers negotiate demand response contracts individually and can realise very large revenues very quickly, particularly when offering FCAS.”
Dani Alexander, ISF

Everyone benefits when demand is shifted to cheaper times of the day, but are load flexors fairly compensated?

Alexander, ISF: Fair compensation, or fair market value, is not always straightforward. Some customers are choosing retailers that show them the wholesale prices in real time, such as Flow Power for commercial and industrial customers and Amber Electric for residential customers. Many large industrial customers negotiate demand response contracts individually and can realise very large revenues very quickly, particularly when offering FCAS. The real issue is how to open up those opportunities to more customers so that everyone can benefit from the potential immediate revenue and overall reduced cost of electricity if load can be flexed to follow supply.   

Leemon, Flow Power: When the NEM was designed over 20 years ago the intention was that the floating 30-minute spot price would serve as a signal not just to the generators but also to the load side to manage demand and receive benefit from the savings. What has evolved is a model where retailers, who pay this floating spot price, offer customers fixed-price contracts with price incentive almost completely removed.

For those customers that are exposed to this price signal and performing demand management (or demand response in the case of extremely high pricing) they’re reducing their electricity costs or earning revenue, but they’re also benefiting much of the grid. In many ways the current market design doesn’t adequately reward those customers with flexible load.

Petkovic, Energy Synapse: One of the most positive aspects of demand response is that all consumers benefit from it, not just those that provide the demand response themselves. We don’t see this as problem. What is a concern is ensuring that energy users are fairly compensated by the retailers and aggregators they contract with. Not having adequate markets means that most demand response is currently implemented via bilateral agreements. This results in a very opaque system. Retailers and aggregators generally have a much stronger understanding of energy markets than the energy users they contract with. This asymmetry of information can put energy users in a vulnerable position.

“Households are a key driver of peak demand and hence utilising these resources in a smarter way could have big benefits for the grid.”
Marija Petkovic, Energy Synapse

What are the prospects for demand response at household level? What changes would open up the residential market to demand response?

Alexander, ISF: The residential sector accounts for just over 10% of Australia’s energy consumption every year, which his larger than the commercial and agricultural sectors combined. The challenge lies in the aggregation of that resource. While many retailers already offer some demand response products, uptake has been low. The introduction of the wholesale demand response mechanism in 2021 should encourage new businesses to enter the market.

Leemon, Flow Power: Although commercial and industrial loads drive the lion’s share of electricity demand the patterns of peaks and troughs are largely driven by residential demand. Solutions aren’t cheap, however. Even the available smart home devices which could be easily programmed to do DR are often beyond the reach of many households. Another area of reform could be significant improvements to the network tariffs that make up 30-50% of electricity bills.

Petkovic, Energy Synapse: There is huge potential for households to provide demand response – not just via batteries but from a range of controllable loads such as hot water, air-conditioning, pool pumps and more. Households are a key driver of peak demand and hence utilising these resources in a smarter way could have big benefits for the grid.

The residential sector also has an advantage in that it is relatively homogenous, compared with C&I. This simplifies the technology requirements and it is not surprising that we are seeing so many start-ups in this sector.

In order to tap into this vast potential, the wholesale market needs to be opened up smaller energy users, who have unfortunately been excluded from the wholesale demand response mechanism. Network services also need to be opened up. Of course, lack of consumer awareness is another issue and ongoing education will be key to solving this.