Taking demand away from the peak

Given record temperatures across Australia this summer, the implementation of more demand-side management, to alleviate system pressures and mitigate wholesale price spikes, ought to be high on Australia's energy reform agenda.

Indeed, the Australian government's 2011 Energy White Paper highlighted demand-side management as a key component in improving the cost effectiveness and efficiency of Australia's National Electricity Market. Demand-side management in the wholesale market includes demand response, where large-scale users of electricity sell load curtailment or ‘negawattts' into the market when wholesale prices exceed retail tariffs, in the same way generators bid power.

In November 2012, the Australian Energy Market Commission released its Power of Choice report, in which the Commission set out recommendations for the reform of the NEM, including the introduction of a demand response mechanism. It was estimated that 2.1 to 2.8 GW of demand response from commercial and industrial users in the NEM, or 6-8 per cent of total peak demand, was feasible in 2011.

The federal and state governments have indicated their support for the implementation of a priced-based wholesale market demand response program, which is expected to take around four years. Amendments to the National Electricity Rules are required to facilitate demand response participation in the market – to change wholesale market settlement and dispatch arrangements and establish baseline methodologies to measure electricity consumers' demand response.

So how does it work? The amount of demand response sold is calculated as the difference between a participant's actual metered consumption during the demand response interval and their estimated consumption had they not changed their consumption – the baseline.

At market settlement, the system operator pays the consumer, or an aggregator or agent acting for consumers, for the quantity of demand response, supplied according to spot prices seen during the peak demand interval. For credible demand response participation in the wholesale market, the system operator needs to develop baseline methodologies that capture the level of demand response bid into the market.

In the US, demand response programs have developed into an effective tool for peak load management across several regions. New York state and New England have operated demand response markets for over a decade. During the summer peak load period in 2011, total demand response resources registered in New York State's reliability programs represented 6.4 per cent of peak load or 33,866 MW.

By way of illustrating the potential benefits of demand-side management, on November 29 2012, Victoria recorded its hottest ever November day. The wholesale price of electricity rose from less than $100/MWh in the morning to nearly $10,000/MWh by 4.30 PM, an extraordinarily high price when compared to similar heat waves earlier in 2012.

RepuTex modelling indicates that the price spikes could have been avoided if 2,000 MW of demand response had been made available to the market, which would have kept wholesale prices under $100/MWh. Although, interestingly, the modelling showed a lower volume of just 500 MW of demand response would have proven insufficient to avoid the price spike.

While consumers benefit from lower, or avoided costs, through current demand-side management measures, under a price-based demand response mechanism they would be able to earn revenue at prevailing spot prices when prices move above retail tariffs. Those consumers best positioned to benefit from such demand-side management are likely to be large commercial or industrial consumers or small-medium commercial users with flexible loads.

The key to maximising the economic benefits from demand response measures lies in building into the market incentives for the sale and purchase of load reductions.

Demand response, in the form of load curtailment bid into the wholesale market, would provide increased competition to generators. The introduction of wholesale market demand response will require regulatory reforms and technical upgrades in the wholesale and retail electricity markets, measures that encourage price-based demand response and that integrate demand response into whole-of-system resource planning.

If implemented correctly, price-based demand response has the potential to reduce average wholesale electricity prices, mitigate price volatility and bring down consumers' total electricity costs.

Over the long-term, demand response can assist in increasing system reliability and delaying investments in peaking plant and network infrastructure. The incentive-based load management measures introduced into the NEM over the past decade provide the platform for the expansion of demand response to include load curtailment bids into the wholesale market.

Paul Bourke is Associate Director of Research at RepuTex Carbon Analytics.