On 12 March 2020, the Australian Energy Market Commission (AEMC) released a second Draft Rule Determination on the proposed wholesale demand response mechanism (Draft Determination). The Draft Determination sets out a series of proposed changes to the National Electricity Rules (NER) which would allow large customers to routinely sell demand response in the wholesale market either on their own account or through specialist aggregators.
Currently the NEM is characterised by active supply-side participation (ie. generation) and passive demand-side participation (ie. consumption). In its Draft Determination, the AEMC considers that moving to a two-sided market (with active participation on both the demand side and supply side) will assist the NEM in evolving towards the power sector of the future, in which there will be a need for flexible and dispatchable resources (including demand response) to accommodate the increasing penetration of variable generation and network infrastructure needs.
What is wholesale demand response and which customers can participate?
Demand response refers to electricity consumers changing their level of consumption in response to short-term market signals. In the context of the NEM, demand response effectively allows consumers to participate in the wholesale market by offering their demand reductions in as a supply resource.
The AEMC’s proposed mechanism would allow large consumers to obtain financial reward, in addition to any cost savings they might have through reduced energy consumption during peak periods
The proposed mechanism is limited to large customers[1] or aggregators. This is because the AEMC's proposed wholesale demand response mechanism is designed to allow meaningful volumes of demand-side participation in dispatch and system operation (at least in the near-term). The mechanism requires loads to be controllable for the purposes of scheduling, and predictable to allow reliable measurement of demand reduction (using baseline methodologies). Large commercial and industrial users’ electricity loads are usually more predictable, as those users operate large processes often on fixed timetables and fixed hours.
The mechanism is not suitable for small customers. It would require significantly increased complexity and cost to implement for small customers, in return for unclear benefit.
How will the DRSP role fit into the NEM?
To be eligible to participate, an organisation needs to register with AEMO as a Demand Response Service Provider (DRSP) and obtain AEMO's consent to classify their electricity user loads as wholesale demand response units (WDRUs). Only a DRSP will be able to sell wholesale demand response through the wholesale demand response mechanism. If an electricity retailer wants to provide wholesale demand response through the mechanism, it too would need to register as a DRSP.
In order to qualify for registration as a DRSP, an organisation would need AEMO's approval to classify an electricity load as an ancillary service load or as a WDRU. A load can be a qualifying load if it has a single connection point, the load is neither a small customer load nor scheduled load, the DRSP has the consent of the customer, and the appropriate metering is installed. AEMO's registration process will outline the obligations with which a DRSP is required to comply, and will provide AEMO with an opportunity to assess the suitability of loads to participate in the mechanism.
DRSPs would have a number of obligations and incentives consistent with the obligations imposed on scheduled generators. AEMO will develop and release guidelines on the registration requirements for classification of WDRUs and other DRSP-related loads.
How does the wholesale demand response settlement mechanism work?
DRSPs would be treated in a similar way to other scheduled market participants in the NEM. DRSPs would submit dispatch bids to AEMO and receive dispatch instructions to provide wholesale demand response to a specified level. When the DRSP is dispatched based on its bid to reduce consumption, AEMO will pay it for its provided wholesale demand response. In effect, DRSPs will be making dispatch bids to reduce consumption and would have the ability to affect the wholesale price.
DRSPs will generally be subject to the same information provision requirements as existing scheduled generators, unless there is a requirement which is not appropriate to apply to DRSPs.
Baselines for DRSP electricity consumption are an integral part of the wholesale demand response mechanism, because the quantity of demand response which a DRSP is selling is determined as the difference between the DRSP’s baseline consumption and its actual levels of consumption. The Draft Determination stipulates that AEMO will develop a guideline which sets out information about the process for AEMO to develop baseline methodologies.
What does this mean for existing electricity retailers?
In its Draft Determination, the AEMC has sought to develop a settlement model which is cost-effective for consumers and market participants, and the proposed settlement model will allow electricity retailers to continue to bill customers based on actual consumption.
In relation to payment settlement mechanics, where a customer undertakes wholesale demand response:
- the customer will be charged by the retailer for actual consumption at the customer's retail rate by their retailer;
- the retailer will be charged by AEMO for the customer's baseline level of consumption in the wholesale market at the wholesale price; and
- the DRSP will receive a payment from AEMO for the quantity of demand response provided by the customer (which is the customer's baseline level of consumption minus its actual consumption) at the wholesale price.
Where the DRSP is an aggregator, the DRSP will likely then share a proportion of the AEMO payment with the customers, in accordance with the terms of any customer agreements.
Key dates and next steps
The Draft Determination sets out the following key dates in relation to the implementation of the wholesale demand response mechanism:
- 23 April 2020: Last day for submissions to the AEMC on the Draft Determination.
- 11 June 2020: Publication date for the final determination and final rule.
- 24 October 2021: Commencement date for the wholesale demand response settlement mechanism.
Existing market participants and large business owners should consider whether they should enter submissions on the AEMC's Draft Determination taking into account the timeframes listed above. Please do not hesitate to contact us if you require any assistance.
[1] The threshold for large electricity customers in New South Wales, the ACT and Queensland is 100MWh per annum, and 40MWh per annum in Victoria, 150MWh per annum in Tasmania and 160MWh per annum in South Australia.
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