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On 31 August 2018, three public advocacy groups wrote to the Australian Energy Market Commission (AEMC) asking for it to change the rules governing how the Australian electricity market works. Their request? Allow consumers to be paid for electricity they avoid using. The concept may sound bizarre, but in simple terms they were calling for the creation of a “two-sided market”, an idea as radical as it is logical. Last Thursday the AEMC granted their request and in doing so has paved the way for a revolution in the way Australians think about and use electricity, one that is likely to cut the cost of energy for households and business and accelerate the transition to a zero-carbon electricity grid.

Why is change necessary?

Since Thomas Edison’s time, electricity supply systems have slavishly adhered to the laws of physics and the rules created by regulators insisting that electricity must ‘flow’ from generator to consumer. But while the laws of physics are constant and immutable, labels like ‘generators’ and ‘consumers’ are losing their meaning. Consumers can be generators. They can store electricity in batteries. And they can shift and shed demand. Technological innovation is making the relationship between generation and consumption of electricity dynamic and that is why the AEMC accepted the argument of the PIAC, TEC and TAI: that archaic rules should not be allowed to hold back the emergence of an efficient and dynamic electricity market.

Over recent years the reliability and security of Australia’s electricity supply system has been in decline. Peak demand has been rising, minimum demand has been falling, and operational consumption growth has been slowing. Similar patterns have been observed in many industrialised economies due to the growth in renewables, retirement of carbon-intensive baseload power stations, improvements in energy efficiency, and increasing demand for air conditioning under extreme weather conditions. As Australia’s Minister for Energy and Emissions Reduction recently remarked, “It is no secret that the National Electricity Market is under pressure”.

What will the rule changes mean in practice (besides more acronyms)?

The National Electricity Market (NEM) consists of two markets: a wholesale market and a retail market. The wholesale market is where participants, such as electricity retailers and large generators as well as some very large industrial users, buy and sell electricity. The retail market allows consumers (e.g. households and most businesses) to choose which retailer they want to purchase their electricity from.

From October 2021, the wholesale market will include a new class of participant called a Demand Response Service Provider (DRSP) and by virtue of a wholesale demand response mechanism (WDRM) these DRSPs will be able to bid wholesale demand response units (WDRU) into the market as a substitute for electricity generation. All of this is laid out in detail in a ‘high level design’ document published by the Australian Energy Market Operator (AEMO) to accompany the AEMC determination.

Demand Response (DR) is the widely used term for the voluntary reduction or shifting of an electricity demand profile. Examples of DR include adjusting temperature setpoints for air conditioning systems, rescheduling the operation of plant and equipment to move load away from peak periods, and the charging and discharging of batteries. DR is routinely deployed to keep peak demand below a maximum level and, increasingly, DR is also being used to ensure networks have sufficient load during times when renewable energy generation exceeds network demand.

AEMO expects most DRSPs to function as aggregators of WDRUs created by energy users through their individual DR activities. DRSPs will be paid the difference between a user’s baseline and actual consumption multiplied by the wholesale spot price. The average spot price over recent years has been less than $100/MWh (10¢/kWh); however, during periods when the network is under strain, spot prices can rise to $15,000/MWh ($15.00/kWh) making DR activities potentially a very lucrative option for energy users. It will be up to individual energy users to negotiate commercial agreements with DRSPs and they will be able to do so without the involvement of their energy retailer.

What are the opportunities for the property industry?

For most building owners and operators, the prospect of being paid anything that even approaches $14,900 for moving a megawatt-hour of load will be very appealing, especially if it can be done regularly and with minimal inconvenience. But whether payments approach these sorts of figures, or not, is beside the point.

Until very recently, energy efficiency and demand response were considered different disciplines with different benefits. Energy efficiency was all about reducing consumption, reducing costs and reducing emissions. DR was all about optimising infrastructure use and avoiding network disruptions and penalty charges. Energy Star and NABERS Energy measure the energy intensity of buildings as a proxy for efficiency. Currently there is no equivalent rating for demand. But as the California Energy Commission has pointed out in its Energy Efficiency Action Plan outlining California’s vision for evolving energy efficiency from kWh-based reductions to demand flexibility:

“it is no longer sufficient to utilize energy efficiency only as a static resource. Energy systems – new homes, replacement heating and cooling equipment, industrial processes and the like – must be both highly efficient and flexible to the maximum extent possible. Flexibility means interactivity with the grid: the ability to manage energy usage, proactively and situationally, to minimize both its cost drivers and its carbon content.”

These ideas are captured in the term “active efficiency” which has recently been coined for the integration of time-dependence and performance benefits from energy savings, including economic productivity, resilience, health, and emissions reductions. For example, it is common practice for large commercial buildings to limit the intake of outside air to reduce energy consumption during periods of warm sunny weather – exactly the time when PV systems are generating maximum output. An active efficiency approach that utilises the benefit of the WDRM might instead take up some of that excess power generation by opening outside air intakes to provide fresher indoor air and greater thermal comfort. This creates a market for the solar power that only needs to be trimmed back when the price signal from the DRSP suggests there is a shortage and the building owner/operator can be paid.

Crucial in all of this is reliable information. Markets only function efficiently if participants can anticipate movements in supply, demand and price and are able to adjust their actions accordingly. With accurate demand forecasting to the building level, and clear timely feedback supporting the adoption of sophisticated active efficiency strategies, building owners and operators will be able to not only dramatically reduce their operating costs, they may also provide better indoor environments and actively support the transition to a sustainable energy system.