‘Shameless’: cheap energy option for consumers being buried

Giles Parkinson, RenewEconomy

For all the talk about the National Energy Guarantee and how it is supposedly addressing the energy ‘trilemma’ of cost, emissions and reliability, it seems they are still making hard work of some of the obvious and cheapest solutions.

The discussion paper released by the Energy Security Board cheered up some quarters by noting the importance of demand response, or demand management – the idea that providing a signal to switch off unneeded power is smarter, cleaner and cheaper than switching on an extra power plant.

But there is some way to go. Demand response may be recognised as important to the NEG, but its rollout will likely depend on the development of separate market mechanisms, and/or a permanent strategic reserve, and on those fronts the signs are not so encouraging.

Bruce Mountain, from CME, notes some of the extraordinary complexity in how the NEG might operate, but it’s not the only critical piece of regulation and rule-making on the table.

Demand response measures have been recommended since at least 2002. However, they have been resisted, and still are, by major utilities who have grown rich by profiting from scarcity.

The Australian Energy Markets Commission’s Reliability Frameworks Review – an increasingly important annexe to the growing complexity of the NEG – has alarmed many because of its failure to embrace these mechanisms.

And it has provoked an excoriating response from the Energy Efficiency Council, and criticism from others.

Demand response measures have been recommended since at least 2002, when COAG’s first major review of the NEM (the Parer report) was released. However, they have been resisted, and still are, by major utilities who have grown rich by profiting from scarcity.

(To understand how, please read this piece from last year by former EnergyAustralia boss Richard McIndoe in response to Snowy Hydro CEO Paul Broad’s claim that demand response was akin to ‘blackouts’).

In its latest report, the AEMC says it has looked at the issue and considers that there are enough signals for demand response to occur. And its position is supported by the country’s biggest gentailers.

The EEC, however, issued a withering rebuke, saying the lack of demand response incentives have cost consumers ‘hundreds of millions of dollars’. (It is probably much, much more).

And the EEC warns the AEMC to be wary of ‘shameless rent-seeking’ by generators who pocket huge profits when they can switch on expensive peaking plants.

‘We fully expect that some generators will object to reducing barriers to demand-response in the wholesale energy market, as these changes will reduce their market power and ability to gain extraordinary returns at the expense of consumers,’ the EEC said. (And they were right).

‘In previous inquiries into demand response, we saw risible objections to demand response, such as the claim that it would cost over $100 million to upgrade retailers’ billing systems to facilitate demand response,’ the EEC continued.

‘At their heart, these objections are really concerns about increasing competition in the wholesale energy market, and we urge the AEMC to dismiss such claims as shameless rent seeking.’

The EEC says the benefits of demand response have been obvious ever since that 2002 Parer report.

But while other markets around the world have embraced it, it has been barely developed in Australia, which has been so focused on ‘supply side’ solutions (build bigger networks, and install more coal and gas generators) that energy efficiency has also been ignored.

In its submission to the AEMC, the EEC says the absence of a Strategic Reserve, which could be largely met through demand response initiatives, is causing far greater distortions to the wholesale electricity market than a Strategic Reserve ever would.

‘Several governments perceive that there are risks of capacity shortfalls and, combined with their declining faith in governance of the NEM, this led them to take independent actions to improve energy security,’ it says.

‘These state-based actions have come at much greater cost to consumers and distorted energy markets far more than a Strategic Reserve ever would.

‘For example, the South Australian Government recently spent over $339 million on diesel/gas generators that will still idle for the vast majority of the year, won’t operate within the wholesale electricity market and will distort investment in the energy sector.

‘If an effective Strategic Reserve had been in place for several years it would have provided capacity at much lower cost, given the South Australian Government comfort and avoided this distortionary investment.’

The reference to South Australia is interesting. Last week, RenewEconomy was sent a link to a fascinating report that illustrated that South Australia’s electricity woes – high prices, ‘peaky’ demand, and lack of competition have been endemic long before renewables entered the equation.

The report, written in 2005 by ETSA, the South Australia grid operator as it was then known, and still available on the website of what is now known as SA Power Networks, laid out the benefits of demand response.

ETSA identified the problems that South Australia faced then – a lack of good quality coal, reliance on expensive gas, limited connections with other states, and a unique demand profile caused by its mild climate contrasted by bursts of extreme heat that sends demand up more than 3-fold.

Even then, almost 90 per cent of South Australian homes had air-conditioning, and the need to address these huge peaks meant that they had the highest electricity prices in Australia – even before the arrival of renewables.

‘(This) is why prices to residential customers are high,’ the report said. ‘It is mainly residential customers who create the peak use.

‘This has been exacerbated by the trend to high density housing without either eaves or appropriate window placement, or other design features, to reduce summer heat. Those customers rely heavily on large air conditioning units.

‘Much of the generating plant, and the network capacity to deliver power during those few peak days, is underutilised for most of the year. Some plant only operates within SA for a few days each year.’

That’s why demand response was considered such a good idea. But not much happened. Now the same problem is affecting all states.

How to encourage demand response (or not) is just one of the issues that divide some of the key members of the new Energy Security Board, particularly the AEMC and the Australian Energy Market Operator.

AEMO’s new CEO Audrey Zibelman been a strong supporter of demand response, having come from US markets where such measures can clip peak demand by more than 10 per cent, avoiding the costly price spikes that drain the pockets of consumers and become fuel for partisan positions on energy politics.

‘If we can reduce the amount of demand, that has the same benefit as the grid, and is a lot less expensive than building a new power plant that is only used for a few hours a year,’ she says.

The AEMC is less keen. It has argued that because the National Electricity Rules (NER), for which it is responsible, do not ‘completely prevent’ wholesale demand response, then they do not ‘impede’ wholesale demand response.

The EEC was not kind in its assessment, and offered this oft-made criticism for the AEMC:  ’While playing with pure economic theory on paper is fun, if markets aren’t designed with real-world conditions in mind then they will lead to sub-optimal outcomes.’

EnerNoc, a company specialising in demand response technologies, sided with the EEC.

It said the AEMC’s arguments were ‘problematic’ and ‘puzzling’, and suggested there was prima facie evidence that retailers  are not sufficiently motivated by their ‘theoretical efficient incentive’, and in practice were doing little.

‘Despite a theoretical ‘efficient incentive’ to pursue wholesale DR, too few retailers are doing so; innovation and competition are being stifled as a result,’ it wrote.

‘A gentailer long on generation may earn more from selling expensive energy than they pay to the market in order to serve their retail book.

‘In the long term, such a gentailer may have an incentive not to engage in activities that reduce spot prices (like wholesale demand response) … and that all of these factors are hindering innovation on the demand side, to the detriment of consumers.’

This article was first published in RenewEconomy and is reproduced here with permission.