As from October 2021, large-scale energy users will be able to sell scaled back use of electricity into the grid under the Wholesale Demand Response rule.
The rule is set to come into effect after the Australian Energy Market Commission brushed aside COVID-19 disruption claims to give the green light to one of the biggest energy market reforms in decades.
The new Wholesale Demand Response rule will later be extended to small to medium-sized businesses and eventually households, allowing them to sell their Negawatts back into the grid.
Australia’s energy market has traditionally been dominated by supply-side response to spikes in demand for electricity, characterised by fast-peaking gas-fired plants and diesel generators.
But the new rule will shift focus to a ‘fight fire with fire’ approach under a formalised demand response mechanism.
At times where demand spikes due to heatwaves or cold snaps, large scale energy users such as aluminium smelters, farms and factories will be able to scale back the intensity of their operations, selling their reduced demand back into the grid.
Wholesale Demand Response expected to lead to lower prices
The modelling shows that this type of response will result in cheaper electricity prices on the market because scaling back and cashing in by large scale users will be more cost-effective than traditional generators pumping out expensive ‘quick fix’ energy produced by high-emission fossil fuel-fired power plants.
In the current situation, big energy producers know that they can make huge profit margins by ramping up gas and diesel generation simply because the threat of brownout or blackout is so damaging that it shoots prices through the roof.
Coal is out of the equation in such situations because inertia (the lack of momentum in starting up generation) excludes them, justifying the high prices demanded by gas and diesel generation.
Scheme to be extended to small and medium-sized businesses
AEMC CEO Ben Barr said that the scheme will be extended to small and medium-sized businesses in the next phase of market reforms which will push towards a “two-sided” market, leading to lower prices across the board as well as reduced carbon emissions.
A two-sided electricity market will involve all players in the buying and selling process. The AEMC said that once this is achieved, the demand response mechanism will become redundant due to open trading across the board.
The AEMC explained its decision, saying that opening the system to all users at one go would create an overly complex system, the costs of which would end up being shouldered by households.
The initiative was championed by The Australia Institute, the Public Interest Advocacy Centre and the Total Environment Centre.
Under the new mechanism, a new category of energy market participants will be created. They will be known as “demand response service provider” participating alongside electricity generators to sell reductions in energy usage.
The AEMC said some of Australia’s largest energy companies, including AGL Energy, Snowy Hydro, Origin Energy and EnergyAustralia, called for the new mechanism to be delayed.
The AEMC said the biggest consideration it made was the views of the Australian Energy Market Operator, which said it was willing and able to proceed without delay.
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