AEMC approves landmark wholesale demand response to improve reliability and reduce prices

In one of the biggest electricity market reforms to date, the Australian Energy Market Commission (AEMC) has given the green light for a new rule that will allow large energy users to trade their energy use in the wholesale market. The so-called wholesale demand response mechanism is described as a stepping-stone to Australia achieving a two-sided energy market – where all consumers, both large and small, would be able to actively trade their energy use.

While until now, the main way to address sudden spikes in demand was to fire up peaking generation, primarily gas, the new rule will make it possible to manage energy security and reliability in a much cheaper way. It will pay smelters and other large energy users to reduce their electricity consumption in the short-term in response to wholesale market price signals and give them greater control over their energy consumption given that scheduling this demand into the market will work in the same way an electricity generator’s supply would be scheduled in.

“This reform will help avoid spikes in electricity demand that can increase prices, and can cause unexpected blackouts,” Minister for Energy and Emissions Reduction Angus Taylor said on Thursday. “The benefits of wholesale demand response will flow through to all households and businesses through lower electricity bills and improved network reliability.”

No time to waste

While some large energy companies have suggested that the introduction of the rule should be postponed in the light of Covid-19 disruptions, the AEMC decided to press ahead saying that “this is a landmark reform that must be prioritized.” “Despite Covid-19, we still need to keep prices down, keep the market working efficiently and work to lower emissions in the energy sector,” said AEMC Chief Executive Benn Barr. The mechanism is now due to commence next year on October 24.

In light of the need to focus on energy security measures and to reduce the introduction of new regulations during the disruption caused by Covid-19, the Australian Energy Market Operator (AEMO) has formally proposed a delay to another momentous market reform –the switch to five-minute settlement. However, the Australian network rule maker has begun an independent assessment of whether postponing the rule will help or hinder energy businesses manage financially during Covid-19. The five-minute settlement rule, which has been in the works since late 2017, is intended to improve price signals to favor demand response providers and fast-response technologies, such as battery storage.

These reforms are all part of the transition to a two-sided market that will engage both large and small consumers and unlock much greater benefits from the distributed energy resources used by households, such as solar panels, batteries, and electric vehicles. The AEMC says that this should be done one step at a time, arguing that such an approach to consumer participation in the market is “cheaper, more practical and safer for households and businesses”.

“If we applied the change to both large and small consumers at once it would involve significant, complex and costly system changes that would end up on household bills,” Barr said. “Small and large energy users respond differently so it’s more practical – and quicker – to start with the group whose demand is easiest to predict. We can also use this experience to learn valuable lessons about dispatching electricity in this new way.”

The AEMC is already working on a two-sided market design as part of the Energy Security Board’s 2025 reforms. Once the two-sided market is up and running, mechanisms such as the wholesale demand response will be no longer needed and retired. In the interim, small consumers can only take part in the demand response trials being run by governments and retailers, including rebate schemes and virtual power plants. “Reform is important but let’s make sure we do it well – and not in a way that sees households and businesses footing unnecessary bills,” Barr said.

The wholesale demand response rule had been jointly proposed by think tank The Australia Institute, the Public Interest Advocacy Centre and the Total Environment Centre, which welcomed the final determination from the AEMC on Thursday and expressed disappointment the network rule maker has closed the door on allowing households to participate in the mechanism.

“We will continue to push for households and small businesses – that is, the other 90% of customers – to be able to reduce their energy costs by participating in the demand response market”, said Mark Byrne, energy market advocate at the Total Environment Centre.