Demand Response

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DEMAND RESPONSE Energy Demand Response Program A COzero reward program for EnergyLink customers.

COzero Smart Energy for Smart Business

COzero offers smarter energy options for Australian businesses of all shapes and sizes.

cozero.com.au

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COzero – Smart Energy for Smart Business

Level 2, 71 Macquire Street

Sydney, NSW 2000

1300 269 376

www.cozero.com.au

info@cozero.com.au

COzero Demand Response Program

Demand Response

REDUCING PEAK DEMAND IN AUSTRALIA’S NATIONAL ELECTRICITY MARKET Demand Response is an alternative method of dealing with periods of system-wide strain in the electricity market, where consumers voluntarily restrict their consumption.

This white paper analyses the role of demand response in a volatile marketplace and provides a summary of the various benefits available to the stakeholders in the National Electricity Market (NEM).

Authors Samantha Wardhaugh Karan Panat William Hunter Joel Courtney Stuart Auld

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COzero – Smart Energy for Smart Business

THE PROBLEM

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The National Electricity Market (NEM), consisting of New South Wales, Victoria, Queensland, South Australia and Tasmania, is one of the most

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volatile electricity markets in the world, where prices can fluctuate between the Market Floor Price (MFP) of –$1000/MWh to a Market

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Cap Price (MCP) of $13,800/MWh and sitting at an average of around $41/MWh 1 . Australia’s geographical isolation has driven the creation of the largest AC grid in the world, with extreme weather conditions

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causing unusual variations in load. The combined impact of a highly fluid market in conjunction with the network topology and demands

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for energy has lead to Australia having a large number of ‘Peak Price Events’ (PPEs), where the price of electricity rises to more than $500/MWh. The NEM determines the wholesale price of electricity through a tiered bidding system. The NEM operates as a gross pool market, with supply matched to demand at 5-minute intervals 2 . Each generator submits a bid consisting of generation capacity and price, cleared by the market on a ‘lowest-cost’ directive. This system, while efficient, can contribute to large PPEs as generators bid as high as possible when demand is high. Often, the situation is compounded by extra-normal events such as network infrastructure failures or generation outages.

1 http://www.aemo.com.au/Electricity/Data/Price-and-Demand/Average-Price-Tables 2 https://www.aer.gov.au/news-release/aer-releases-new-guideline-to-prevent-excessive-electricity-network-upgrades

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COzero Demand Response Program

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Figure 1: NEM prices over the past 14 years Source: AEMO half-hourly historical data 2002-2015

Although these PPEs occur frequently, their duration is generally short – very few lasting more than an hour. In total, these events account for less than 0.2% of the total active grid time in the last decade, but due to their magnitude these events have driven more than 15% of the average price of electricity.

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COzero – Smart Energy for Smart Business

Demand Response

AS A SOLUTION Since demand defines how much generation a grid must be able to provide, reducing demand is the simplest way to decrease system stress.

This is the basic principle of Demand Response (DR): incentivising customers to reduce their energy usage during times where the network is under unusual levels of strain, as indicated by the market price of energy delivered. The major parties involved in implementing a demand management system are the electricity networks and retailers, however there are also opportunities opening up for third party aggregators.

The role of networks The electricity networks in Australia are responsible for providing a consistent and reliable electricity supply. Demand Response is able to provide a ‘non-network’ solution to help the network deal with constraints, either temporarily by pushing out investment requirements to a future date, or permanently removing the need for additional capacity. To ensure that demand response can adequately replace additional upgrades, the network must follow a procedure to implement a demand management system that is defined by the Australian Energy Regulator (AER): 1. Network constraint discovered 2. Non-network solutions investigated 3. Non-network solution report generated 4. Most cost-effective option selected 5. Network enters negotiations with chosen option

COzero Demand Response Program

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The role of retailers Although the responsibility for network infrastructure does not fall to retailers, they still stand to benefit from demand response. Retailers buy electricity from the market at the spot price and sell it to their customers, generally at a fixed rate. When spot prices spike, retailers may not only fail to turn a profit, but may also face financial losses. DR decreases the amount of risk the retailer is exposed to by reducing the overall volatility of the market and the effect of the spike.

Demand Response Event

Actual Usage Predicted Baseline

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Figure 2: Demand Response Event

For commercial customers, retail implementation of DR generally occurs as a business-to-business opportunity; the retailer notifying a DR participant of an expected spike in the spot price, the participant reducing their energy usage and, after the spot price has returned to normal, receiving compensation from the retailer commensurate to the change in load – directly through payments, indirectly through reduced average rates or any number of other commercial agreements between the two parties.

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COzero – Smart Energy for Smart Business

Regardless of how the customer is compensated, the retailer must be able to quantify how they performed during the event to determine future compensation.

By analysing historical data, the retailer can develop a model of expected usage for the day of the peak event for the customer, and compare this model with the actual usage data to determine how much the customer reduced their load.

An example of a baseline usage graph is shown in the previous page, where the reduction from the expected value can be clearly seen.

The role of third party aggregators In addition to the two traditional parties to DR, there is an emerging trend for third parties to participate in DR programmes – the Third Party Aggregator (TPA).

These TPAs look to either provide a service to established networks or retailers, acting as service providers or platform providers, or where there is a market opportunity and the rules permit, they may actively participate as a DR provider.

At present, the latter option is still under investigation by AEMO and the AEMC3 .

3 http://www.aemo.com.au/Electricity/National-Electricity-Market-NEM/Security-and-reliability/ Demand-response-mechanism

COzero Demand Response Program

BENEFITS OF DEMAND RESPONSE Network Benefits A fundamental cause of inefficiency in the design of electricity networks is the challenge of having to accommodate for the highest usage periods of the year, regardless of how short the period lasts for. This calls for expensive infrastructure to be rolled out across the grid, the costs of which are passed down to all users of the grid.

Curtailing consumer demand can be a useful measure to reduce infrastructure requirements, allowing networks to better control the timing of additional investment.

CME Australia estimates that the cost per MW that can be avoided through an effective DR program in the NEM lies between $1.7 and $6.2 million per MW. In areas with high seasonal demand during short periods of the year, for example small holiday destinations during Christmas, Demand Response allows networks the option of not having to invest in infrastructure purely to cope with this seasonal demand. In Australia, networks are under tight regulation and face heavy penalties for failing to repair and service areas with outages or brownouts. A program that is able to quickly and locally reduce demand minimises the effect of such unforeseen events and reduces penalties incurred by the network.

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COzero – Smart Energy for Smart Business

Customer Benefits Customers participating in a Demand Response program may receive compensation from their retailer, this can be through cash payments, rebates or reduced electricity costs. All electricity consumers will also benefit from the lower electricity price that is brought about through the implementation of DR. Additionally, in networks where DR is effectively implemented, reliability of the grid is improved. Allowing consumers to participate in these programs grants additional options in managing their cost of electricity.

…if DR technologies and programs had reduced peak electrical demand in the NEM by 3000 MW... the present value of the avoided expenditure is $15.8bn…

– Bruce Mountain Director, CME Australia

Retailer Benefits Retailers have to buy their electricity at the spot price in the market.

This is a pool price made up the of the bid stacks of various generators, and set at the expected demand level. This means that retailers are exposed to the large fluctuations that are characteristic of the electricity market. In order to manage this risk, many retailers either own generators, or take out significant hedging contracts.

COzero Demand Response Program

Incentivising customers to reduce usage during times of high market prices allow retailers to reduce their costs. Additionally the overall stabilisation and increase in reliability of the grid leads to a less volatile market where the cost of exposure is lower.

Through creating a Demand Response offering for clients, retailers have a competitive advantage by offering services to increase customer loyalty and improve satisfaction.

Money Flow In the NEM

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B. Transmission C. Distribution D. Customer (you) E. Energy Retailer (Cozero) F. Spot Market

Figure 3: Money Flow In the NEM

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Market Wide Benefits There are numerous market-wide benefits to having extensive demand management capacity. The increased stability to the grid created by Demand Response reduces the need for extensive corrective capital expenditure, reducing prices in the market.

Demand Response programs reduce the ability of generators in the market to charge excessive prices, leading to consumers having increased market power. This has a flow on affect in that it reduces the severity of price peak events and leads to a more stable electricity market. The diversification benefit provided by having more generation sources is also crucial towards ensuring grid reliability.

COzero Demand Response Program

Environmental Benefits Correctly implemented Demand Response has the ability to respond quickly to market fluctuations. Wind and solar power provide almost half of all green energy, but as they are inherently tied to weather patterns, they provide a highly variable source of electricity. Many power plants cannot alter their power output fast enough to respond to the change in supply from wind and solar generation, but DR may provide some of the quick response times that would allow increased amounts of solar and wind power integrated into the grid.

There are also secondary environmental benefits; less infrastructure required decreases the nation’s carbon footprint, and shifting load to off peak times reduces the use of inefficient peak period generators, improving overall energy efficiency.

…EU-wide benefits of DR by 2020 would comprise 100 TWh of annual energy saving; an annual reduction of 30 million tons of CO2; and tens of billions of Euros both in terms of savings in avoided investment relating to peak generation capacity and Transmission & Distribution, and savings for customers in electricity bills…

– Torriti, Hassan and Leach, 2010 Centre for Environmental Strategy University of Surrey, Guildford United Kingdom

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COzero – Smart Energy for Smart Business

MOVING FORWARD The Australian National Energy Market provides a unique set of challenges to the networks and retailers that provide the nation’s population with electricity. Several of the inherent difficulties resulting from the nature of the grid can be reduced by implementing effective Demand Response programs, but currently, only a handful of services are available for customers who wish to get involved with this project.

ABOUT COZERO DEMAND RESPONSE COzero’s Demand Response project allows consumers to take advantage of both the Network and Retail side of DR, maximizing the benefits they receive. When combined with Energylink, COzero is able to provide a range of energy efficiency and money saving programs that help solve many of the difficulties the grid and Networks face.

COzero Demand Response Program

ABOUT COZERO Founded in 2007 and based in Sydney, Australia, COzero is a leader in the smart business energy space. EnergyLink, our flagship energy management software provides our clients smarter ways to consume and track their energy.

To find out more about COzero or our Demand Response program, visit https://www.cozero.com.au/products-services/

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Level 2, 71 Macquire Street Sydney, NSW 2000 phone: 1300 269 376 web:

cozero.com.au

email: info@cozero.com.au