2 Markets for residential electricity flexibility

Because enabling technologies are an important contributor to flexibility capital, there is (or should be) a close interrelation between the types and availability of these technologies and the design and implementation of incentives, with the two sometimes bundled together to create flexibility products and mechanisms. Design and deployment of both incentives and technologies are, of course, strongly influenced by regulation. Feedback from households is an important consideration in the design of incentives, technologies and mechanisms.

The framework suggests that the multiple influences on household uptake and response will preclude ‘one-size fits all’ tariffs and incentives. Successful incentive design requires segmentation of households according to their available loads, capacity and values. It is incumbent on utilities to provide flexibility opportunities that align with household abilities and opportunities to respond.

There are several existing and potential markets available for households to provide electricity flexibility. Broadly speaking, there are currently three markets that households can potentially participate in: the wholesale spot market, network markets and ancillary services markets. Local energy trading (LET) is a fourth type of market that operates within these other markets.

As discussed in detail in Section 3, residential electricity users can access these markets through a variety of routes. The most common is through tariffs in the retail electricity market, which as discussed below, include a wholesale price component as well as regulated network components (transmission use of system3, TUOS; distribution use of system, DUOS; which combined for the network use of system, NUOS), which may include time-varying volumetric rates and/or demand or capacity charges. Solar (‘prosumer’) households are able to self-consume their generated electricity or export it, which may attract a feed-in tariff (FIT) from the retailer, related to the wholesale cost of electricity. Using electricity flexibility to respond to tariffs can provide value in the wholesale electricity market by reducing spot prices and helping to maintain minimum system-level operational demand, can also provide value to networks by reducing demand at peak times and by reducing exports.

Households can also use electricity flexibility to participate more directly in the wholesale spot market using commercially available options (through an aggregator) and through a number of virtual power plant (VPP) trials involving retailers and aggregators. Similarly, trials are available to selected households where electricity flexibility can be used to directly provide network support to DNSPs, as well as provide value into ancillary services markets (the provision of frequency controlled ancillary services (FCAS)).

LET, also known as peer-to-peer trading (P2P), is another market where households can use electricity flexibility to generate value for themselves. Instead of responding to fixed tariffs, households can bid into an electricity marketplace where other participants also bid in either demand or generation. The electricity is then allocated according to the matched bids.

Although Embedded Networks could be considered another market, they are essentially just a privately owned network where derivations of currently available tariffs may be used, and so are not considered a separate market here.

Demand Response (DR) can be delivered through direct load control (DLC) of appliances (commonly air conditioning (A/C), electric hot water (EHW), electric vehicles (EVs) or pool pumps) by a 3rd party; behavioural demand response (BDR), which involves householders switching off appliances or changing thermostat settings in response to a message from the 3rd party; or by participation in a VPP trial whereby household battery energy storage systems (BESS), EVs or other appliances are orchestrated to offer aggregated DR to the various markets.

3 The ‘use of system’ charges refer to any charges that electricity users pay for the use of the relevant electricity network. These cover costs such as capital expenditure, operation and maintenance.