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Possible implications for Demand Response, flowing from Q2 pricing patterns changes?

As I noted a few weeks ago on WattClarity®, I watched with puzzled interest as a new pricing pattern emerged across all regions of the NEM through Q2 2016.

Since that post, prices have maintained their bounce – as a result of which there’s been an increasing volume of commentary (some better informed & thoughtful than others) being published in all sorts of places.  Nothing has changed in the past 3 weeks, in that much of the commentary has been focused on working backwards from Outcomes to Causes (some has devolved into simplistic/disappointing finger-pointing):

Cause-Effect-Implications

As noted on WattClarity®, we’re far more interested in the future implications of these pricing pattern changes (than on delving into particular causes), should they turn out to be systemic changes (it’s part of our scenario analysis, including scenarios such as these).

We have been a keen supporter of demand response in Australia’s National Electricity Market for more than 15 years.  Ours was a pretty lonely voice way back when we started, but we’ve been encouraged to see that the acceptance of demand response in the market has grown (amongst the major industrial energy users who supply it, and amongst the retailers and others that facilitate it).

The services we have provided (like these) to large industrial energy users have delivered considerable benefit to their operations in an increasingly challenged environment – whilst also delivering benefits back to the market as well.

However what’s been happening more recently, in terms of pricing patterns, has given us significant cause for concern.

1)        One particular approach to Demand Response under threat?

In terms of outcomes through Q2 2016, the following is the key chart I’ve been thinking more and more about:

2016-07-04-AllRegions2-distributionofQ2prices-NEMReviewdata

This highlights a staggering number of trading periods where the spot price settled above $100/MWh – in all regions!

This has not been normal – however my concern is that it might be becoming the “new normal”.

NEM history has trained us all to think in terms of prices above $1000/MWh as the significant ones – which is why we read articles such as this one from Giles.   However my concern is that the goal posts are shifting (have already shifted?), and that there might be a new(better) metric that we need to start tracking – one that poses a significant challenge for demand response.

2)        Demand Response in the energy market

On this site, we’ve outlined a number of different ways in which demand response has been operational in the NEM over the years.

On the energy market side, economically-based demand response initiatives have been based, historically, on the fact that the price duration curve has had a very particular shape – the vast majority of prices being very low (well below $100/MWh) with the occasional spike to a very high level (above $1000/MWh) but not much in between.

With this profile, large industrial energy users (including some who have been quoted in the press in recent weeks) have progressively learnt of (and secured) the significant savings that have been possible through a combination of both:

  • Taking spot exposure for loads over which they have some control; and
  • Using software like deSide® to automate curtailment on the few occasions when the price is high.

Given the historical nature of prices, the benefit has looked something like shown in the diagram on this page.  Typically, an energy user might expect that, by curtailing only 10 or 20 hours each year they might be able to avoid the mega-prices and so experience an average cost of (the energy component of) electricity consumed being 10-20% lower.

In reality I can’t think of any particular industrial energy user that likes to operate this way – they would all just rather run flat out and produce as much product as possible.   An understandable focus, for operations-focused people in high capital cost plant (much like a coal power station, really).

However in the case of the energy users we work with, the savings they have made in operating in this manner have been one of the factors sustaining operations under severe cost pressure from different directions.

However results for Q2 2016 have looked very meagre indeed.

Giles flagged how the incidence of mega prices has reduced (again, I’m not so much focused on spelling out all the causes), but unfortunately missed the other part of the story – that the incidence of prices in the middle has significantly increased.

The combination of both does flag serious challenges for this method of demand response.

Sadly ironic, given that the concept of “Demand Response” (moreso than the specifics) is sometimes held up as a complement to increased intermittency of electricity supplies.

Given our practical experience in making it actually work over more than a decade, it’s something I have been puzzling about for some time – such as I noted here in presentation at All Energy in 2015.  Challenges aplenty to puzzle through in terms of how it might actually work.

… but back to Q2 2016, in particular…

Starting in the glorious north and assuming a completely flat load with perfect foresight of price outcomes in each half-hour, we’ve plotted the real benefit that would have been available to energy users in Queensland operating in this way at various levels of curtailment.

2016-07-04-DemandResponse-QLD-NEMReviewdata

The blue line shows the declining average cost of energy for various amounts of curtailment, and this is very, very flat.

Why is that the case?

I’ve copied one of the other charts from the prior post on WattClarity over here to illustrate another way:

2016-07-04-QLD2-distributionofQ2prices-NEMReviewdata

All other years (except 2007 and 2016) show a very small number of prices rising above $100/MWh – hence the established (outdated?) heuristic:

IT WAS:  a 10%-20% reduction in average cost by curtailing only 10-20 hours per year

In NSW the gradient of the benefit curve is almost identical (i.e. near flat).  We see a requirement to curtail for 200 hours to gain a 20% benefit – a full week offline over a quarter.

2016-07-04-DemandResponse-NSW-NEMReviewdata

It is the same underlying pattern of price distributions which you can review here if it is of interest.

Down in Victoria, we see the same flat benefit curve – though at least, in this instance, the “no curtailment” average starts from a lower base.

2016-07-04-DemandResponse-VIC-NEMReviewdata

Across to South Australia we see that 10 hours of curtailment would have delivered a 10% benefit (in approximate terms), illustrating the gradient of the curve that we have been more accustomed to.

2016-07-04-DemandResponse-SA-NEMReviewdata

Over the water into Tasmania and we see another representation of the pain experienced by large industrial energy users in Tassie:

2016-07-04-DemandResponse-TAS-NEMReviewdata

Some very high average costs at the top left of the chart – with reductions down to more “normal” cost levels only with massive periods curtailment.

To sum up, through Q2 a major industrial energy user would need to have curtailed for hundreds of hours across the quarter in order to see average cost of energy settle at something more like what energy users had been accustomed to seeing through all prior Q2 period, with the exception of the drought.

Again, this begs the question asked on WattClarity – was Q2 2016 an aberration from the norm (as was the case with the 2007 drought), or is it becoming the “new normal”…

3)        Is Demand Response for major industrials challenged in this broad energy transition?

… If this is the case, then it would appear that a form of Demand Response at major industrial loads (along with the industrial loads themselves) are structurally challenged.

It would be ironic if the wholesale pricing pattern that seems to be emerging was to incentivise price-responsive, flexible, major energy users to go back onto fixed contracts* – at the same time as we’re going to be asking the demand side to become increasingly responsive (whether by price or by other means) as a method of balancing with increasingly intermittent supplies.

* notwithstanding the costs of these fixed contracts

Surely there’s a better way?

Sitting now in Q3 2016 and observing a similar pricing pattern continuing, the truth is that the answer to that question is unknown.  High prices are, after all, supposed to prompt a market response (that is, of course, if one of more knee-jerk reactions by politicians or others don’t happen sooner).

What’s certain, however, is that the level of uncertainty has risen.

Established heuristics developed with respect to historical pricing patterns are set to be challenged.  This, in turn, means that it will cost more for energy users to figure out what commercial approach to take (and even broader questions about whether to stay or go – with energy costs being one of several considerations).

“Interesting” times ahead, which we will be working through with our clients.

4)        Notes…

Finally, please note again that:

  • We see the current “energy transition” is far broader than concerns about climate change (or, putting it another way, even if concerns about climate change were to magically evaporate – which they won’t – the energy sector would still transition, though perhaps the destination would not be identical);
  • We’re striving to remain technology agnostic – each technology (and fuel source) having their own strengths and weaknesses (in the specific context of Australia’s electricity market, and more globally).

Sad that we feel the need to continue to add in this notice…