As part of its consideration of the Demand Response Mechanism and Ancillary Services Unbundling Rule change proposal, the AEMC commissioned Oakley Greenwood (OGW) to provide quantitative evidence regarding the amount of demand-response capacity that is currently available in the NEM through several different contracting forms offered by electricity retailers to customers that consume 100MWhpa or more. More specifically, the AEMC sought quantitative information on:
- the magnitude of demand response capacity that is currently subject to different contractual forms with an energy retailer; and
- the number of businesses that provide Demand Side Management (DSM) services to large customers and/or retailers, and a description of their product and service offerings.
To do so, OGW interviewed seven retailers and five DR Specialists. The interviews completed with DR specialist service providers was augmented with desktop and web-based research that covered another 22 businesses that provide demand response services to large customers and/or retailers in the NEM. Highlights of the results are presented below.
- The amount of DR available from end-use customers varies widely across retailers in both absolute terms and as a percentage of their total load. Available amounts within the retailers interviewed ranged from zero to over 100 MW. Retailers indicated that the amount of DR being exercised by their customers – at least in absolute terms – has not changed that much in the past five years.
- It is clear that some retailers are much more focussed on demand response than others and this variation exists within both large and small of retailers. However, there are a few smaller retailers that specialise on the large customer market, and these tend to be the most likely to be active in offering DR agreements of one sort or another.
- At present, the transaction costs entailed in making these arrangements leads to them being offered only to larger commercial and industrial customers (primarily those with an average load of about 5 MW or more. Several retailers also noted that developments in DR-enabling technology and software will allow these arrangements to be provided to the next smaller tranche of commercial and industrial customers in the medium term. One retailer said that their view is that small business and domestic customers represent the real opportunity for significant increases in DR participation, and that this would be almost entirely the result of technology enablement.
- Based on the results of the interviews it appears that the pool-price arbitrage arrangements that typified most DR arrangements some time ago have largely (though not completely) been replaced by customers taking some exposure to pool price and then managing their load (and in some cases purchasing hedges from a party other than their retailer).
- For customers with spot price exposure, the ability to avoid the price (and in some cases to export when price is high) is the primary compensation.
- There are two types of more traditional DR arrangements: one pays on dispatch only, the other offers availability payments, but often includes clawback of the availability payment if the customer does not dispatch in events that meets the price threshold they have nominated.
- All of the retailers surveyed said they are currently seeking to increase their use of DR arrangements. This appeared to be motivated in the case of most retailers as a means for addressing customers’ preferences (where such a preference exists), though a few retailers see such arrangements as a significant (and in some cases the primary) means by which they differentiate themselves in the market. None of the retailers said that their interest in DR arrangements was primarily motivated by the operational advantages that DR can provide to them. However, for one or two of the smaller retailers, it seems that the ability to benefit from the use of DR as a means of reducing their need to manage volume and price risk and/or their dependence on the contract market goes hand in hand with their use of DR as a primary part of the value proposition they offer to customers.
- The DR Specialists interviewed tended to offer one of two types of service:
- Aggregators (companies that actively engage customers in DR, either on behalf of the customer or on behalf of a retailer or distributor) stated that while they remain profitable and continue to be active in the market, they have seen the level of end customers’ interest in DR decline as a result of what they described as a lack of direction and impetus in DR. These DR specialists tended to be supportive of a more aggressive approach to regulation with appropriate enforcement of participation which would, in their opinion, result in higher uptake of DR.
- Advisory / software providers (companies that provide services and information that can help end customers identify DR opportunities and their value, but do not actively engage with customers to deploy DR). These DR specialists, in general, reported that the market for their services was increasing, primarily as a result of end-customers becoming more educated about how to effectively participate in the market. While they agreed that additional focus to DR in policy and regulation could further increase the market for their services, it did not seem, in our view, that this was of as much importance to these firms as it is to the aggregators.
- Some DR Specialists have postulated that there is a substantial amount of DR (potentially in excess of 2,000 MW) being undertaken by commercial and industrial end customers who have access to market data and are operating with exposure to the spot prices. These operations have put mechanisms in place to control site operations and limit the cost impacts of wholesale market price spikes. These DR Specialists suggested that some of these activities are being undertaken by the end customers independently and without requiring intervention (and possibly even knowledge) of retailers, distributors or aggregators. They anticipate that the number of end customers operating in this manner will probably increase, though it will probably be limited to the larger organisations who can justify retaining individuals on staff to monitor and manage these interactions.
- They also noted that at present more DR activity is being undertaken in the commercial sector than in the industrial sector due to industrial facilities’ management being very focused on production and resulting concern about DR’s potential to impose production constraints.
 Demand Side Management services include the provision of energy efficiency products and/or services, energy management products and services (including specialised software), as well as demand response products and services, including advisory services, specialised software and load aggregation.
 This estimate of the aggregate DR capacity that is currently available and being exercised (though not in an aggregate way) by commercial and industrial end customers who have access to market data and are operating with exposure to the spot prices was assembled from the comments provided by several of the DR Specialists. It is based on these respondents’ (a) knowledge of the behaviour of specific large industrial facilities, including aluminium smelters, and (b) their conservative (in their view) extrapolation of the number and likely behaviour of other large facilities that they believe to have some level of exposure to spot prices.
The full report can be found on the AEMC website here.