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Real Barriers we’ve experienced in the growth of Demand Response in the NEM


Last week, I posted this brief summary of our 15+ year journey with the growth of Demand Response in the NEM.  Over the course of this journey, we have continued to bump up against a number of barriers to our efforts to continue growing some forms of demand response revolving around the use of the spot price as a trigger for curtailment activity.

Hence, in the context of the AEMC’s current deliberations about ways to further enhance the responsiveness of the demand side to commercial signals, I thought it might be useful to provide a brief summary of what we have actually experienced, in the way of barriers.  Based on what I have heard from some others, our experiences are a little different from what others have spoken about.

Barrier #1)   Resistance from different parties

In the early days of our involvement with demand response in the NEM (i.e. more than a decade ago), there were not many voices of support at all.  That was understandable.  Back then, there were many who did not want to know – and those who would claim things like “demand response does not work in the NEM”.

Over time that resistance has progressively diminished, as those Resistors have seen examples where the sky has not fallen in, and where energy users (who have chosen to walk down the path of spot exposure) have seen considerable benefits.

However, it has proved a surprisingly stubborn resistance to overcome in some parts of the energy sector – including with some parties who we’d not normally think would be so resistant.  I’d like to highlight a few specific examples:

Barrier #1a)  Energy Users themselves

Back when we started with our first energy users as clients taking spot exposure (15+ years ago), demand response did not have many friends in the NEM.

The clear majority of energy users themselves were certainly not friends, or advocates for demand response.  I still remember the (somewhat frosty) response I was greeted with at industry events (like EUAA conferences) when identifying options other than “plain vanilla” re-contracting.  That attitude has been slowly changing since that time – though it is something that is changing one client at a time.

In his article on WattClarity on 8th October 2018, guest author Michael Williams provides his recollections of the type of discussion he generally has with new energy users he picks up as clients as he starts the process of helping them accommodate some form of demand response:

“I’ve had clients who initially say there’s no way they could contemplate shutting down equipment even for half an hour as it would impact upon costumer supply or service. However, when I have analysed those same plants I have found that they consistently shut down every day for morning and afternoon tea, lunch, meetings, breakdowns, and for full stock. They were often surprised at how often they actually shut down.

Other clients have asked what they should do with their labour when they do shut down. There is always opportunity for clean ups, communication meetings, training, equipment risk assessments, and the list goes on.”

The reactions we’ve seen have been fairly similar to this, at energy users of differing sizes.

Over the 10+ years that have followed, a growing number of energy users have come onboard in a range of energy intensive industries.  In 2018, for instance, we were pleased to be able to commence service to a couple of additional energy users progressing down the path incorporating spot exposure and a mix of physical and financial hedges (one of them discussed in this post from June 2018).

Resistance on the part of energy users has been generated in part by internal resistance – but has also been reinforced by external resistance as well.

Barrier #1b)  Retail Energy Brokers

I’ve heard that there are >100 consulting firms that are devote a considerable portion of their time to assisting C&I energy users secure lower energy costs – and are paid for their service.  We collectively refer to these consultants as “Retail Energy Brokers” and have come across a fair number in our journey.

In the early days, I found it strange that these brokers would (with a few specific exceptions) be strongly opposed to the idea of energy users procuring energy in more than a “plain vanilla” way.

Over time, however, I have come to understand that it’s just been a natural response for a number of reasons, including:

Reason #1)  Given most retail brokers have had no form of direct wholesale market experience in their prior career – to them wholesale has been seen as a “black box” (and a scary one at that).  Much more frequently, these retail brokers have held prior experience as retail sales representatives at a number of energy retailers, so have been contented to repeat the same processes that they commonly saw on the other side of the fence.

Reason #2)  Rather than “teaching the Energy User how to fish”, with the perceived risk being that the energy user might be then less reliant on the consultant’s services, the commercial incentive has been for the Retail Broker to just give the Energy User a fish every couple of years (in the regular re-contracting round), and get paid for the effort.

Thankfully the passage of time has seen a number of pre-existing Retail Brokers climb up the learning curve – and others (like guest author Michael Williams) leave their positions within energy users doing things more progressively to make their services more broadly available.

Sadly, however, the reality is that the majority of Retail Brokers are still fairly resistant of alternative approaches that might work for securing lower average cost of energy.

If there are energy users particularly interested in who we might suggest as Retail Brokers they could work with, please give us a call on +61 7 3368 4064

Barrier #1c)  (Some) Retailers

I understand that other commentators might describe retailers (particularly gentailers who are “long generation” in a particular region at a particular time) as the most significant barrier to demand response.

Our experience has been a little different – we’ve seen them as a distant third in terms of actively resisting (after the energy users themselves, and their advisors).

That said, there have sadly been few retailers who have been actively focused on growing that side of the market.  Based on what I have heard from Energy Users, most retailers (when asked) would be willing to provide pricing to energy users who have asked for spot exposure – however:
(a)  few have actively advocated for this as a way forward; and
(b)  where prices have been offered (i.e. the pricing becomes some form of recurring administration charge, on top of the spot pass-through) we’ve heard Energy Users complaining that the prices offered seem higher than they would have expected.  Given most retailers don’t actively pursue this approach as a value stream in their business, I would understand if they had not formal processes in place to service this type of client and, as such, the pricing offered would appear expensive as a manual work-around for a relatively small percentage of their client base.

I would expect that Retailers choosing to make this a standard part of their offering would be able to achieve considerable savings on the administration costs – and hence offer lower prices to Energy Users.  The advent of 5-minute settlement (from 1st July 2021) would seem an opportune time for some to take this step – given the investment required, in any case, to update their billing systems.

That’s why we’ve been particularly interested to watch the growth of a retailer like Flow Power (after its re-branding), and the commencement of Amber Electric (which offers the intriguing possibility of an approach that would deliver spot-exposed demand response at a residential level).

Barrier #1d)  Other Demand Response Advocates (truly!)

This one has really surprised me, particularly given the parties involved.  On occasions we have been on the receiving end of comments from prominent DR Advocates along the lines of:

“you should not be so vocal about [your successes with spot-exposed demand response], as it makes it harder for us to tell a ‘NEM is broken’ story, and hence gain acceptance of our preferred rule change” (which has most commonly been the creation of a centralized market for NegaWatts). 

We know of others who also promote spot exposure as an effective means of demand response who have also heard similar messages from advocates for other mechanisms.

Sad, but also understandable if those promoting this view have fallen into a trap of thinking that Demand Response is only about NegaWatts.

Barrier #1e)  Journalists and Media

As the years have progressed and the successes with demand response as a part of a procurement strategy have grown, this particular barrier has diminished somewhat – though it does seem to make a periodic re-entry:

Example #1)  Here’s some detective work we did in November 2017 to get to the bottom of what appeared to be some pretty shoddy journalism just a little more than a year ago.

Example #2)  Here’s another case in the AFR from only September 2018 which was along the same lines of the claims made in EcoGeneration (linked above), with an excerpt included here:

In the interests of completeness, readers might want to refer to this conversation on Twitter at the time of the article above (and in relation to one of the rule change proposals).  It seems that the “negligible levels of a few hundred megawatts” came from a similar (mis)reading of this Oakley Greenwood report to the AEMC that I discussed here.

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I can understand the reasons why these rule change proposals have been submitted, and am keen to see demand response continue to grow.  It’s essential that Demand Response does grow, because of the looming challenges of the energy transition.

However when these people above continue to use terms like “negligible levels” and phrases like “mostly been limited to emergencies” (which is not how the demand response we work with is used), we’re going to continue to find barriers to demand response higher than would otherwise be the case.  People still do listen to journalists, and so we have unfortunately encountered energy users who say, when introduced to the concepts of going on spot, and managing their exposure (at least partially) by physical curtailment:

“But I heard [from Newspaper, or DR Advocate, or Retail Broker] that Demand Response does not work in the NEM.  How can it be that you’re talking about energy users who have been working this way for a decade or more?”

I ask the same question myself – not about how it works for energy users (as we have seen it working often enough).  Instead, we continue to ask why some people seem intent on diminishing the options available to Energy Users…

I understand that spot-exposed demand response is not perfect for a number of reasons (including the fact that it is not transparent).  However just ignoring it as an option – or (worse) misrepresenting that it does not exist at all – does not seem in anyone’s long-term interests.

Barrier #2)   Lack of Firmness in Forward Pricing

Based on our experience, it’s clear to us that the second major barrier to demand response in the NEM is the lack of firmness in forward pricing.

Currently as it stands, energy users who respond to a price trigger within the “current” 30-minute trading period have a fair level of certainty about the price they will avoid incurring – via the “Estimated Trading Price for the Current Half-Hour”, which is baked into our software.  That 30-minute response time is important to many of our clients (some of our clients can respond within seconds to price spikes (e.g. electrolysis, arc furnaces, etc), whereas most others need a little time to wind down – or start up embedded generation).

As an aside, it is worth noting that the move to 5-minute settlement is going to make the situation worse for many energy users, because most can’t respond within the 5 minutes that the price will be firm.

We’re actively working now (in advance of the 1st July 2021 transition date) to do what we can to help our clients manage this change.

Outside of the 5/30 dynamic, there is a larger picture – and that is that many energy users we’ve come across need more than a half-hour period to trigger a response.  This is a fundamental barrier to demand response – and one that the rule changes currently under consideration at the AEMC are not going to resolve.

Given the rapidly increasing focus we’re providing to the price setting process in the NEM (e.g. via our ez2view software, via training for new clients, and via this Beginner’s Guide), we’ve been giving this challenge considerable thought.

A common comment we’ve come across (including amongst energy users challenged by the lack of firmness) is that they would like to “lock in” a prior predispatch price forecast above their trigger price and curtail on that basis.  However this logic belies the fact that most price spikes indicated as possibilities in predispatch do not eventuate – indeed, it is the purpose of predispatch to signal tightness in supply/demand (and hence potential volatility) in order to incentivize a market response (hence predispatch should be viewed more as an indication than a “forecast”).

In 2018 we had an existing client come to us to speak about an additional load they have at another site, which is of reasonable size – 10MW or so.

This particular load has more complicated constraints surrounding it, including:
(a)  A minimum notice period to trigger curtailment of more than 30 minutes  – i.e. which means they need to trigger curtailment looking forward to a period where prices are not firm;
(b)  A minimum and maximum time offline once curtailment was triggered; and
(c)  Constraint surrounding times between curtailment events.

With cases like this, the client is essentially grappling with lack of firmness in forward pricing – and indeed a sliding scale of lack of firmness (e.g. predispatch forecasts 24 hours in advance being less firm than those only 2 hours in advance).  We worked with our client as noted here to provide visibility of other “Leading Indicators of Volatility” in their particular region (a “Defcon Rating” of sorts) that they can use in the complex optimisation decisions they need to make.

There has been work done separately by the AEMO and AEMC to look into the establishment of a Short-Term Forward Market as a financial mechanism (but not a physical one) that has resulted in this Rule Change Request at AEMC on 20th December 2018.   In our view this is a much more important development than the rule change propositions for the establishment of a Negawatt Mechanism as it has the potential of addressing a real barrier that affects various categories of demand response.

We’ll watch this evolution with interest – but would expect that the price cap in the short-term forward market would end up being well below the Market Price Cap in the real-time market.  This might still be at a level to incentivize some demand response – but energy users should be aware that the chance to “lock away” savings of $14,500/MWh* hours in advance is highly unlikely to happen.

*  i.e. $14,500/MWh  or whatever the Market Price Cap is at the time

Used to be more of a barrier)   Lack of access to data, information, and control

It used to be the case, back when we started our journey in support of demand response, that a barrier to successful demand response was an understanding of what was happening in the wholesale market.  Back at that time, we had clients sign up to the only dashboard they could access at that time (NEMwatch) to have a view of wholesale.

Since that time, however, we have continued to advance the services we provide to eliminate this as a barrier; by:
(a)  delivering NEM data compatible with industrial process control systems via deSide® and more recently via other services, and
(b)  providing visibility of data in a form that the energy user can understand; and
(c)  incorporating other data relevant to their financial hedges in ways that energy users can access.

This growth and evolution will continue into the future – with, or without, these particular rule changes.  Readers should certainly not be misled into think that they are an “all or nothing” proposition.

Readers should also be aware that (of course) it isn’t only us who have been reducing these barriers to demand response.  Over the past 15 years a growing number of options are emerging for those Energy Users who want access to market prices, and the ability to trigger curtailment based on price.  The expansion of options will probably continue expanding in the future, in line with the expansion of the number of energy users who walk down this path.

 

 

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