The AEMC is currently considering 3 separate, but related, rule change proposals relating to a particular form of demand response in the NEM as noted here.
Given our experience in supporting the growth of different forms of demand response in the market over a number of years, we have fielded several requests for comment and input. Hence, as time permits we’ll be putting thoughts together as posts on this site, and over on WattClarity®.
Today, we thought it would be useful to provide a brief outline of our involvement in Demand Response in the NEM over more than 15 years.
(A) Why we exist, as a company
We’re a software company formed 19 years ago (as Global-Roam Pty Ltd at the start of 2000) to help a broad range of clients understand the increasing complexities inherent in the energy sector – including specifically in the Australian National Electricity Market (NEM).
We do this, so our clients can make better decisions – and hence manage risks, and grasp opportunities apparent to them in the space.
Beyond having a B2B orientation, we don’t have a particular focus on any segment within the market. We serve wholesale participants (generators, retailers, traders, large energy users) and a wide range of others. As our client base has grown, so has the service we have supplied to a growing number of large energy users across all 5 regions of the NEM.
(B) Growth of business, helping Energy Users with Demand Response
Over the years since we commenced operations, the range of services we have provided to energy users to help them achieve lower average cost of electricity consumption has expanded – with the ancillary benefit that the increased price responsiveness these services encourage (i.e. as forms of demand response) is of broader benefit to the market as a whole.
(Approach B1) Energy Users as Scheduled Loads
In an ideal world, all of the demand side of the supply/demand balance would operate as Scheduled Loads. If this was the case:
(a) Most importantly, we would see energy users truly reflecting the value of that energy (at each time and place) in all of their consumption decisions – i.e. not just at the times of highest price;
(b) As an ancillary benefit, there would also be much greater transparency of the collective value ascribed to energy – at the same time and place (in our view, this would go some way to addressing the problems inadvertently caused by Villain #5c).
Historically in the real world, however, the market has not yet evolved that way. Limitations in technology (though perhaps we are on a ) have meant that the barriers to most energy users walking down this route have been seen as too great:
The vast majority of energy users are not in the energy business – but rather are interested in using the energy to deliver something of value to their customers (or themselves) in turn. Hence in practical terms the complexities of becoming a Scheduled Load (including the perceived distractions from their core business) have been too great a barrier to this point.
Currently the only scheduled loads in the NEM are the pumping components of pumped storage hydro, and the growing number of battery storage facilities larger than 5MW. A number of these loads are clients of ours.
(Approach B2) Energy Users with Spot Price Exposure
I think it was back in 2003 when we first noticed a range of energy users coming onboard with a licence to an earlier version of our NEMwatch product, as a means of gaining visibility of the wholesale spot market – to help them manage their Demand Response capability in the NEM.
These initial clients had a form of real-time pricing (i.e. spot exposure) passed to through to them in their retail contract – they used our software as a means of understanding when they might physically curtail some of their operations in order to achieve lower average costs of the energy component in their annual electricity expense.
Seeing this early interest in Demand Response at that point, and understanding the importance of demand response to the ongoing evolution of the NEM, we developed more tailored ways to serve these specific types of clients that more closely met their particular needs (including through our deSide® software offering). This component of our business grew from that point, with clients coming onboard across all 5 regions of the NEM – bringing one or many sites onto spot pricing.
(Approach B3) Energy Users as Wholesale Market Customers
In some cases, where the energy user has been very large, they have found it beneficial to eliminate the retailer entirely as the “middleman” and register directly with the AEMO as a wholesale Market Customer.
From a demand response perspective this is not fundamentally different to the approach described in Approach B2 above – hence the way we serve these energy users is not significantly different in some cases (though we do find them proceeding more quickly up the sophistication curve, discussed below).
A number of these wholesale Market Customers are clients of ours.
(Approach B4) Prior Experience with NegaWatts
In addition to those directly spot exposed, we’ve also been serving energy users as clients who’ve had optional Negawatt buy-back mechanisms in place with a number of different Retailers over the years (i.e. this method of demand response).
In these cases, it seemed that the approaches in place (though varying from contract-to-contract, and noting that we try not to learn the specifics of any particular contract given the scope of the clients we serve) seem to have some commonalities in that:
Characteristic #1) There is some form of “fixed” retail rate between the energy user and the retailer;
Characteristic #2) There is some option for the retailer to call the energy user and ask them to curtail (e.g. the retailer might do this if prices were high and they were “short generation”, so carrying exposure to the spot price at that particular time); and
Characteristic #3) It is the Energy User’s option whether to curtail or not (i.e. they are not compelled to do so); and
Characteristic #4) If they do curtail, the Energy User is paid some amount by the Retailer – which is generally calculated as:
Payment = Deemed Amount Curtailed x Spot Price x Share of Benefit
“Deemed Amount Curtailed” is the difference between a Baseline (i.e. what they would otherwise have consumed – not withstanding the inherent uncertainties in this exercise in hypotheticals) and
“Share of Benefit” is whatever was negotiated between the parties (it seems 50/50 is a notional starting point)
It’s worth briefly summarizing our experience to date:
Observation #B4a – In some instances, it’s been a stepping stone
In a number of cases, Energy Users use this approach as an interim step that they view as highly educational – about the nature of volatility in the wholesale market. On occasions they have progressed up the maturity curve (i.e. to Approach B2 above) after a certain period of time.
I can understand this perspective – given that the cost side of the equation is at fixed price and that which is exposed to the spot price is only a benefit (i.e. a potential revenue stream) and not a cost. Hence the Energy User can feel safer in this approach – albeit that the risks of wholesale have already been bundled into the fixed retail pricing that they have been offered.
Observation #B4b – The incentive is to “Game the Baseline”
We were initially surprised when some Energy Users began telling us that they were using our software to anticipate when the retailer might call them to turn off so they could dial up their consumption ahead of time (i.e. effectively gaming their Baseline).
However we’ve heard the story a number of times now – and, on reflection, we recognize that it’s a rational motivation given the somewhat perverted commercial structures in place. The Energy User trades off known additional cost (i.e. Increased Consumption x Fixed Retail Cost) against the anticipated possible benefit (i.e. Negawatt Curtailment x Much Higher Spot Price x Their Share).
This has been an learning experience for us, and has helped us remain aware of other (“false” and ultimately destructive) arbitrage opportunities that are in place in the NEM by virtue of overlapping but conflicted pricing structures.
Observation #B4c – Mixed Results for both parties
In conversations with both parties (Energy Users and Retailers – our clients and others) over the years this approach seems to have mixed results. The types of comments we’ve received, and have overheard, are many and varied – but include the following:
1) A Retailer saying “well, I called them a number of times and [Choose Problem Encountered Here]”
– with Problem Encountered including:
(a) Phone number did not work anymore, or
(b) Noone was there to pick up; or
(c) The person we spoke to said that they did not understand what to do; or
(d) The person did understand, but decided they could not curtail – and this is the Nth time this [PERIOD] we’ve received the “won’t curtail” response
… as an aside, not dissimilar to the challenges I understand AEMO is having with some smaller new entrant generators who are having troubles providing a genuine 24×7 response to dispatch instructions if Scheduled or Semi-Scheduled.
2) On the other hand, there is the Energy User who says something along the lines of “Our Retailer does not call us anymore, or has never called, or…”
It’s not all doom-and-gloom however. We have spoken with others (Energy Users and Retailers) who have been quite happy with the way their arrangements have been working. We see this approach as a fairly agile* way of helping Energy Users up the learning curve – but we don’t see it as a “permanent” solution to lower energy costs for the types of clients we deal with.
* we see it as agile as it’s purely a commercial arrangement between two private parties that can be renegotiated quickly if both parties see value in that. That’s particularly important if the method is a stepping stone to something more sustainable in future.
It’s also worth noting that, given our experience in the forms of demand response noted above, we continue fielding questions about possible moves to introduce a centrally-dispatched form of Negawatts as a notional supply-side contribution. If time permits, we’ll post more thoughts directly on that over at WattClarity.
(C) Growth in Maturity
Because of the nature of clients we serve (oftentimes 2 or 3 competing firms in the same type of energy-intensive industry) we have made it a point not to learn too much of the specifics of the arrangements in place, lest we inadvertently let important details slip in other conversations. This should be kept in mind, in relation to the following observations:
In our journey over these 15+ years, our sense is that there’s been a significant growth in maturity with those (ourselves included) involved in demand response in these ways – including these few selected examples:
(C1) Variability in curtailment levels
We’ve seen energy users progressively gain more sophistication, which has been driven in part by the escalation in costs they have seen. We’ve seen that:
(a) the incentive to curtail will vary from time to time, depending on other hedge arrangements they have in place (i.e. the price of a hedge might be such that there are periods the energy user decides not to curtail – or, conversely, to pursue curtailment more aggressively);
(b) Similarly, the approach to curtailment could vary depending on the shape of the Energy User’s order book at the time (e.g. on occasions with a full order book and no spare capacity, they might rarely curtail – whereas in contrast at times of a light order book and much spare capacity, they might shift operations to times where prices are likely to be lowest);
(c) Interestingly, there is increased talk of consuming more when prices are low – and particularly with the likelihood of increased negative prices with the solar correlation penalty and wind correlation penalty growing. I expect this variability in consumption will grow even further, given the different pricing patterns emerging in the energy transition – though note these concerns (specifically in relation to demand response) I voiced back in July 2016.
(d) Excitingly, the rapidly declining cost of storage will increasingly provide the large users we serve with additional degrees of freedom in the timing of their “consumption from the NEM” decisions.
As the level of sophistication has increased, sometimes the levels of understanding about why prices are what they are also increased. Sometimes this has led the principal energy-sector analysts in our Energy User clients upgrading to our ez2view™ insight software package.
These are all excellent developments.
(C2) Justify CAPEX to build in spare capacity
On occasions we have seen energy users utilize the knowledge that they can vary the timing of their consumption to assist with justification of capital investment works on their sites – such as in building bigger product storage capability, to enable them to pursue more curtailment opportunities and run harder when prices are low.
That’s also an excellent development.
(C3) Incorporate Renewable PPAs
More recently we have seen a growing wave of energy users in the NEM adopt longer-term partial pricing security through a form of renewable PPAs with particular projects (existing, or being developed through the security they provide in their PPA).
There is never a complete match between the production profiles of that particular wind/solar plant and their own consumption profiles – in which case we have been called on to assist energy users in managing the risks associated with the “unders and overs” in their particular arrangements.
This has resulted in the development of new software for that purpose.
If there are other Energy Users out there who’d like to learn how we can help in this respect, please let us know:
(a) Contact us on this form; or
(b) Just give us a call on +61 7 3368 4064.
(C4) Help to manage Price Firmness
In our experience, lack of price firmness is one of the Real Barriers to further growth in Demand Response.
We have been called on to assist energy users with other loads that they wish to take to spot that have additional complexities that need to be taken into account in a curtailment decision – such as a minimum notice period, minimum time offline and so on.
Given that prices are only fully firm within a given dispatch interval, and that predispatch prices show considerable variability (understandably – and necessarily) we have been investing considerable time in identifying other leading indicators of volatility, to help the energy user make a more informed call about curtailment (via a “Defcon Rating” of sorts), taking into account constraints such as a notice period to curtail.
(D) Overcoming Real Barriers to Demand Response till today
The growth we have seen in Demand Response with Energy Users (some of which has been summarized above) has been occurring in parallel with us being systematic in addressing a number of Real Barriers we’ve experienced to Demand Response in the NEM.
(E) Possible service, into the future
Given the current AEMC deliberations about the addition of this form of demand response coincide with this summary, it’s worth a short note about some possible enhancements to our service in the future.
This is not the first time a rule change has been proposed that would facilitate the creation of a “NegaWatt Buy-back Mechanism”. Most recently, the AEMC assessed such a mechanism in parallel with two other rule changes I saw to be related. The AEMC assessment then coincided with 2 other deliberations we saw as very related as noted here in November 2015.
We have a pragmatic view, despite some reservations about the current group of suggestions for the best way to increase the flexibility of the demand side. Given the keenness of the people advocating for this particular form of change, as a prudent business we have have invested some time to identify additional ways in which we could serve energy. We’re quite comfortable that this part of our business will gain another significant spurt of growth if (or when?) such a rule change is made.
I trust that readers will understand that we’re not going to share details of the specifics of what we’d do in that hypothetical future world (for competitive advantage reason).