Connect consumer demand response and energy efficiency into any ‘capacity mechanism’

Image from Canva to illustrate a Wattwatchers blog post

Will we, won’t we, and what if we do? If Australia does proceed down a path of turning the ‘energy-only’ National Electricity Market (NEM) into a dual ‘energy and capacity market’, as the Energy Security Board (ESB) is currently consulting on, then a lot of extra attention needs to be paid to ensure upfront participation for household and small business electricity consumers.

GETTING FROM OLD ENERGY TO NEW ENERGY ISN’T EASY

Much of the stakeholder scrutiny on the ESB’s proposed ‘capacity mechanism’ is directed towards the overt suspicion of a not-so-hidden agenda to prolong the operational life of ageing coal-fired power stations. Or, alternatively, that this will be an inevitable by-product of hurried, poor design for such a major energy market reform, even if it is not the intention or primary motivation per se (and to be fair the ESB insists it isn’t).

Of course keeping coal around for longer is not what ‘we want’, if like Wattwatchers you are firmly in the camp seeking an orderly but accelerated transition to a clean, reliable, fair and affordable energy future, with renewably-generated electricity, technology-enabled flexibility, consumer-side energy resources, and electrification as core pillars.

Before we continue, some definition of what we’re talking about. Around the world, ‘capacity markets’ are used in some wholesale electricity markets to pay resources for being available to meet peak electricity demand in the future. So an ‘energy market’ trades in actual electricity, while a ‘capacity market’ trades in the ability to produce electricity and make it available when called upon. The ‘capacity’ can be enabled by generation, storage, transmission, and, importantly, also on the consumer side through demand response, energy efficiency and load-shifting.

So, first thing, don’t make it a lifeline for coal

Coverage of formal submissions to the ESB’s current consultation process by Renew Economy makes it clear how strong the opposition is to any suggestion of throwing polluting old coal plants a consumer-funded lifeline, including risking consumers facing even higher prices for power. In another Renew Economy opinion piece, the current capacity mechanism proposition and process from the ESB is denounced as a ‘farce’, and it warns that time to fix it is running short.

Hopefully the ESB, the new Australian Government, and the nation’s Energy Ministers will be listening.

Few argue that market and regulatory reform are needed to make the the electricity system fit-for-purpose in the 21st century, but is a capacity market the answer? To this point, we like the thinking of the Institute for Energy Economics and Financial Analysis (IEEFA) in its submission to the ESB, which proposes alternative ways to deal with ‘coal exits’.

In Wattwatchers’ submission to the high-level design consultation for its proposed ‘capacity mechanism’, we’ve taken the view that in spite of understandable coal controversy, the ESB may well recommend proceeding in some form, and that if this is the case then it will happen relatively quickly to be in place for 2025 and beyond.

Thus we focused on what we perceive as a positive, that the ESB is looking to include demand response activities as a form of ‘capacity’, although the details of what this might look like remain sketchy at this stage.

An immediate concern, shared by Energy Consumers Australia (ECA) which advocates nationally for household and small business energy consumers, is that demand response could be limited to larger industrial and commercial electricity customers, and won’t be extended to the mass market of 10 million or more small-site consumers. This is the link to the primary ECA submission, which is supported by expert consultant submissions from Econalytics and Finncorn Consulting.

Lynne Gallagher, the ECA’s CEO, makes it clear in her introductory letter that energy transition risks for consumers and also investors, including those associated with phasing coal out and high levels of renewables in, ‘can be mitigated by a well-designed capacity mechanism that includes a material role for demand response and energy efficiency’. She highlights the tight July 2025 deadline for implementation of a capacity mechanism, stressing that ECA support will be contingent on this being designed into the initial phase of a capacity mechanism (i.e. not excluded or left to some later time down the track).

The highly active and well respected Energy Efficiency Council (EEC), in its submission to the ESB, clearly isn’t convinced that a capacity market is the right answer for the energy system’s current and future needs. But nonetheless the EEC contends: ‘If the ESB develops a capacity mechanism, it is critical that demand response, energy efficiency and load-shifting can all bid for capacity.’ (As an example of load-shifting, the EEC cites heating hot water at midday instead of overnight.)

And, similar to Wattwatchers, the EEC highlights guidance from the International Energy Agency (IEA), which identifies energy efficiency as the largest source of capacity for energy markets globally. Wattwatchers pointed the ESB to another IEA position outlined late last year in a tracking paper, which sees the need for a ten-fold increase in global demand response capacity (on 2020 levels) to meet its Net Zero Emissions by 2050 Scenario (NZE).

A fellow energy technology scale-up, Evergen, also has focused strongly in its submission on the need for any capacity mechanism to treat Distributed Energy Resources (DERs) like rooftop solar and home batteries – or Customer Energy Resources (CERs) as they are increasingly being called – as ‘first-class citizens’ by deliberate design.

(NOTE: All public submissions to the ESB’s current consultation can be found at this link: https://www.energy.gov.au/government-priorities/energy-ministers/priorities/national-electricity-market-reforms/post-2025-market-design/capacity-mechanism/post-2025-market-design-capacity-mechanism-high-level-design-consultation-paper-june-2022

This is a ‘two-sided market’ opportunity

The Wattwatchers submission says in part:

Our submission urges the Energy Security Board (ESB) to use this process of consultation and the detailed design phase now underway to ensure that any capacity mechanism introduced will overtly allow for mass-market participation through demand response and energy efficiency at the level of household and small business consumers.

This will reflect the growing focus of the ESB, the Australian Energy Market Commission (AEMC) and other industry regulatory and market bodies on customer engagement and involvement, demand-side activities and opportunities, and distributed energy resources (DERs) like rooftop solar and home batteries – which increasingly are being recognised as ‘customer energy resources’ (as a recent Wattwatchers blog post highlighted when ESB and AEMC chairperson Anna Collyer spoke at a 2022 stakeholder forum event hosted by the Board of the ECA).

As such, the ESB has an opportunity to correct the industry’s course in regard to small-scale customer participation in the energy market – and what may become a dual energy and capacity market by 2025 – after the AEMC in 2020 declined to extend the groundbreaking introduction of a Wholesale Demand Response Mechanism (WDRM) to include household and small business electricity consumers as well as large commercial and industrial ones.

Wattwatchers further submits that broad-based small-scale customer participation in the electricity system, facilitated by direct inclusion in a capacity mechanism (if this eventuates), and also through revisiting other mechanisms like the WDRM, will help to achieve a timely and orderly transition to a more flexible, clean, reliable and affordable energy future; and to Net Zero greenhouse gas emissions for electricity at a faster rate and lower cost than will be the case in its absence.

To achieve genuine customer participation in the evolving energy system, policy-makers, regulators, market operators and other industry players need to ensure that this objective is consistently built into every relevant aspect of the transition agenda and market architecture, including the foreshadowed introduction of a capacity mechanism for the NEM.

Consumer-facing technologies and data-driven solutions, the territory which Wattwatchers operates in, are vital to enabling this customer participation in an increasingly flexible electricity system as it moves from Grid 1.0 to Grid 2.0 and beyond, and to what the AEMC has described as the ultimate objective of a ‘two-sided market’.

Wattwatchers is Australia’s leading digital energy platform, enabling fast, powerful and scalable solutions to monitor, analyse and control electrical circuits in real time – maximising the benefits from renewable electricity, sustainable building and energy management. Our solutions suite spans devices, datasets, analytics, software and Internet of Things (IoT) connectivity, for energy and non-energy applications across home, community, commercial and industrial, and utility use cases.