Powerful demands

A change to the national electricity market proposes that large electricity users could be paid for cutting their energy use. Connor Pearce reports on how this will affect manufacturers.

Over the past five years, Australia has experienced a revolution, almost unlike anything the country has seen before.

As Australia’s fleet of coal-fired power stations reach the end of their life, and the cost of solar has dramatically dropped, Australia has switched from an energy sector powered by fossil fuels, to one where renewables will produce 50 per cent of electricity in Australia by 2024, and 100 per cent by 2032, according to the Lowy Institute.

During this period of transition, which was largely unplanned at a government level and driven by electricity generators and individual households and businesses, electricity prices have been volatile, particularly during the unplanned closure of Hazelwood Power station. For manufacturers who consume large amounts of electricity – not to mention gas – this has been a significant source of pain, as David Headberry, public officer of the Major Energy Users group points out.

“Australia used to have electricity prices that were the envy of the world, and now we don’t. There are lots of reasons behind that, but the fact is that big electricity users are saying we can’t afford electricity today.”

Headberry’s organisation includes manufacturers such as BlueScope, Norske Skog, Northern Cement, Orica Australia, and BOC Australia. One solution to the issue of high prices that these companies have instituted is known as demand response, which Headberry summarises as, “if giving up the ability to use electricity for 20, 30, 40, hours a year gives us a much lower price for our electricity that we have to buy, then we’ll do it”.

While larger manufacturers – who buy electricity on the wholesale market via agreements with retailers to purchase at the spot price – have been able to respond to high prices by shutting down electricity-intensive processes, the technology has been out of reach
for smaller manufacturers. Now, the Australian Energy Market Commission (AEMC), the body which makes and changes rules for the National Electricity Market, is proposing to expand the potential of demand response.

The proposed change, which will be decided on December 5, is known as the wholesale demand response mechanism, and will enable a new type of energy market participant, demand response service providers, otherwise known as aggregators. These aggregators will be able to sell the estimated load of large energy users, including manufacturers, as equivalent to generation.

Nathaniel Galindo, general manager of engineering at Flow Power, an energy retailer that provides demand response services via spot price pass through, explains how this proposed change would further enable demand response.

“Currently there is no bidding mechanism that would accept a load reduction in the same form as what a generator would bid to supply energy. A market mechanism does not exist that would allow a user to reduce their load and be paid for it.”

If implemented, the change could allow manufacturers to reduce their energy costs, or be paid for shutting down processes at times of high energy costs. Galindo noted that current savings can be significant.

“Savings can be as low as five per cent on your more stable, quieter months, and as high as potentially 30 to 40 per cent on your more volatile, peakier months during the summer,” said Galindo.

The proposed mechanism would still allow the current processes to occur, highlights Suzanne Falvi, executive general manager, security and reliability at the AEMC.

“The mechanism doesn’t do anything to alter the demand response that is already happening. There are lots of large users who, through their retailers or themselves, already work out how to change their electricity consumption in response to prices.”

“What this mechanism does is open up competition in this space. Currently, unless you’re doing demand response yourself, you do it through a retailer. What we want to do through this mechanism is open this up to someone other than a retailer who can help manufacturers offer their demand response into the wholesale market.”

As Headberry points out, the current market rules require users to have a level of sophistication that is out of reach to smaller manufacturers without the resources to manage their energy usage.

“Why this current change is so important is that while some end users were actually taking spot price pass through and managing their demand against price, this takes a lot of management to be able to do and you need to be really switched on. The rule change has been put up has introduced the concept of the aggregator, and their prime business will be going around and collecting end users that are prepared to load shed.”

Until now, in Australia, these aggregators or demand response service providers have not existed, and thus Falvi expects that new business models of providing electricity at lower costs to manufacturers will emerge, if this change is approved.

“It should be clever service providers who will look at a manufacturer’s business and say, ‘Actually, you know, we could save you this amount of money if you can shut down production line C, given how we expect the wholesale market to work’.

“Your demand reduction is going to have value and either save you money or make you money.”

While the technical ability to implement such a change has existed for some time, according to Falvi, recent technological developments have enabled demand response to be done more accurately and affordably.

“As technology has evolved, there has been a keener interest in wholesale demand response and there has also been a change in attitude to people wanting to do more of it,” said Falvi.

How this mechanism would work is manufacturers, in accordance with an aggregator, would set a baseline of power use. Demand which does not reach this baseline would be then sold in the market as a substitute for generation.

“The baseline is a very intentional design feature,” said Falvi. “All the demand response that is being offered is on the supply side as opposed to the demand side.”

One criticism of the scheme is the potential for this baseline to be misrepresented to enable demand response service providers to sell extra unmet demand that would not have been used anyway, as Galindo highlighted.

“There is the possibility for service providers or even individual customers to manipulate the market by being able to adjust their baseload and adjust their demand responses in order to maximise the potential gain,” he said.

introducing a whole lot of other service providers and entrants who will potentially take advantage of what the wholesale demand response mechanism can do and look at it from a monetising perspective.”

Falvi counters that the design of the mechanism and the safeguards that are in place will prevent this happening.

“We’ve set out a very comprehensive framework for how baselines will be developed, approved, and tested. They’ll be set by the system operator and the framework will actually outline what are the acceptable thresholds for accuracy and freedom from bias, as determined by the system operator.

“The regulator will have a compliance role in how the mechanism works.”

The current demand response rule change is part of wider changes to the electricity market in Australia, as users, regulators, and generators work out how to manage the dynamic supply and demand of an energy market with a greater proportion of renewables, and increasingly flexible use.

For some, there is potential for what is known as a “two-sided market” whereby electricity users, particularly larger, energy intensive manufacturers, will become even more significant players in the market.

“At its theoretical best, a two-sided market effectively presupposes that a retailer knows exactly what energy is being used at what time,” said Falvi.

Headberry, however, remains sceptical that a two-sided market is what will ultimately work best for manufacturers.

“If you’ve got to use electricity to make your steel products, you can’t easily avoid not using electricity. If they don’t make steel they don’t make any profits. They could probably forego it for relatively short periods of time, but a normal operation says you’ve got to have an availability factor at your facility of 95 to 98 per cent make your products competitive.”

As these debates continue to occur, manufacturers will be hoping that with Australia’s large potential assets of solar energy, hydrogen, and other forms of renewable energy, the country will once again return to being an energy superpower, in a low-carbon future.