by Wayne Pales, General Manager of Technology Strategy at the Australian Energy Market Operator (AEMO) and Director of the Chapel Group
In recent years there have been hundreds of demand response pilots. In places such as California, they have moved beyond pilots and have been scaling out demand response for several years. As a result of these pilots and large-scale programs, we know that if approached in a certain way, demand response works.
In Australia, I believe we can safely assume demand response will become an integral part of how we operate our markets and our grid. Setting demand response policy is new ground for our rule makers so we can expect a number of course corrections in the next few years, but the general direction can be predicted with a high level of confidence.
Given this trend, what should electricity distribution businesses be doing to prepare?
I recently attended a presentation from an Australian electricity distributor where they were sharing their experiences from a recent demand response pilot. I regularly attend such sessions, both here in Australia and overseas, to stay abreast of developments in demand response.
As often is the case, the team presenting their findings were very passionate, the work they had delivered was of high quality, and they were understandably proud of what they had achieved. My concern is that distribution businesses in Australia continue to structure pilots that yield the same results as most other demand response sharing sessions I have attended over the years. To be precise, lessons being shared in 2018 are almost identical to those I learnt when I first became involved in demand response back in 2012.
We know from hundreds of programs globally that with effective consumer engagement, people will participate in demand response in sufficient numbers to materially impact peak demand. We know certain consumer segments will respond better than others. We know that, despite people’s stated desire to do the right thing by the environment, the majority are driven first and foremost by the dollar. These, and other lessons, have been learnt over the years to the point that we can now be confident how a pilot will turn out, based on its design.
I am not suggesting we don’t have things still to learn, quite the opposite. In a recent blog post1 I asserted that as you scale out demand response, you must retain the ‘test and learn’ culture developed during the early pilot stage. With ever-changing consumer awareness and expectations, a changing regulatory landscape, and rapidly changing technology, your organisation must be in continuous learning mode.
What I am suggesting is distribution businesses need to accept that a lot of the questions they are testing for have been repeatedly answered, and instead they should be seeking answers to some of the harder questions, the questions that can only be answered at scale.
Such a recommendation may understandably be met with pushback from those in the senior ranks of distribution businesses. Why should distribution businesses adopt demand response at scale when the rules are not yet asking for this? Why cannibalise core business now when there is no immediate need to? These are sensible questions to be asking, and none of us know with certainty what the right decision is.
However, if we look at trends in other industries, we can see patterns where incumbents ‘missed the boat’ because they didn’t act quickly enough. If you consider the revenue profile of a typical Australian distributor, I will hypothesise that the risk on revenue would not be material over the next few years if they were to start scaling out demand response, at least not until rule changes come through that compensate them for heading in such a direction. On the flip side, I believe the benefits to positioning oneself in such a leadership position would be significant.
So what questions should distribution businesses be trying to answer? The following are a couple of questions that always go unanswered in small-scale pilots:
What is the price point a distributor can hit to make demand response as cost effective as possible? As you start your journey, you should initially expect quite a high cost per kW reduction as you need to make investments in systems, people, consumer engagement etc. Over time you should be striving to explore ways to drive these costs down, and this can only be done at scale.
How will you ensure consumers sign up to your demand response program? I emphasise the word your because in geographies where there is only one utility, the challenge is how to get consumers to participate in the one demand response program. In Australia, we can expect a future where energy aggregators and retailers, as well as distributors, are all vying for the same consumer. Distributors have several disadvantages that they need to overcome now before the market becomes overcrowded. Firstly, consumers have a relationship, or at least an awareness, of retailers as that is who sends them a bill, they do not have a relationship with distribution businesses. So distributors need to not only raise awareness, but create a level of trust with consumers. Secondly, until very recently, distribution businesses had no real concept of a consumer as their organisations were focused on the supply of energy to a supply point. Distribution businesses have long journeys ahead of them to become truly consumer centric and be able to compete against those companies born with consumer centricity in their DNA.
These and many other questions are the ones distribution businesses need to answer now. By doing so they will be better informed to influence policy, better informed to position themselves to generate value at scale, and better informed to know how they want to play in a market that will get very crowded, very quickly.
It is time to accept that demand response works. Distribution businesses cannot afford to continue to run pilots that ask questions we already know the answers to. Is it time for Australian distribution businesses to make the bold decision and scale out demand response?