As the demands placed on Australia’s energy grids continue to evolve, demand management activities play an increasingly important role in ensuring a reliable supply of electricity, without the need to build costly additional infrastructure that will only be required at times of peak demand. In the wake of the Australian Energy Market Commission’s (AEMC’s) Power of Choice review, various changes to the National Electricity Rules have been made to incentivise demand management activities and further rule changes are currently under consideration. The Energy Networks Association (ENA) recently released a paper outlining the appropriate steps to ensure distribution network companies can make the most out of demand management.

In February 2015, the AEMC published a consultation paper asking for industry feedback on changes to the National Electricity Rules (NER) proposed by the COAG Energy Council and the Total Environment Centre (TEC), including reforms to the existing demand management incentive scheme.

The objective of the rule change requests was to provide an appropriate return to distribution network service providers to incentivise efficient demand management projects, as well as improve clarity and certainty regarding how the scheme will be developed and implemented.

The ENA’s response addresses various questions raised in the consultation paper, strongly supporting the rule change proposals and encouraging further reforms to promote demand management activities and support higher risk innovation projects with the potential to bring forward significant benefits to consumers over the long-term.

Furthermore, the ENA suggests that the AEMC should broaden the scope of the rule change process to consider the regulatory framework for demand management by electricity transmission businesses.

Incentivising demand management in a changing market

Like the Power of Choice report and the COAG Energy Council and TEC rule change proposals, the ENA’s response identifies a gap in the current incentive framework that could discourage distribution businesses from pursuing demand management projects. The ENA suggests the creation of more comprehensive innovation allowance and incentive arrangements, that take into account wider market factors that may impact the ability of network distribution companies to implement demand management schemes.

For instance, the response states, “The current framework is unclear as to how it would treat network businesses implementing distributed generation supply solutions for remote customers. In a number of circumstances, demand management and distributed generation are more than just substitutes for network augmentation.”

The ENA calls for a longer-term view of the future role of demand management and distributed generation to be developed as part of a broad vision for the future of the energy sector. The response cites recent Australian Energy Regulator (AER) cuts to demand management programs proposed by networks in New South Wales and the ACT as examples of why more positive regulatory incentives and guidance are needed.

The ENA says that the current design of the incentive scheme represented a reasonable “first step” at the time of creation, but that a re-examination of both the governing rules and their design is warranted.

In particular, the ENA believes the rules should specify clearer policy objectives and guiding principles for the separate innovation allowance and demand management incentive scheme components, which are absent from the current framework.

Redesigning network incentives and regulation

The ENA suggests that the balance of prescription and flexibility incorporated into the current rules could be improved.

“On the one hand, the rules provide wide discretion over some core elements, such as the overall objective and whether the scheme needs to be consistent with guiding design principles. On the other, the AER lacks discretion under the rules to recognise net market benefits attributed to a demand management project.”

The ENA considers that clear objectives and principles should exist to guide the discretion in the design and implementation of an incentive scheme or regulatory approach and that the degree of prescription and flexibility should be adapted to match the specific context.

“As an example, there may be relatively lower levels of overall prescription around the ‘small scale incentive scheme’ provisions in recognition of the limited financial penalties and rewards applicable under those schemes, but relatively greater prescription around more material issues such as principles for the rolling-forward of capital bases.”

The need for financial incentives for distribution businesses to innovate is also raised.

The ENA states that these are necessary to encourage demand management solutions when they may otherwise be considered ‘higher risk’ than network alternatives, due to Service Target Performance Incentive Scheme penalties and reputational damage if the solution fails to address a network constraint.

The response also reiterates the need for demand management incentive schemes to be technologically neutral.

As demand management can take a number of different forms and be achieved via a range of technologies, the ENA states that it would be inappropriate to predicate the forms of demand management permitted under the scheme and this could stifle innovation.

For instance, the ENA considers that there is no need to favour embedded generation projects over other demand projects conducted under the schemes. To do so may risk cross-subsidisation and distort investment decisions. It is also unnecessary, as networks have been conducting demand management projects with embedded generation and energy storage as a component for some time.

Encouraging demand management innovation

The ENA states that the proposed rule changes to innovation allowances would provide greater certainty for networks seeking to make significant multi-year investments in demand management projects, which may have high upfront costs.

“The proposed amendment by the COAG Energy Council – by providing scope for recognition of leading edge innovative projects and activities – has the strong potential to increase utilisation of any future allocated allowances.

“Similarly, by increasing the scope of innovation allowance projects to tariff based projects, the rule amendments would position networks to undertake a range of additional experimental trials and programs in a new area not provided for under existing schemes. This is likely to increase future utilisation of allowances.”

The ENA also supports provisions for payments to network distribution businesses based on a proportion of market benefits produced by a demand management project and for the rules to explicitly include a payment for revenue foregone in the implementation of innovative demand management projects

The ENA strongly advocates for the inclusion of both tariff and non-tariff based demand management options within the scheme, stating that there is “significant net public benefit in measures that provide incentives to undertake innovative tariff design and trial initiatives to support demand management, including direct load control and rebates or incentives to reduce demand at critical peak”.

“Demand management tariffs provide an opportunity for innovation in sending sharper price signals to customers of the value of reducing peak demand, in locations where the value could be high.

“With the passage of the AEMC’s recent network tariff rule changes, networks and customers will be more closely engaged than ever before in developing new and revised tariff offerings that drive lower system costs for consumers in the long term. In this environment, mechanisms which promote and encourage a trialling of range of innovative tariff design options will serve as a useful empirical base of knowledge for future network tariff approval processes.”

For the good of Australia’s grid future, incentives under the National Electricity Rules should encourage the use of the optimum solutions for constraints throughout the network. The ENA’s response to the AEMC’s consultation paper represents the next steps on the road to further innovation in the energy sector and encouraging projects that facilitate the creation of more responsive, effective energy networks within Australia.

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