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Key Wholesale Electricity Market Changes: Wholesale Demand Response Mechanism

‘Demand response’ is the action a consumer can take to temporarily change their energy consumption, in response to a range of incentives. ‘Wholesale demand response’ refers to the action taken in response to wholesale price signals. Wholesale demand response is designed to be cost competitive and can efficiently compete with peaking generation in times of a tight supply and demand balance.

Demand response or demand side participation promotes efficient consumption of electricity and improves the efficiency of the energy markets by delivering the lowest combination of generation and network resources to meet the supply/demand balance.

In 2018 the Australian Energy Market Commission (AEMC) received three rule change requests, all seeking to introduce a mechanism for wholesale demand response.  In March 2020, the AEMC issued its second draft determination and draft rule to implement the Wholesale Demand Response Mechanism (WDRM) with a view to making a final rule change determination in June 2020.Implementation of the mechanism in currently scheduled for October 2021.  The AEMC is currently assessing a rule change request, to delay the implementation of a 5-minute settlement from July 2021 to July 2022; if approved, this may also result in a delayed start date for the WDRM.

What is the WDRM?

The National Electricity Market (NEM) is a ‘one-sided’ wholesale market, where only the supply side (generators) are involved in providing price and quantity bids to the Australian Energy Market Operator (AEMO).

The WDRM is seen as a first step to move the NEM towards a ‘two-sided’ market, where supply and large customers (demand) are transparently involved in providing price and quantity bids to AEMO, the WDRM will not apply to small customers.  Large customers who participate in the WDRM will be financially rewarded for the value they provide to the energy system. In addition, this mechanism would capture the broader benefits of greater demand side participation (e.g. reduced peaking generation capacity) and share these benefits with all consumers.

There are a number of components required to introduce the WDRM in the NEM, the key changes to the NEM include:

  • The introduction of a new wholesale market participant category, a demand response service provider (DRSP). An organisation will need to register as a DRSP with AEMO and obtain their consent to classify loads as wholesale demand response units. AEMO’s consent may require the installation of metering, telemetry, or other load control equipment at the customer’s site. It's envisaged DRSPs will be entities such as a demand response aggregator or a retailer.
  • DRSPs to provide information to AEMO (such as price and quantity bids) and respond to scheduling instructions provided by AEMO. These obligations are intended to replicate some of those that are applied to scheduled generators.
  • Provision of a process for having baseline methodologies determined by AEMO and applied to wholesale demand response participants. Baselines are an estimate of the (counterfactual) level of consumption that would have occurred were it not for the demand response.
    • AEMO can also amend or develop new baseline methodologies through a transparent consultation process.
    • Some flexibility will be retained for AEMO to use parameters for specific customers’ load characteristics within the baseline methodologies.
  • Provision for DRSPs to be settled in the wholesale market for the wholesale demand response they (and their customers) have provided at the prevailing spot price. The quantity of demand response provided is determined as the difference between the baseline consumption and actual levels of consumption for the relevant period.

How will the WDRM be settled and customers paid for providing demand response?

The approach to settlement is designed to be cost effective and involves the least change to retailers billing systems and AEMO’s settlement systems.  The approach includes:

  • The retailer charging the customer for its actual consumption of electricity at the customer's normal retail rate.
  • AEMO charging the retailer for the customer's baseline level of consumption at the wholesale spot price.
  • The DRSP receiving a payment from AEMO for the quantity of demand response provided by the customer (i.e. the customer's baseline level of consumption minus its actual consumption) at the wholesale spot price.
  • The DRSP sharing a proportion of this AEMO payment with the customer in accordance with the terms agreed between those parties.
  • The DRSP sharing a proportion of this AEMO payment with the retailer to recover a portion of the cost it incurs by hedging for the customer's baseline level of consumption in the wholesale market but only being paid by the customer for metered energy. AEMO will calculate the reimbursement rate on a quarterly basis and will be based on the load weighted average spot market prices over the previous 12 months.

If you have any questions or need advice on the impacts and opportunities of the Wholesale Demand Response Mechanism for your business energy, please contact your Energy Action Account Manager.

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