It’s been a week since the release of the Australian Energy Market Commission’s (AEMC) Draft Determination on the Wholesale Demand Response Mechanism. The ensuing week has given me time to assess the mechanism in greater detail – and consider whether the general enthusiasm that followed is warranted.

Later this year U2 will come to Australia to perform songs from their Joshua Tree album. It’s the first time in 30 years that U2 will tour solely to play this album. I’ve already purchased tickets and am very enthusiastic about going.

While the Joshua Tree may seem like a lifetime ago, it is only a slightly shorter time window (by roughly 10 years) that we have being trying to find the right solution to deliver a two-sided National Electricity Market (NEM).

There have been multiple reviews and considerable effort expended, including the AEMC’s own solid efforts. So, why are we in the position where we, in the words of Bono, still haven’t found what we are looking for? Or, are we possibly looking for something we don’t actually need – and should we simply allow the market to deliver the solution?

Turning to the Draft Determination, the AEMC’s solution to this 20-year old problem (against a TEC, PIAC and TAI rule change), is to create a new category of registered participant – a Demand Response Service Provider (DRSP).

The DRSP, who must register as a market participant, will be able to bid demand response directly into the wholesale market – receiving the wholesale price multiplied by the demand reduction (against a baseline) in return. This action would change the level of demand for electricity in the market and could, given the interaction of supply and demand, reduce the wholesale price.

Before commenting on the AEMC’s draft, it’s worth taking a step back to consider why the use of demand response over the past 20 years hasn’t been more prominent for larger energy consumers.

I consider, that it’s because of two principle issues (and not market failure); 1. Businesses have, because of low historic electricity prices, been more interested in producing ‘widgets’ – than in changing their consumption patterns; and 2. Retailers, to whom businesses contract to, have been able to effectively manage, through judicious use of a range of insurance products, the retail price their customers pay for their electricity – all against a wholesale market that can be quite volatile.

However, as a result of the sectoral transformation currently underway, and subsequent changes to the generation mix, this situation is changing rapidly and all market participants – retailers and generators – are increasingly interested in exploring opportunities to mitigate exposure to increasingly higher electricity prices.

Demand side response opportunities are, categorically, becoming more attractive to both retailers and end use customers in managing load and price exposure as the transformation ensues.

As to the attractiveness of demand response as a product, it’s important to note that there are three prices that come in to play; 1. The prices of alternative insurance products that are available in the market (i.e. caps/swaps, weather hedges, or acquiring physical generation); 2. The price which customers wish to be paid to change their consumption pattern (i.e. the demand response); and 3. The price which the retailer is able to offer – when comparing all available insurance products to manage the exposure of their load against the wholesale price.

In my view, and although I consider that whilst the AEMC have done some good work on the Draft Determination, the AEMC’s proposal effectively removes this last step – the economic assessment of insurance products – which means that the DR product is valued (and paid) more than it otherwise should be, thereby diminishing efficiency.

There are some further unintended consequences, and limitations, including that:

The addition of a layer to the settlement process – the DRSP – adds to market administration and transaction costs – further impacting efficiency.

It creates perverse incentives – which can lead to additional regulatory costs – arising from the creation of consumption baselines (the higher the baseline the greater the return to the DRSP and demand response provider).

The host retailer’s relationship with their customers may be eroded by the inclusion of a third party – the DRSP. Noting that the AEMC draft states that an incumbent retailer can become a DRSP if it so chooses.

This mechanism (as noted by the AEMC in the draft determination) is unable to be expanded to residential customers because of consumer protection provisions.

I consider that the above issues are sufficient to warrant further assessment by the AEMC of their Draft Determination to implement this mechanism. Further weight is added to my argument, when consideration is also given to the broader market changes and likely changes to come.

These changes include, the transition to 5-minute settlement and the COAG Energy Security Board post 2025 Market Design Review – which could lead to the adoption of further market changes (the scope of which is unclear).

In closing, unfortunately (and noting the considerable efforts of the AEMC), I still don’t think we have found what we are looking for and whilst I am enthusiastic about seeing U2 in November, I think that the enthusiasm shown for this draft determination is largely misplaced.

And although I am a strong supporter of demand response, I don’t think that supporters of this measure have adequately considered the negative impacts of implementation. Impacts, which would be mitigated by allowing participants to develop and adopt solutions in consultation with, and in support of, their customer’s needs (without the addition of unnecessary regulation).

Finally, I encourage the AEMC to review their decision – and in doing so – consider any, and all, alternative options including, not implementing the change.

Note: Simon Camroux is head of regulation for SIMEC Energy Australia, and says: We are actively engaging with our customers to deliver ‘win-win’ solutions which include through demand response in order to reduce the cost of energy supplied and assist SEA in managing its wholesale market exposure.