Survey of Demand-Side Participation in the national market

Transcription

1 Survey of Demand-Side Participation in the national market prepared for: National Electricity Code Administrator Level 5, 41 Currie Street Adelaide SA 5000 September 2000 PHB Hagler Bailly ECONOMIC AND MANAGEMENT CONSULTANTS Level 25, Optus Centre, 367 Collins Street, Melbourne VIC 3000 Tel: Fax:

2 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY END-USE CUSTOMER SURVEY FINDINGS MARKET PARTICIPANT SURVEY FINDINGS MECHANISMS FOR ENHANCING DEMAND SIDE RESPONSE IN THE NEM BACKGROUND SCOPE OF THE STUDY DEFINITION OF DEMAND-SIDE RESPONSE END-USE CUSTOMER SURVEY FINDINGS CURRENT LEVEL OF PARTICIPATION IN DSM THE NEED FOR INCENTIVES BARRIERS TO DEMAND SIDE PARTICIPATION EXPECTATIONS OF MARKET PARTICIPANTS IN DELIVERING DSM SUGGESTIONS FOR REFINING THE NATIONAL MARKET TO PROMOTE DEMAND SIDE RESPONSE OTHER ISSUES MARKET PARTICIPANT SURVEY FINDINGS CURRENT LEVEL OF PARTICIPATION IN DEMAND-SIDE MECHANISMS FOR ENHANCING DEMAND SIDE RESPONSE IN THE NEM...22 APPENDIX A SURVEY GUIDES... A-1 PHB Hagler Bailly Page i

3 1. EXECUTIVE SUMMARY NECA is committed to facilitating proactive demand-side participation in the national market. As a first step in this undertaking, NECA commissioned PHB Hagler Bailly to conduct a survey of market participants to ascertain the current level of, and attitudes, to the demandside response that is occurring in the national market. This document presents the findings from this first demand side survey and reports on the extent of and attitudes to demand side participation in the national market. It also provides, based on feedback from the survey respondents, and a brief assessment of mechanisms that could be implemented for enhancing demand side participation in the market END-USE CUSTOMER SURVEY FINDINGS The major findings of the 20 surveys conducted with major commercial and industrial electricity consumers are discussed in this section. These interviews were drawn from each of the four national market states, NSW, Victoria, Queensland and South Australia and across a representative range of industry sectors. The twenty surveyed customers account for a total of 2,154 MW of maximum electricity demand across 2,260 sites, although a single customer contributed over 40% of the total demand. The surveyed firms represented sites with loads ranging from 1 MW through to almost 1000 MW. Participation in demand side programs 8 of the twenty firms reported that they are currently actively participating in one or more demand-side programs but only three were able to quantify the load reduction achieved. Load reduction impacts A total of 817 MW of demand-side load reduction although, one customer contributed 98% of this total. If this major customer is removed, the 17 MW of load reduction out 1,254 MW of total demand represented by the nineteen remaining firms which equates to 1.3% of the total maximum demand. Managing loads in response to pool price Almost all the firms surveyed purchase electricity under fixed price contracts, which provide full protection from the price volatility of the pool. Barriers to demand side participation include: inability to shed load and therefore manage risk; lack of knowledge and/or confidence with the various options available to manage risk; unable to justify committing additional resources and specialist skills to manage these risks; a belief that playing the spot market is not part of core business. PHB Hagler Bailly Page 1

4 Drivers for demand side participation The overwhelming driver for participating in demand side programs is the prospect of financial gain. The need for incentives 16 of the firms surveyed either agreed or strongly agreed that some form of incentive ought to be developed to promote voluntary demand side response as a means of freeing up system capacity during peak periods MARKET PARTICIPANT SURVEY FINDINGS This section presents the survey results for the 18 Market Participants that responded to the survey questionnaire. These respondents were drawn from each of the four national market states, NSW, Victoria, Queensland and South Australia and included electricity retailers, network service providers and generators. Current level of participation in demand-side Table 1 presents a broad overview of demand side activity levels in the national market over the two year period 1998 to 1999 in terms of projects evaluated and underway and total MW of demand side capacity. Table 1 Overview of demand side activity in the national market Respondent DSM Projects Evaluated DSM Projects Underway Total MW of demand side capacity Retailers Transmission Service Providers Distribution Service Providers Generators Total Barriers to demand side participation these include: demand side projects not being financially viable lack of interest and demand for the product from customers insufficient demand side resource to make the development of a retail product an attractive business proposition insufficient lead time to meet network requirements, and operation and structure of the national market. Drivers for demand side participation the main factors driving market participants to implement demand side projects, are as follows: managing exposure to pool prices PHB Hagler Bailly Page 2

5 responding to regulatory requirements building relationships with large customers and servicing customers in a competitive market environment increased asset utilisation (NSPs) reduction in energy losses, and increasing unhedged sales (generators) MECHANISMS FOR ENHANCING DEMAND SIDE RESPONSE IN THE NEM While the findings of this survey indicate that the level of demand side activity in the national market is gaining momentum, there still remains a significant amount of largely untapped demand side resource. Based on feedback received from the surveys, mechanisms that may encourage greater demand side participation will need to focus on (but not be limited to) refinements to the Code, improving the awareness and understanding of end-use customers on the national market, particularly the wholesale market, risk management issues and the benefits of demand side participation, and encouraging greater participation in the market by specialist third-party demand side aggregators and co-operatives. Therefore, next steps that could be considered in this process include: conduct a detailed review of the Code to ensure that: demand side aggregators and demand side co-operatives are not disadvantaged and that the Code actively facilitates and encourages their participation, generally strengthen the Code to place a greater emphasis on demand side, with explicit definition of demand side and rules for demand side bidding and taking into account demand-side products available in other markets. follow-up interviews with a number of the market participants that contributed to the survey who felt that certain aspects of the national market were acting as a barrier to program development, in order to obtain further details. The details could be used to inform the Code review discussed above. implement an education program that aims to improve customer knowledge of the national market with an emphasis on demand side and the potential benefits to customers that are able to curtail load at short notice. This could include publishing and promoting case studies of customers that have elected to take part or full spot price exposure, how they manage the associated risk, and the benefits they have been able to achieve. PHB Hagler Bailly Page 3

6 encourage the jurisdictional regulators to review the rules governing the regulated functions of the market to ensure that appropriate signals exist to encourage (and at the very least not discourage) for demand side response as an alternative to traditional network capacity upgrades. PHB Hagler Bailly Page 4

7 2. BACKGROUND NECA is committed to facilitating proactive demand-side participation in the National Electricity Market (national market). As a first step in this undertaking, NECA commissioned a survey of market participants to ascertain the current level of, and attitudes, to the demandside (demand side) response that is occurring in the national market. As defined in NECA s Terms of Reference for the project, the objectives of the survey are to: establish a database recording the status and scale of retail demand-side programs and initiatives, and customer involvement in the national market. determine the likely trends for future involvement of the demand-side in the national market. develop, monitor and report on appropriate indicators of demand-side participation. explore customer attitudes to the market, particularly their: understanding of market design level of interest in proactive demand-side participation expectations of the market, and market intermediaries, particularly retailers and, in respect of new investments, network service providers support for existing retails and demand side products interest in additional demand-side products, and thoughts and suggestions for enhancing market design. This document presents the findings from this first demand side survey and reports on the existing extent of and attitudes to demand side participation in the national market. It also provides, based on feedback from the survey respondents, and a brief assessment of mechanisms that could be implemented for enhancing demand side participation in the market SCOPE OF THE STUDY The study was conducted by PHB Hagler Bailly for the National Electricity Code Administrator. It was underpinned by the following analytical framework: PHB Hagler Bailly Page 5

8 extensive stakeholder consultation where the views of stakeholder committee energy retailers, network service providers, consumer representatives and regulators were canvassed. A discussion paper was widely circulated among these stakeholders prior to a meeting where the issues and topics to be covered in the market research phase of the study were finalised. surveys with energy retailers, network service providers and major electricity consumers to obtain information on the extent of demand-side activity in the national market, drivers and barriers for these programs, level of program participation, and customer understanding, expectations and interest in demand-side management. The findings and insights from this research are discussed in the rest of this report. Detailed survey guides are presented in Appendix A DEFINITION OF DEMAND-SIDE RESPONSE For the purposes of this report, demand-side response has been defined as including both short term demand elasticity in response to energy prices in the spot market and also potential forms of customer participation in other demand reduction programs such as those directed at deferring or avoiding network augmentation. From an end-user perspective the characteristics of the demand-side response involved are quite similar and it is possible that the same demand-side resource could be used for both purposes. PHB Hagler Bailly Page 6

9 3. END-USE CUSTOMER SURVEY FINDINGS This section presents the major findings of 20 major commercial and industrial electricity customers that participated in the survey. These interviews were drawn from each of the four national market states, NSW, Victoria, Queensland and South Australia and across a range of industry sectors. Table 2 Major End-User Surveys Completed national market State Sector NSW Victoria Queensland SA Manufacturing Water Supply 1 Mining 1 Education 1 1 Retail 1 Cultural & Recreation 1 Property Services 1 Communications 1 Health 1 Total As indicated in Table 2 the survey respondents represented a wide range of industry types. The table gives a breakdown of the number of and sectors represented by the end-users that contributed to the survey CURRENT LEVEL OF PARTICIPATION IN DSM The twenty major customers surveyed account for a total of 2,154 MW of maximum electricity demand across 2,260 sites, although a single customer contributed over 40% of the total demand. Individual customer loads represented by the firms surveyed ranged from 1 MW through to almost 1000 MW. Participation in demand side programs Eight of the twenty firms reported that they are currently actively participating in one or more demand-side programs. However, only four of these eight actually provided details of the demand-side strategies that they have in place, while three of these were able to nominate the actual load reduction resulting from the demand-management strategy. PHB Hagler Bailly Page 7

10 Load reduction impacts Those participating in demand-side programs contributed a total of 817 MW of demand-side response. Once again, one customer contributed a significant proportion of this total and therefore the results are heavily skewed and potentially misleading if extrapolated to the entire market. If this major customer is removed, the two remaining firms contributed 17 MW of load reduction out 1,254 MW of total demand represented by the nineteen remaining firms; this equates to 1.3% of the total maximum demand. The types of demand-side strategies implemented by the surveyed firms include: rescheduling loads (2 firms) switching off non-essential loads (1 firm) energy efficiency1 (2 firms) There were no customers that reported participating in programs that involve operating standby generators, equipment cycling or direct load control. Two participants reported being involved in programs that were offered by their electricity retailer, while one was involved in an arrangement with a generator. While none of the firms reported being involved in programs with their NSPs, a NSW NSP recently approached one of the surveyed firms offering a demand side program to help defer augmentation of local substation assets. The firm s technical staff is currently evaluating this offer. Managing loads in response to pool price All but one of the firms surveyed purchase their electricity from retailers under fixed price contracts which provide full protection from the price volatility of the pool. As a result few customers appear to be undertaking demand side activities in direct response to pool prices. While few firms have neither taken up pool price exposure in their retail contracts nor purchase directly from the wholesale market, ten firms had at least investigated one or both of these possibilities in the past. There were a variety of reasons given as to why these firms finally deciding not to pursue direct exposure to the wholesale market. These include: inability to shed load and therefore manage risk; lack of knowledge and/or confidence with the various options available to manage risk; unable to justify committing additional resources and specialist skills to manage these risks; 1 Although energy efficiency does not strictly comply with the definition of demand-response as presented earlier, energy efficiency measures were nominated by two firms as their preferred long term load management strategy. PHB Hagler Bailly Page 8

11 belief that playing the spot market is not part of core business. As a number of respondents noted: We ve looked at the advantages and disadvantages. While there are cost savings on one side there is also VOLL risk on the other. On balance we would rather stay on fixed rates as we can t shed load easily. We considered spot price exposure in the last contract but we decided we didn t have the resources and knowledge to monitor and manage the risks. Some firms do monitor pool prices from time to time. Three firms mentioned that they monitor pool prices frequently, while eight monitor prices occasionally and the remainder either rarely or never. A check of pool prices is useful to some firms in benchmarking their contract prices against the pool to compare with contract, while those that don t monitor the pool have an expectation that this is their retailers responsibility. Reasons for participating in demand side programs The overwhelming driver for participating in demand side programs, as mentioned by all the three firms currently undertaking demand side activities, is the prospect of financial gain. As indicated by the comments earlier, demand side response activities required a significant commitment in terms of resources, cost and time on the part of the participant and therefore there needs to be a fairly clear and significant financial return to make the effort worth while. With the exception of one customer who is receiving $500/MWh, no other firms were willing to disclose the level of financial incentive they were receiving from the program THE NEED FOR INCENTIVES Sixteen of the firms surveyed either agreed or strongly agreed that some form of incentive ought to be developed to promote voluntary demand side response as a means of freeing up system capacity during peak periods. One respondent strongly disagreed with the idea of incentives, while three others did not have a view either way as they felt limited technical scope existed within their operations to undertake demand side activities, and hence incentives would have little impact. A number of the respondents that supported the idea of incentives as a mechanism for encouraging demand side, did so in principle as something that should be offered in the market place even though such incentives would have little impact on their own operations. In these cases it was acknowledged that the incentives would not necessarily benefit them directly due to the limited opportunities in their operations for curtailing load. The following comments highlight the range of comments received: Increases in VOLL are important. Pool rules need to be flexible so as not to discourage load management. PHB Hagler Bailly Page 9

12 There are many customers like ourselves who have considerable capacity to load shed at various times. This aggregate load could have the capability of deferring capital investments in generation. Being a hospital it is difficult to load shed anyway, but it should be something that everyone is encouraged to do it provides potential cost savings and helps the generators. The only way to encourage DM is to either penalise or entice people to do it. For many firms energy costs rank low on a scale of importance relative to other business input costs such as labour and raw materials; an issue raised by a number of respondents. In this context, incentives can help raise the profile of demand side measures and potentially make energy cost savings worthwhile pursuing for individual organisations. It is interesting to note that the one respondent who disagreed with the notion of incentives is also an existing demand side participant. The rationale for this view was based on concerns that as more end-users become involved with demand side, the benefits available for existing participants would be effectively diluted. Very few firms were able to provide any useful feedback on the minimum financial incentive they would require before undertaking demand side activities. From the authors experience this is often a difficult question to respond in a survey, as detailed research is often required to quantify the value of the demand side resource to the end-user. This process is generally undertaken after customers are presented with concrete program offer s from a third-party BARRIERS TO DEMAND SIDE PARTICIPATION A worthwhile first step toward achieving a greater level of demand side response in the national market is to identify the main impediments preventing end-use customers from becoming more active participants in the market. Having recognised these impediments specific initiatives can then be developed to overcome them. Impediments to demand side participation The firms surveyed provided some valuable insights into some of the impediments preventing them from undertaking demand side initiatives or expanding the existing demand side initiatives in their operations: no suitable loads or standby generation (7 firms) never been offered the opportunity (6 firms) lack of time or resources to review demand side options (4 firms) lack of knowledge about demand side options (3 firms) operating plant cannot be shutdown at short notice (3 firms) risks to plant and personnel outweigh the financial gain (2 firms) PHB Hagler Bailly Page 10

13 not a high priority at the present time (2 firms) rebate amount for load shedding not sufficiently attractive (1 firm) network charges act as a disincentive (1 firm) Demand side operational issues In addition to overcoming these barriers a number of firms were able to provide useful feedback on conditions that would have to be met before they d be prepared to participate in a demand side initiative. Customers are likely to be more responsive to demand side initiatives that incorporate some degree of flexibility rather than firm commitment on the part of the customers without penalties, ensure good communication links between the customer and the retailer/nsp and make available expert assistance to help identify and scope out demand side opportunities. The following comments highlight the range of comments received: Option to participate depending on schedule. Preparation to shutdown would need to be advised at least two days before. Confirmation of shutdown the night before with option to withdraw still open. On day of participation 2 hours warning of participation time with final option to withdraw. Financial reward. Pool rules need to allow demand side bidding to be made ACTIVE or INACTIVE. A scheduled customer under the current rules is interrupted before other customers - this is O.K. when I want an active bid - but not at other times. Much more and better contact and communication between ourselves and the network during the load shed, eg regular telephone calls, updates. Need time to assess it in detail and need the assistance from a retailer/distributor to help run it. They really need to consult - not just send in forms for us to fill in. They may need to send someone out to work with our staff for a week if needs be to really understand our operation. The findings suggest that market intermediaries such as demand side aggregators or cooperatives 2, a role which could be played by retailers, NSPs or any other third parties, could provide a useful mechanism for delivering firm demand side capacity to the market. 2 Demand-side co-operatives incorporate both flexible arrangements for members as well as delivering firm demand side capacity to the market. demand side co-operatives typically involve a host and a group of industrial and commercial customers with demand side capacity. The role of the host is to aggregate and manage the available resource that could be firmly bid into the market on any given day. To achieve this while still providing co-op members with flexibility, the firm capacity bid is typically less than the simple sum of the demand side resource of all the members in the co-operative. For example, the co-op may bid 40 MW of firm load on average, while the total resource available by co-op members is 100 MW. PHB Hagler Bailly Page 11

14 3.4. EXPECTATIONS OF MARKET PARTICIPANTS IN DELIVERING DSM Customers have a greater expectation that retailers should offer demand side programs compared to other market participants such as NSPs and generators. This expectation is in part raised by retailers already having approached firms offering demand side initiatives and/or that retailers are likely to have the best understanding of their business operations. The surveyed firms expect retailers to provide: technical expertise in load reduction technologies; assistance in identifying and scooping demand side opportunities on the customers site; and a sufficiently attractive incentive to make participation worthwhile. The small number of firms who expect NSPs and generators to offer demand side programs, felt that all market participants should be involved because demand side response is a supplychain issue and the full benefits can only be captured when all market participants are involved. Interestingly, only one respondent mentioned they expected their NSP to offer demand side initiatives as a means of deferring network augmentation SUGGESTIONS FOR REFINING THE NATIONAL MARKET TO PROMOTE DEMAND SIDE RESPONSE The surveyed firms were given the opportunity to submit suggestions and ideas on ways to improve the national market to better promote demand side response, as noted below: Ability for retailer to form relationship with customers to manage load shedding. and direct participation of enterprises should be treated as generators of negative power. Have to come up with some system where I don't have to employ someone to manage pool prices but where I can still participate. For example, if there was a third-party that monitored pool prices on behalf of a group of customers, we d be interested in participating and possibly looking at load shedding. More face to face presence by the industry. Imparting knowledge on how the market works and the impacts we can make if we did things differently. There is very little communication out there on these issues. Establish a web page and give case study examples and also use the media. Visit each distributors web site and review their network charges. PHB Hagler Bailly Page 12

15 3.6. OTHER ISSUES While the survey focussed primarily on demand side issues, some useful feedback on customers general experiences in the market since deregulation was also collected. An understanding of customer s experience in the market so far, and the context of electricity supply within their operations, can assist in developing mechanisms for encouraging more active demand side participation in the market. Benefits of deregulation All but one of the survey respondents had an expectation that deregulation would bring benefits to their business. In virtually every case, firms expected that deregulation would deliver energy cost reductions. Other benefits of deregulation cited by a minority of respondents include (1) improved reliability of supply, and (2) additional services. In the main, customers expectations of energy cost reductions have been met to varying degrees, with some respondents noting that the actual cost savings achieved were below expectations. The findings varied by state and tended to reflect the different market conditions in the four national market states. Generally, customers in NSW had achieved significant price decreases initially when the market first deregulated, but were now expecting to enter a period of rising prices. SA respondents on the other hand, had fairly low expectations of cost savings, with both firms interviewed having opted to remain on tariff. There was concern expressed that when safety net tariffs are removed, electricity prices will increase significantly due to the current supply situation in that state. The two comments noted below provide further insight: Significant cost savings of about 25% in 1997 and 98, but we anticipate savings to evaporate shortly as prices start going up (NSW). We have lobbied government to extend the safety net tariff until extra capacity comes in or interconnects or we will otherwise look at cogeneration on site (SA). Risk management In theory, large end-use customers can utilize load shedding and other demand management measures as risk management strategy for minimising exposure to extreme pool prices. However, the customers surveyed are exposed to little in the way of price risk, having elected to manage through a contractual mechanism in the form of a fixed price electricity supply contract. The risk of risk of extreme pool price exposure is therefore passed onto the electricity retailer. The reasons why customers prefer these arrangements were discussed earlier in Section 3.1 under Managing loads in response to pool price and 3.3 Barriers to demand side participation. The more important risk management issues facing major customers, once a fixed price supply contract has been negotiated, are not price but supply reliability and quality of supply. Fourteen of the twenty firms surveyed considered that supply reliability was the most important energy related issue they have to deal with. A number of customers manage this risk by relying on backup sources of supply such as standby generators and UPS systems. PHB Hagler Bailly Page 13

16 Other customers noted that their lack of knowledge and understanding of the national market further adds to this risk. Overall satisfaction with the national market Fourteen of the twenty firms were either satisfied or very satisfied with the electricity market reforms that have taken place to date, while five were less than satisfied. There is some variability in the level of customer satisfaction by state, as indicated in Table 3, with the most dissatisfied customers from the SA market. Table 3 Customer Satisfaction with Market Reforms national market State Satisfaction Rating NSW Victoria Queensland SA Total Very Satisfied 2 2 Satisfied Dissatisfied 2 2 Very Dissatisfied The following comments highlight the range of views on electricity market reform from the survey respondents: Can t see anything but benefits at the moment. The pace of reform is just right given that we are all learning through the process. The national market principles aren't really working in SA. If the situation doesn't improve we will be looking to expand our operation outside the state. PHB Hagler Bailly Page 14

17 4. MARKET PARTICIPANT SURVEY FINDINGS This section presents the survey results for the 18 Market Participants that responded to the survey questionnaire. These respondents were drawn from each of the four national market states, NSW, Victoria, Queensland and South Australia and included electricity retailers, network service providers and generators. The following table gives additional details on the number, and categories of, Market Participants that contributed to the survey of demand-side participation in the national market. Table 4 Market Participant Survey Respondents national market State Sector NSW Victoria Queensland SA Retail Transmission Service Providers 1 1 Distribution Service Providers 1 2 Generators Total CURRENT LEVEL OF PARTICIPATION IN DEMAND-SIDE Table 5 presents a broad overview of demand side activity levels in the national market over the two year period 1998 to 1999 based on two variables number of projects evaluated by Market Participants in each year and number of projects underway in each of the baseline years. Table 5 Overview of demand side Activity in the national market Respondent DSM Projects Evaluated DSM Projects Underway Retailers Transmission Service Providers Distribution Service Providers Generators Although all categories of Market Participant are represented, this data clearly illustrates that the electricity retailers are currently the dominant player in demand-side initiatives in the national market. Based on their combined responses to the survey, there appear to be three main factors driving retailers to implement demand side projects, as follows: managing exposure to pool prices PHB Hagler Bailly Page 15

18 responding to regulatory requirements (a reflection of the NSW licensing conditions), and building relationships with large customers and servicing customers in a competitive market environment. In contrast, they appear to be hindered in their delivery of demand side products by the following: demand side projects not being financially viable lack of interest and demand for the product from customers insufficient demand side resource to make the development of a retail product an attractive business proposition, and the structure and operation of the national market itself. Network service providers cited deferral of capacity additions to T&D systems as being the key reason for their organisations to evaluate and implement demand side projects. Other drives included: regulatory/licensing requirements increased asset utilisation, and reduction in energy losses. Barriers to the uptake of demand side activities given by the Network service providers were fairly evenly distributed across the following factors: demand side projects not being cost effective insufficient lead time to meet network requirements lack of customer interest, and operation and structure of the national market. Based on the survey responses from the Generators that have actively evaluated and/or implemented demand side programs, lowering exposure to pool prices and increasing unhedged sales are key drivers. Barriers include insufficient demand side resource combined with lack of end-use customer interest in participating in programs of this nature. Details of the demand side activities currently being undertaken by the survey respondents are summarised on a program-by-program basis in Table 6, Table 7 and Table 9. PHB Hagler Bailly Page 16

19 Table 6 Details of demand side Programs Implemented by Generators Respondent demand side strategy Target Sector Participants Total MW of demand side capacity Generator 2 Interruptible loads Industrial 1 60 Generator 4 Interruptible loads Industrial 1 27 Generator 6 Interruptible Loads Industrial Not unexpectedly, given their objectives of utilising demand side opportunities to manage the commercial risks associated with variable pool prices and hedging contracts, demand-side activities undertaken by the Generators have focused on the use of very large one-off industrial loads that bring a relatively large amount of MW from point sources. In total, this activity has produced just over 750 MW of demand side response from the Generators surveyed. Two of the three programs have a firm load commitment from the participants while the third is operated on a best endeavours basis. From the perspective of a participant in one of the programs the ability to interrupt load on request from the host Generator provides them with: ability to manage energy costs, and lower overall costs. In comparison, as detailed in the table below, the Retailers have implemented a wide range of demand side programs across the residential, commercial and industrial sectors. These programs are currently providing at least 422 MW of demand side capacity either as a firm commitment in the case of programs such as direct load control of hot water or power factor correction or as best endeavours in the case of most interruptible loads and standby generation. The incentives used to engender participation in the programs include a range of financial instruments, including: subsidies, loans and lower tariffs for programs focussing on DLC of hot water or installation of energy efficient equipment or power factor correction dispatch payments for interruptible loads and standby generation programs, or availability and dispatch payments for interruptible loads and standby generators. In a number of the programs the host Retailer is providing information on energy efficiency technologies, or acting as a supplier for energy efficient equipment. These programs do not appear to offer any financial incentives to program participants. PHB Hagler Bailly Page 17

20 Table 7 - Details of demand side Programs Implemented by Retailers Respondent demand side strategy Target Sector Participants Total MW of demand side capacity Retailer 1 Standby generation Interruptible loads All Not Reported Not Reported DLC of water heaters All Not Reported Retailer 2 Standby generation Interruptible loads DLC of water heaters Retailer 3 Interruptible loads Equipment cycling Power factor correction Industrial and Commercial and Residential Industrial and Commercial Not Reported industrial 1 Retailer 3 Fuel substitution All 4 residential 5 commercial 5 industrial Energy efficiency. All 1000 residential 20 commercial 18 industrial DLC of water heaters Commercial and Residential residential 5000 commercial Not Reported Not Reported Not Reported Retailer 4 Interruptible loads Industrial 5 industrial 5 Power factor correctionindustrial 7 industrial 1 Energy efficiency advice Power factor correction Retailer 5 Interruptible loads Equipment cycling Industrial and Commercial 5 commercial 31 industrial Industrial 2 industrial 10 Retailer 6 Fuel substitution Residential 10 residential Not Reported Power factor correctionindustrial and Commercial Interruptible loads Industrial and Commercial Power factor correction Time-of-use tariffs/contracts Fuel substitution Cogeneration Power factor correctionindustrial and Commercial Time-of-use tariffs/contracts Fuel substitution Cogeneration 10 commercial 20 industrial 1 commercial 10 industrial 10 commercial 20 industrial PHB Hagler Bailly Page 18

21 The actual usage of these programs in the national market in 1999, as reported by Retailers, is summarised in Table 8 along with the reported dispatch mechanisms. Table 8 Usage of demand side Programs Hosted by Retailers Respondent demand side strategy Conditions dispatched Times used 1999 Average dispatch duration 1999 Total hours 1999 Average MW dispatch 1999 Retailer 3 Interruptible loads Equipment cycling Power factor correction Load control are based on best endeavours Power factor correction not dispatched Retailer 3 Fuel substitution Not dispatched Supply of solar products Energy efficiency. No conditions Advice is provided through customer centres documentation and brochures and audits DLC of water heaters Controlled by frequency Power is provided for a minimum of 5 to 6 injection hours per night. Retailer 4 Interruptible loads During periods of pool price volatility participants are asked to shed load by telephone Power factor correction Energy efficiency advice Power factor correction Retailer 5 Interruptible loads Equipment cycling Not applicable Not applicable Phone call followed by confirmation fax PF control is automatic in all instances Upon customer request, but following on from information provided by Account Managers Retailer 6 Fuel substitution Not applicable Replacement of electric hot water system with gas boosted solar system Power factor correction Not applicable Account Managers / Energy Services Engineers identify and "deliver" power factor correction The benefits retailers believe they derive from these programs are fairly wide ranging, as illustrated by the survey comments presented below. Aids in managing portfolio risks Provides value added product and services to offer customer sustainable savings in energy cost PHB Hagler Bailly Page 19

22 Enables us to supply a range of alternative products for customers which are environmentally friendly Differentiation of products and services offered Cheaper hot water therefore increase load from electric hot water. Minimise exposure to high pool price Customer relationship building benefits Return on cost of Power Factor Correction job (Margin) Feedback from customers to their host retailers also places the current demand side offerings in a very positive light, with several respondents mentioning that the programs provided: commercial benefits via reduced energy bills and cash returns for customers. a vehicle for illustrating that their business is environmentally friendly and a good corporate citizen. customers with expert advice on energy management matters. Despite these benefits, three retailers did feel that there were aspects of the national market that are acting as impediments to the development of their demand side programs. Rebidding by generators, inaccuracy in demand and price forecasting (predespatch) - DSM customers are not paid by the market for their services in the same way generators Price should go to VoLL when involuntary load shedding occurs (based on recent experience of Vic Government imposed power restrictions) PASA - Forecasting of prices are not accurate Services and support activities that the Retailers believe would enhance their ability to deliver demand side programs to their customers included: Access to "live" consumption data Provide symmetry of information to retailers and generators - demand side bidding program where bids are paid in the same way generators are paid Improved sales channels and support documentation More training for staff Customer awareness training and IT solutions to allow remote access to control rooms Improved IT systems PHB Hagler Bailly Page 20

23 Table 9 - Details of demand side Programs Implemented by Network Service Providers Respondent demand side strategy Target Sector Participants Total MW of demand side capacity NSP 1 Interruptible loads Power factor correction NSP 3 Standby generation Interruptible loads Power factor correction Standby generation Interruptible loads Power factor correction Standby generation Interruptible loads Power factor correction NSP 5 Standby generation Interruptible loads Power factor correction Time-of-use tariffs Fuel substitution Cogeneration Missing Industrial 2 5 Industrial and commercial 3 3 Industrial 2 2 Missing As for the Retailers, the NSP s had also received positive feedback from participants in their programs, noting customer benefits like reduced energy costs and reduced network costs. However, they too felt that aspects of the national market were acting as a barrier to program development. Regulations continually changing; (ie. Revenue cap calculations). Makes it difficult to determine the real financial benefit of the program to the business AGL has a monopoly on the Gas Industry & is blocking real competition. If real deregulation opened up this market, there would be a lot more gas fuel substitution programs occurring The potential for demand side bidding (ie Hazelwood controllable load proposal) will remove any incentive to demand side manage Notwithstanding the barriers cited by the NSPs (and those mentioned previously by the Retailers) both Retail and NSP respondents were generally positive about the operation of their demand side programs and reported that that they would be looking to expand them and increase the participation levels over the next 12 months. PHB Hagler Bailly Page 21

24 5. MECHANISMS FOR ENHANCING DEMAND SIDE RESPONSE IN THE NEM While the findings of this survey indicate that the level of demand side activity in the national market is gaining momentum, there still remains a significant amount of largely untapped demand side resource. It should be recognised that the demand-side is inherently different to the supply-side and these unique differences should be taken into account when formulating strategies for enhancing demand side response. For example, the fact that many end-users do not consider demand side as part of their core business means that innovative approaches for bringing forth this resource will need to be examined. This contrasts with the situation on the supply-side where the supply of electricity is fundamental core business for generators. Based on feedback received from the surveys, mechanisms that may encourage greater demand side participation will need to focus on (but not be limited to) refinements to the Code, improving the awareness and understanding of end-use customers on the national market, particularly the wholesale market, risk management issues and the benefits of demand side participation, and encouraging greater participation in the market by specialist third-party demand side aggregators and co-operatives. The importance of the latter group in facilitating greater demand side response should not be underestimated. Aggregators and co-ops have the potential to play an important role in overcoming many of the barriers preventing customers from taking up demand side activities. Therefore, next steps that could be considered in this process include: conduct a detailed review of the Code to ensure that: demand side aggregators and demand side co-operatives are not disadvantaged and that the Code actively facilitates and encourages their participation, generally strengthen the Code to place a greater emphasis on demand side, with explicit definition of demand side and rules for demand side bidding and taking into account demand-side products available in other markets. follow-up interviews with a number of the market participants that contributed to the survey who felt that certain aspects of the national market were acting as a barrier to program development, in order to obtain further details. The details could be used to inform the Code review discussed above. implement an education program that aims to improve customer knowledge of the national market with an emphasis on demand side and the potential benefits to customers that are able to curtail load at short notice. This could include publishing and promoting case studies of customers that have elected to take part or full spot price exposure, how they manage the associated risk, and the benefits they have been able to achieve. PHB Hagler Bailly Page 22

25 encourage the jurisdictional regulators to review the rules governing the regulated functions of the market to ensure that appropriate signals exist to encourage (and at the very least not discourage) for demand side response as an alternative to traditional network capacity upgrades. PHB Hagler Bailly Page 23

26 APPENDIX A SURVEY GUIDES PHB Hagler Bailly Page A-1

27 DEMAND-SIDE PARTICIPATION SURVEY (Major Customers) National Electricity Code Administrator Office Use Only Organisation Name Site Name Site Street Address Suburb: Site Post Code State: ABOUT THIS SURVEY The purpose of this survey is to collect information about the operation of the National Electricity Market (NEM). This important information will allow the National Electricity Code Administrator (NECA) to assess and monitor the level of demand side management initiatives that may be available to your organisation in the deregulated electricity market has brought your organisation. DUE DATE Please complete this questionnaire and return it in the reply paid envelope by QUESTIONS If you have any enquiries regarding the survey, please contact Paul Dunn of NECA at (08) PHB Hagler Bailly Page A-2

28 CONTACT PERSON Please provide the details of the person who should be contacted if any questions arise regarding this questionnaire. Name: Position: Phone: Fax: Business Details 1 Please give a brief description of the activities carried out by your business at this location. Main Activity: 2 What are the normal operating hours for this site? Hours 3 How many full time personnel are employed at this site? Employees Site Energy Use Details 4 What is the approx. maximum electricity demand of all the sites in your organisation in megawatts? MW PHB Hagler Bailly Page A-3

29 5 How many metered sites does your organisation have? sites 6 When did you first become eligible to choose an electricity supplier? Date Reactions to the NEM 7 Please describe the importance of risk management in your business activities as it relates to electricity supply? 8 Do you perceive that the NEM brings elements of risk to your business? Yes Go to next question No Go to question 14 9 Please briefly describe what you perceive these risks to be. 10 How significant are these risks in the context of your business? PHB Hagler Bailly Page A-4

30 11 Do you rely on external parties to manage these risks? Yes Go to next question No Go to question Who do you rely on to manage these risks? 13 How frequently do you seek their advice? Benefits of Deregulation 14 Does your organisation expect to benefit from electricity deregulation? Yes Go to next question No Go to question What benefits do you expect to realise? PHB Hagler Bailly Page A-5

31 16 What benefits have you realised to date? 17 Are there any aspects of the electricity market that could be improved? Your Responses to the operation of the Market 18 Do you monitor pool prices to gain an understanding of the supply demand volatility of the NEM? Frequently Occasionally Rarely 19 Does your current retail electricity contract have fixed price rates, spot price rates, or a mixture of fixed and spot? Spot Go to next Mixed Go to next PHB Hagler Bailly Page A-6

32 Fixed Go to question Do you control your operations or production processes to manage potential exposure to fluctuations in spot market prices? Yes Go to next question No Go to question Can you describe the load management techniques used? 22 Have you taken steps to manage the risk of price fluctuations in the spot market price by entering into hedging contracts? Yes Go to next question No Go to question Can you describe your hedging arrangements? PHB Hagler Bailly Page A-7

33 24 As an alternative to purchasing electricity under a fixed price retail contract, have you considered the options of switching to a retail contract which includes some form of market price exposure or of participating directly in the NEM? Yes Go to next question No Go to next question Demand side Management via Voluntary Load Shedding Arrangements 25 Do you believe there is a need for incentives to be developed which would promote voluntary load reduction as a means of freeing-up system capacity to meet periods of peak demand and/or curtailed supply? Strongly Agree Agree Disagree Strongly Disagree 26 What are your reasons for giving this rating? 27 What are your expectations of your electricity retailer in promoting demand side capacity resource in the NEM? 28 What are your expectations of your network service provider in promoting demand side capacity resource in the NEM? PHB Hagler Bailly Page A-8

34 29 What are your expectations of the electricity generators in promoting demand side capacity resource in the NEM? 30 Is this site participating in a demand side program? Yes Go to next question No Go to question Is this demand side program an offering from your electricity retailer (retail), your network service provider (NSP) or your generator (gen)? Retail NSP Gen 32 What demand side load management strategy(s) have you implemented? Operate a standby generator If yes, specify MW Reschedule a process or manufacturing operation Switch off non critical loads Equipment cycling via direct load control Interruptible tariff If none of the pre-coded categories apply, please provide your response in the space provided below PHB Hagler Bailly Page A-9