As discussed in Chapter 3, a significant trend in energy consumption
patterns has been the growth of peak demand.
During the course of the inquiry, peak demand was cited as a key driver
of increasing electricity prices and, consequentially, reducing peak demand was
identified as a central tenet of any strategy intended to reduce electricity
For example, Victorian electricity distribution businesses informed the
committee that household electricity consumption has been declining in recent
years—a trend set to continue due to 'improving energy efficiency, penetration
of rooftop photovoltaic systems, changing consumption patterns in the
industrial sector and the response to higher retail electricity prices'.
However, these businesses also highlighted that peak consumption has continued
to increase 'due largely to increased penetration and use of air conditioning
on hot days'.
Similarly, the Energy Supply Association of Australia (ESAA)
demonstrated the relative growth in peak demand in contrast to aggregate demand
growth as shown in Figure 5.1.
Figure 5.1: Peak versus aggregate
As part of its inquiry into electricity network regulatory
frameworks, the Productivity Commission highlighted that driving demand away
from peak periods could negate significant infrastructure costs, a key
contributor to rising electricity prices:
Demand-side management aims to reduce network and generation
costs by changing the pattern of consumption. It usually intends to shift
consumption away from peak demand periods, as these drive marginal generation
costs and network augmentation. One of the criticisms made by Garnaut (2011) is
that network investment has been used too readily in Australia to meet rising
peak demand (notwithstanding static or even falling overall electricity
consumption), when demand-side management might have been more efficient.
While estimates vary across jurisdictions, around 25 per cent
of retail electricity costs are accounted for by temperature driven peak demand
events that occur for less than 40 hours per year (NESI 2011). Trials and case
studies of demand-side management identify potential reductions in peak demand
usually in the order of 5 to 40 per cent. Evidence on how this impacts network
spending is limited, but one Australian study suggests avoidable infrastructure
costs of around 5 per cent, simply from delaying capital investment on a
project by one year through demand response initiatives (CRA 2004).
However, as mentioned in Chapter 3, whether peak demand has been rising
in recent years is the subject of some debate with some evidence suggesting
that over the past four years, both summer and winter peak demand has fallen in
the National Electricity Market (NEM) states.
To address rising peak demand, the Productivity Commission examined
potential benefits associated with demand management:
...because it can:
- avoid an inefficiently high rate of peak demand growth, delaying
the need for network augmentation and reducing the size of the peak-specific
- improve the utilisation (and productivity) of supply side
capacity by allowing financial incentives to shift the timing of electricity
use and reduce the gap between average and peak consumption—achieving
- decrease investment in costly peak-generation and reduce the
generation costs by reducing reliance on higher cost peaking supply (open cycle
- improve competition and reduce the ability of an individual
generator to exercise market power in the wholesale market during congestion at
- improve supply reliability, including increasing load shedding
options and assisting with the restoration of power after loss
- reduce volatility in demand (and wholesale prices)
- allow operational efficiencies for network businesses. Including
from advanced meter infrastructure [for example smart meters and smart grids],
which enables remote access to consumption data, assists with more timely and
less costly disconnection and reconnection, and improves network planning and
detection of outages
in the short term, provide scope for some consumers to receive
reduced electricity bills and, in the longer term, could slow the rate of
growth of future electricity bills for all consumers.
The remaining sections of this chapter explore options for managing
demand in the Australian electricity market.
The benefits of demand management are well recognised
and there are a variety of ways in which demand management can assist consumers
to save energy and reduce peak demand. A study by Deloitte on behalf of ESAA
provided an overview of the benefits from a number of demand management
measures as shown in Figure 5.2. In its draft report, the Productivity
Commission estimated that 'critical peak pricing would produce savings worth
around $100–$250 per household each year'.
Figure 5.2: Total estimated value
of gross benefits 2012–13 to 2021–22 (NPV)
During the course of the inquiry, network businesses, consumer advocacy
groups and academics alike recognised the benefits of and role for demand
management. Victorian electricity distribution businesses stated:
While it is early days, demand management will play an
increasing role, enabling a reduction in network augmentation costs by reducing
the length and extremity of peak demand periods.
The Consumer Utilities Action Centre (CUAC) saw 'room for demand side
participation to increase in the NEM' and was 'broadly supportive of demand
side reform to reduce network costs and peak demand'.
Professor Ross Garnaut was also supportive of demand management
activities as part of the solution to address the current Australian system
...provides incentives for exacerbating peak demand, because at
a time when total demand is falling the only way that the transmission and
distribution companies can expand the regulated asset base, and therefore get
their guaranteed rate of return over more assets, is by exacerbating peak
In most developed countries efforts are made to diminish peak
demand. The curious Australian approach to this—the idiosyncratic Australian
approach to this—is one reason why the ratio of peak demand to average demand
has been rising quite rapidly in Australia over recent years, when it is
falling in much of the rest of the world. Of course it is hugely costly for
electricity consumers to have this exacerbation of the peaks.
The following demand management mechanisms are discussed below:
- cost reflective pricing and smart meters;
- demand side participation in the wholesale market;
- information and consumer empowerment; and
- a range of technological solutions.
Cost reflective pricing and smart
Cost reflective pricing
refers to prices which signal the costs of supplying and transporting
electricity at different times of the day and / or year to consumers in
different locations. Retail prices developed on a cost reflective basis tend to
vary by time of day and sometimes by geographical location.
There is a wide range of cost reflective pricing tariffs including time
of use and variations of time of use (such as seasonal time of use); full
wholesale price pass through (real time pricing); critical peak pricing;
variable peak pricing; peak time rebates and / or incentives; and new forms of
network charges that attempt to capture the cost of peak demand (such as
capacity based charging).
In its Power of Choice draft report (PoC report), the Australian
Energy Market Commission (AEMC) demonstrated the risks and rewards for
consumers associated with various tariffs (see Figure 5.3).
Figure 5.3: Types of tariffs for
cost reflective pricing
The AEMC also explained the reason for implementing cost reflective
A rationale for implementing cost reflective pricing is that
by exposing consumers to the costs they impose on network and generation, they
can respond in ways to reduce these costs over time. This in turn will reduce
energy bills for all consumers in the long run...
[A] survey of domestic and international trials showed that
where consumers are exposed to time varying prices, peak demand reductions of
up to 30 or 40 per cent could be achieved.
Cost reflective pricing requires the concomitant installation of
advanced metering infrastructure (AMI) or "smart meters". Smart
meters are a reasonably new technology that enable consumers to make choices
about energy use by providing real-time information on electricity consumption.
Unlike traditional accumulation meters, smart meters record electricity usage
at regular intervals (for example, every 30 minutes) and, if equipped to do so,
can automatically send the data to electricity suppliers via remote
communication, thereby eliminating the need for manual meter readings.
Smart meters also enable the use of in-home displays, dashboards and web
portals so that consumers can access detailed information about their
electricity consumption. This information can then be used to identify ways to
save electricity, reduce energy costs and compare electricity pricing offers
from competing providers.
In-home displays, dashboards and web portals are discussed in greater detail
later in this chapter.
Smart meters in Victoria
Most Australian consumers have an accumulation meter and not a smart
meter. The notable exception to this is Victoria where smart meters have been
installed in a state government-mandated roll-out that commenced in 2009. It is
expected that all households and small businesses in Victoria will have a smart
meter by 2013.
From 2013, Victorian consumers will have the option of moving to flexible pricing
tariffs, facilitated by smart meters.
The Victorian smart meter program involves installation of 2.6 million
new meters across the state, of which more than 1.2 million have now been
Whilst the Victorian smart meter program has resulted in the detection of
around 13 000 wiring defects that have been rectified to improve consumer
safety, it has also come at a cost to consumers: in 2012, the cost to consumers
of the smart meter roll-out was a net increase of $80–$120
Consumer criticism of and resistance to the Victorian smart meter
roll-out has been well publicised;
the Energy Retailers Association of Australia (ERAA) stated:
...it became a high-profile issue in Victoria and, in some
ways, the way it was done without much consumer involvement, information or
consultation, and they got the cost of the meter upfront without getting any of
the benefits has poisoned the environment around them. [Smart meters] have a
role to play. The major benefits are captured all along the energy value chain
but the major benefits from a customer's point of view going forward is a lot
greater understanding of data on energy use patterns, and more information
means better decision making, remote connection and disconnection.
As a result of the negative consumer reaction in Victoria, in their
submission to the inquiry, Victorian network distribution businesses emphasised
the importance of consumer communication around the implementation of smart
meters and flexible pricing:
- Incentives for change through flexible pricing - the Victorian DBs
support the Victorian Government’s view that introduction of flexible pricing
must be undertaken in an orderly way. It will be important to ensure that
introduction of flexible pricing is supported by a consumer information
campaign and that the pricing structures and their impacts are very clearly
explained, particularly to vulnerable consumer groups. We have been working on
development of flexible network tariffs which will be introduced consistent
with Government policy and appropriate regulation.
- Consumer education - at this stage, consumer understanding of smart
meters and the opportunities they create is limited. Following the Victorian
Government’s decision in December 2011 to continue with the smart meter
rollout, the Government’s consumer communication program has developed
significantly, including the launch of the recent “Switch On” initiative. We
support the Government’s increased communication on smart meters, which we
believe is critical to benefits delivery and take-up.
Smart Grid, Smart City trial
In addition to the Victorian smart meter program, there is currently a
smart grid trial in Newcastle. The federal government has committed up to $100
million to develop the Smart Grid, Smart City trial in the Newcastle region in
partnership with the energy sector.
The demonstration project:
...gathers information about the benefits and costs of
different smart grid technologies in an Australian setting. Building a smart
grid involves transforming the traditional electricity network by adding a
chain of new smart technology. It includes smart sensors, new back-end IT
systems, smart meters and a communications network. Smart grids provide real
time information about the electricity network to make it more efficient and
help reduce interruptions, support more renewable energy and gives households
greater control over their energy use.
The Department of Resources, Energy and Tourism (DRET) described the
benefits of a smart grid:
A smart grid works by combining advanced communication,
sensing and metering infrastructure with the existing electricity network...
A smart grid can improve the reliability of electricity
services for consumers by identifying and resolving faults on the electricity
grid, better managing voltage and identifying infrastructure that requires
maintenance. Smart grids can also help consumers manage their individual
electricity consumption and enable the use of energy efficient 'smart
appliances' that can be programmed to run on off-peak power.
The project commenced in October 2010 and is expected to end in
The committee made a site visit to the Smart Grid, Smart City Centre in
Newcastle on 24 October 2012 and was pleased to be able to view this technology
and its benefits firsthand.
Cost reflective pricing and smart
meters in the NEM
Submitters and witnesses were broadly supportive of cost reflective
pricing, and the installation of smart meters, and acknowledged the benefits
for many consumers in reducing both their own electricity bills and the price
Indeed, the Productivity Commission stated:
A potentially key tool of demand management is the use of
electricity prices that vary to reflect the costs of supply at different times.
In principle, such approaches should help ensure that peak network capacity is
available for high value uses, in part by allowing cheaper non-peak prices for
lower value or less time sensitive uses.
The Productivity Commission continued:
Although not used extensively to date in Australia to manage
electricity demand to households, price signalling appears to the Commission to
offer significant scope to do so.
Most studies find that Australian consumers do adjust their
consumption in response to time-based pricing. For example, across seven
Australian pricing trials, the average reductions in peak demand were between
13–40 per cent (Futura 2011). The extent of response by consumers of course
depends on the strength of the price signal and consumers' ability to adapt. In
particular, when prices are considerably higher during a declared peak
event—so-called critical peak pricing—the reduction in peak consumption is
generally more than four times that under flatter "time of use"
To facilitate cost reflective pricing, the Productivity Commission
recommended establishment of a single set of licence requirements for all NSPs
operating in the NEM.
The Productivity Commission argued that:
Such a change would of course have wider benefits—including
for the transmission component of the NEM and by assisting the introduction of:
- an NEM-wide reliability framework...
- a common and efficient approach across jurisdictions to the
provision of assistance to vulnerable consumers...
The Productivity Commission subsequently recommended that the Standing
Council on Energy and Resources (SCER) initiate a process to establish a
uniform set of licence condition for all transmission and distribution network
businesses in the NEM, and that these conditions should be included in the National
Electricity Rules (NER) and replace current state and territory licence
The AEMC has acknowledged, however, that the majority of consumers do
not receive this sort of cost reflective pricing. It outlined that:
A rationale for implementing cost reflective pricing is that
by exposing consumers to the costs they impose on network and generation, they
can respond in ways to reduce these costs over time. This in turn will reduce
energy bills for all consumers in the long run...
[A] survey of domestic and international trials showed that
where consumers are exposed to time varying prices, peak demand reductions of
up to 30 or 40 per cent could be achieved.
EnerNOC described cost reflective pricing as 'economically elegant' but
offered the following caution:
The dynamic pricing approach is widely praised as
economically elegant, and performs well in some trials, but has not been very
successful in practice. The problem appears to be that customers are reluctant
to expose themselves to such volatile prices that they may be unable to afford
to run their air conditioning when they want it most.
When faced with the risk of very high prices, a very large
proportion of customers is likely to opt out of dynamic pricing in favour of
flatter price arrangements which protect against volatile prices. Of course,
this undermines the objective of dynamic pricing. Mandating that dynamic prices
be passed through to customers avoids this issue, but is likely to be a wildly
unpopular policy, and could cause serious issues for vulnerable customers.
Other submitters were also cautious about the implementation of cost
reflective pricing and smart meters because of concern about low income and
vulnerable consumers' ability to change their pattern (time) of consumption. It
was acknowledged that many low income and vulnerable consumers may be unable to
shift electricity consumption away from periods of peak demand and that
exposing these consumers to cost reflective pricing may result in the perverse
outcome where their electricity bills increase. Ms Carolyn Hodge of the Public
Interest Advocacy Centre (PIAC) summarised the issue:
I think we have to take real care to think about the level of
capacity that consumers have to change their behaviour. I think there are savvy
people who are well-resourced and who can make investments in technology to
understand their energy usage and perhaps invest in some low-control technology
or log on to web portals and understand pricing messages. There are also people
who have a fairly low level of discretionary use. For those people,
understanding that there are critical peak pricing times would only serve to
heighten their anxiety about electricity prices in the knowledge they are going
to have difficulty affording that next bill.
The Total Environment Centre (TEC) had a similar view:
We have always supported the continuation of a kind of safety
net in the electricity market in the form of regulated tariffs, which should be
available to people who might be overly exposed to time-of-use pricing, and we
continue to support that. At the same time, we think it is really important
that more people who can afford to do so do go onto time-of-use pricing. We
agree with the AEMC in its Power of choice draft report that more should be
done with time-of-use pricing.
The AEMC's PoC report flagged 'a lack of metering capability' and a low
level of consumer understanding about the relationship between usage and cost
as impediments to the implementation of cost reflective pricing.
The PoC report suggested that addressing these impediments would 'require a
balance between managing consumer impacts and addressing the needs of consumers
who would face increased financial difficulties under new pricing structures
and strengthening the arrangements for retailers and distributors to set cost
Consequently, the PoC report recommended:
only on introducing time varying prices for the network tariff component of
consumer bills. Retailers would be free to decide how to include the relevant
network tariff into their retail offers; and
residential and small business consumers into three different consumption bands
and applying time varying network tariffs in different ways...
The PoC report also noted work by SCER examining the business case in
different jurisdictions for the implementation of smart meters.
SCER found that industry-led installation of smart meters was 'currently at a
low level' but could be expected to increase in the future.
SCER identified several impediments to industry-led roll-outs:
- split incentives between the various industry players (given the
disaggregation of distribution and retail functions), consumers and society.
- different regulatory treatment of different meter types, which
places legal restrictions on contractual options for retailers and customers
and encourages distributors to focus on approaches that receive regulatory
- a lack of transparency in metering charges where these are rolled
into distribution use‐of‐system charges, which
prevents full comparison of price and service for different metering options
and between metering providers.
- a lack of clarity regarding access to meter data and control
functions by various industry sectors such as retailers, distributors and
The first issue may be addressed as technology prices come
down and businesses are able to make an internal business case or establish
appropriate contracts to aggregate benefits across the supply chain, while the
later issues are matters to be considered by market institutions and policy‐makers, through either
rule changes or the development of the AER’s regulatory approach to metering
and related services. The fourth issue is critical, as it relates to the
governance of fundamental meter data and can impact the way industry sectors
The PoC report proposed a three-tiered model for implementing cost
reflective pricing, as shown in Figure 5.4 below. Deliberately, the PoC report
did not define the thresholds for each of the consumption bands arguing that
these thresholds would likely vary between jurisdictions and over time.
With respect to smart meters, the strategy proposed in the PoC report would
require band 1 consumers (large consumers) to have a smart meter; band 2
consumers (medium to large consumers) would be deemed to have a smart meter (by
virtue of being deemed to be on a time varying network tariff) with the ability
to "opt-out"; and band 3 (small consumers) would be deemed to have an
accumulation meter (by virtue of being deemed to be on a flat network tariff)
with the option to "opt-in". The combined strategy for implementing
cost reflective pricing and smart meters, as suggested in the PoC report, is
summarised in Table 5.1.
As raised earlier, the implementation of smart meters in Victoria
emphasised the need for appropriate and thorough consumer education and
engagement. The importance of this education and engagement was discussed in
the PoC report
and was re-iterated throughout the inquiry; for example, Victorian distribution
network businesses stated:
Historically, the biggest issue facing the Victorian rollout
has been the lack of effective communication of the vision. In any future
rollouts a comprehensive communication and education program about smart meters
and how to harness them is essential.
The Consumer Action Law Centre (CALC) also noted the need for consumer
as did CHOICE.
Figure 5.4: AEMC proposed strategy
for implementing cost reflective pricing
Table 5.1: Model for implementation
of cost reflective pricing and smart meters
Cost reflective network
Medium to large
Deemed to be on a cost
reflective network tariff (with a smart meter)
Option to move to a flat
network tariff (no smart meter required)
Small to medium
Deemed to be on a flat
network tariff (no smart meter required)
Option to move to a cost
reflective network tariff (with a smart meter)
The committee recognises the significant benefits that can be delivered
by cost reflective prices and smart meters: given network costs associated with
infrastructure to meet increasing peak demand appear to be one of the most
significant drivers of recent increases in electricity prices, it seems that
cost reflective pricing and smart meters have a role to play in modifying
patterns of electricity consumption and reducing peak load.
To this end, the committee agrees with the recommendations of the PoC
report regarding the gradual introduction of cost reflective pricing and smart
meters. In this respect, the committee supports the introduction of cost
reflective pricing and smart meters as shown in Table 5.1. However, it is the
committee's view that any introduction of cost reflective pricing and smart
meters must also include explicit consumer protections, in particular for low
income and vulnerable consumers. Whilst the three-tiered model goes some way to
protecting small to medium consumers, further consumer protections are needed
and these are discussed in Chapter 6.
The committee believes that prior to and during the roll out of cost
reflective pricing and smart meters, there must be a comprehensive consumer
information and education campaign. As demonstrated by the experience in
Victoria, it is essential that consumers understand the costs as well as the
short- and long-term benefits associated with cost reflective pricing and smart
meters that accrue both to them and to electricity network businesses and
retailers: the consumer information campaign must seek to ensure that consumers
understand these costs and benefits.
Noting that the business case for implementing smart meters will likely
differ between jurisdictions, meaning that the time and circumstances in which
smart meters are implemented will also differ between jurisdictions, the
committee recommends that implementation of cost reflective pricing and smart
meters occurs in a planned, logical sequence: the committee feels that the way
in which the digital television switchover was rolled-out by pre-determined
geographic locations warrants consideration as a possible model. Such an
approach would assist with planning and allow consumer information and
education to be targeted to the needs of consumers in each location.
The committee recommends that SCER agree to introduce cost
reflective pricing for electricity in conjunction with smart meters in all jurisdictions
in the NEM:
- based on the model proposed in the Power of Choice draft
report comprising three consumption bands for large (band 1), medium to large
(band 2) and small to medium (band 3) consumers;
- where smart meters are mandated for consumption band 1, opt-out
for band 2 and opt-in for band 3; and
- accompanied by a comprehensive consumer information and education
campaign funded by the Commonwealth, state and territory governments during
both the planning and implementation phases.
Demand side participation in the
The PoC report made a number of recommendations to enhance consumer
participation in the wholesale market and ancillary services market, noting
that this would increase competition among network businesses. The PoC report
identified certain barriers to this process such as:
- commercial practices;
- current rules;
- the risks of consumers being exposed to the spot price;
- the cost of participation relative to the benefits; and
- the current inability to "unbundle" the sale and supply
of electricity provided through a retailer.
To address these barriers, the PoC report recommended the creation of a
demand response mechanism whereby demand side participation in the wholesale
market was enabled:
AEMO pays consumers for the quantity of demand response
delivered to the market during the trading interval at the spot price. As a
result, consumers participating in the mechanism pocket the difference between
the spot price and the retail price (energy component).
This mechanism rewards consumers for reducing their consumption by a set
amount through a payment for "demand resources" analogous to the
wholesale spot price. The amount of demand resources payed to a consumer would
be calculated as the difference between the consumer's actual metered
consumption and their baseline consumption (an estimate of what their
consumption would be had they not changed their consumption).
The PoC report described the demand mechanism thus:
Under this mechanism it is necessary for consumers to
continue paying their retailer for electricity according to their estimated
baseline consumption. Similarly, consumers' retailers are required to pay the
wholesale market spot price according to their estimated baseline consumption.
This arrangement allows for AEMO to recover enough funds to pay consumers [or
an aggregator on their behalf]
for their demand response at the wholesale price. The total net benefit to
consumers of providing the demand response under this mechanism is the spot
price minus energy component of the retail price (this excludes the opportunity
cost of not consuming).
The PoC report found that the costs associated with this proposal
would be limited to administrative costs as many of the provisions needed for
operation of the mechanism are already in place. These costs would arise from
the development of new procedures and guidelines for registering demand
resources and changes to the settlement process to account for the recovery of
funds. The PoC report noted that no major changes to metering procedures would
Figure 5.5: General design of
demand response mechanism
Dr Paul Troughton, Manager of Regulatory Affairs for EnerNOC, described
an example of this type of demand side participation in the wholesale market:
EnerNOC is a demand response company. By demand response we
mean paying electricity users for measured reduction in their consumption at
times when the grid needs it—when either there is a physical issue or prices
are very high. Everywhere around the world that demand response has been
allowed to compete in the market, it has proven to be the cheapest way of
dealing with critical peaks in demand. This is really what the NEM needs. Peaks
are the root of all evil in the NEM at the moment, and they do need to be
fixed. The fundamental idea is that it is much cheaper to pay people who are
willing to change their behaviour for a few hours in a year to do so than it is
to build a load of infrastructure that is only going to be used for those few
hours in the year. 
The committee also heard from Dr Troughton that commercial and
industrial demand response has some significant policy and cost of
The interesting thing about looking at commercial and
industrial demand response, which is what we do, is that it does not need any
subsidy and it does not need a smart meter rollout. It does not need a consumer
protection campaign. It does not impact on vulnerable consumers. It is just
about reaching out specifically to people who are able and willing to make
changes and giving a very pointed incentive to them to do so. 
The committee was informed that the initial design for the NEM focussed
on the supply side. Whilst this has been good for security of supply, it has
had some negative impacts, including on networks costs, because of the need to
predict demand rather than treat demand in a more dynamic way:
It treats electricity demand as being an unchangeable
fact—that you forecast it and it will come—and then it is the purpose of the
electricity market to give enough strong incentives for all of the various
participants to go out and build the infrastructure needed to meet those
forecasts. And that has worked, in that the lights have stayed on, but it is a
very expensive way of doing things. If you can move away from this predicting
and providing into trying to see whether you can treat that forecast as not
being unchangeable, then you can get a more intelligent and cheaper outcome.
We have known about this supply-side bias for a long time,
but it has not yet been fixed. There have been lots of reviews and lots of
vague recommendations but no actual meaningful action. While that has been
going on for the last decade, $16 billion worth of supply-side infrastructure
has been built, and that should not have been needed.
The AER indicated that in its view the next wave of reforms would be at
the consumer end:
We are seeing there—and this is acknowledged through power of
choice—that at the customer end customers will make the choice of local
generation—that is, solar or other domestic generation—of demand management, of
storage as we see in the future electric vehicles coming on to the scene and of
grid services. That is a recognition of very significant changes in the
electricity market over the medium and longer term.
In EnerNOC's opinion, creating a market for demand side bidding would go
some way to addressing increasing peak demand and reduce the need for further
...if you address peak demand—the very narrow, sharp peaks in
demand—through demand response rather than by building network infrastructure,
it is so cost-effective by comparison that you can afford to make it
considerably more profitable for the network business so that it is really a
no-brainer for them to do it. And, looking at the whole picture, everyone comes
out ahead. The total costs are reduced. There is more profit there but much
less spent in total, so consumer bills come down. That is what a solution has
to look like.
Such an approach was also strongly supported by the Energy Efficiency
which stated that it 'solves multiple problems':
First, allowing energy users to sell reductions in energy
demand into the market provides a time-of-use price signal to large energy
consumers that encourages them to conserve energy during periods when supplying
energy is expensive. Currently, very few large energy users face a price signal
that reflects the true cost of supply at that time.
Second, the price signal for consumers would be set by the
generation market. In other words, consumers would only be paid to reduce their
demand if it was cheaper than generation. In the short term this would increase
competition in the energy market and reduce the wholesale price for
electricity, reducing electricity prices for all consumers. In the long term
this would reduce the need to build very expensive peaking generators and
networks...reducing the growth in electricity prices for all consumers.
Third, these changes would make it easier for third-parties
that are experts in reducing peak demand to help consumers to optimise their
energy demand patterns. Allowing consumers to sell demand-response into the
market provides a clear value for this demand-response, facilitating commercial
Fourth if this market were established it would also enable
meaningful volumes of peak reduction to be developed and sold to network
companies This would help reduce expenditure on transmission and distribution
infrastructure and partially address the split incentive, whereby the benefits
of demand-side actions are split between several parties.
The committee agrees with the proposal for demand side participation in
the wholesale market as advocated in the PoC report and supported by various
submitters and witnesses to the inquiry. Offering consumers the opportunity to
reduce their peak demand and to be financially rewarded for doing so appears to
the committee to be the "carrot" to the "stick" of cost
reflective pricing. Further, the committee acknowledges that the costs
associated with introducing this new wholesale market participant appear to be
low. On that basis, the committee supports the introduction of a demand
response mechanism that allows consumers to sell their demand in the wholesale
electricity market for the prevailing spot price.
Where such a mechanism enables third parties to sell demand in the
wholesale market on behalf of consumers, these third parties must be
accredited, authorised to act on behalf of and required to act in the interests
of consumers. The committee proposes that SCER examine incorporating the
accreditation and regulation of these third parties offering demand management
services in the National Energy Customer Framework (NECF).
The committee supports the proposal in the AEMC PoC report for consumers
or authorised third parties representing consumers to sell their demand in the
wholesale electricity market for the prevailing spot price. The committee is
also pleased to note that such a mechanism will be in place by 1 July 2014.
The committee recommends that SCER examine incorporating the
accreditation and regulation of third parties offering demand management
services in the National Energy Customer Framework (NECF).
Information and consumer
The need for better quality and more readily available information for
consumers was cited by various submitters and witnesses and identified by many
of these as a way in which demand for electricity could be modified for the
benefit of consumers via reductions in demand and electricity prices.
As Mr Terry McConnell stated:
...the energy business is incredibly complicated. We have heard
before about the acronyms within the energy sector. There are many of them. The
problem is this business is technical, it is complicated, and the average
punter simply does not understand it fully. What I have pushed for since I
started working in the sector is education, education, education. Anything that
we can do to improve the education of the consumer, whether they be residential
or even the commercial, industrial consumers, will make a difference. We need
dashboards, in-house home displays, price signals and whatever else—we need to
do all of that.
The complex and technical nature of the electricity market together with
barriers to consumers accessing data and information prevent consumers from understanding
their electricity consumption, as well as the relationship between this
consumption, the wider electricity market and drivers of increasing electricity
prices. CHOICE described the combination of 'rapidly rising prices and
generally poor information' as 'a "perfect storm" in which consumers
find it difficult to navigate an increasingly complex market'.
CHOICE argued that better information and data made available by
advances in technology 'has the potential to empower energy consumers to make
more informed decisions, and achieve greater product differentiation in
Further, CHOICE raised the Commonwealth government's 2012–13 Budget proposal
...a scoping study on the establishment of an energy
information hub to improve energy information disclosure by retailers and
distributors in order to help consumers to better understand and manage their
and recommended fast-tracking this proposal to:
...enable consumers to identify energy efficiency options.
Providing wider access to this consumption data, with appropriate privacy
safeguards, would also encourage genuine competition and product
differentiation in energy retailing and promote cost-effective distributed
CUAC similarly advocated for improved consumer information and support
for consumer decision making
as did One Big Switch:
Data is power. The energy usage data that we generate as
consumers is incredibly valuable, and we want some of that value to flow back
to consumers in terms of the decisions they make.
At present I have seen in some of the retailers' reports
around this that they are worried about confusing consumers; they are worried
that this data might get out. We would point to examples overseas, in America
and in the UK, where this data is becoming more and more freely available.
People can make it available under privacy and security arrangements to trusted
third parties who will interpret it and give them the information they need in
terms of energy efficiency or, it might be, switching to other plans. We
believe that getting the data out there is absolutely vital. The
retailers—Origin and Energy Australia—are doing various trials around this with
web portals or whatever. That is great and that sort of innovation is to be
welcomed; but it is also really important that we unlock the creativity of
software developers and people who write apps because it is that kind of area
which can come up with some great ideas. In America for example there is a
Facebook application that can tell you how you compare a benchmark against
similar people in terms of the savings you make. That makes a big difference.
It really is about control. People want control. We just did
the Big Electricity Switch. We believe people wanted to do something; they felt
powerless through far too much of this process. Please give them the
opportunity to do something. We believe that they will take it and shake it
with all hands.
In addition to the suggestions to provide consumers with greater direct
access to their information and data, the EEC highlighted the role of market
intermediaries to 'reduce the impact of information barriers by using economies
of scale to develop skills, gather information and perform functions on behalf
of multiple consumers'.
The EEC argued:
The structure of the NEM already implicitly accepts that
information barriers exist and that market intermediaries have a critical role
to address these information barriers. On their own, most energy consumers
would find it extremely difficult to secure an affordable and low-risk energy
supply by purchasing energy directly from the wholesale market. Retailers have
a critical role in securing energy supplies and hedging energy costs on behalf
of consumers...Unfortunately, the NEM structure currently impedes consumers
engaging third parties to optimise demand, as consumers cannot easily
commoditise the value of demand response separately from their overall energy
contract. If consumers could commoditise the value of demand-response this
would create a revenue stream that third parties could use to cover costs and
reward the responsive energy consumers.
To address the paucity of information available to consumers, the AEMC's
PoC report recommended a number of regulatory reforms:
- Changes to the NER to clarify the requirements on a retailer to respond
to a consumer's request for access to their energy and metering data.
- New provisions the NER and NECF that require, at a minimum, a retailer
is to provide residential and small businesses consumers with information about
their electricity consumption load profile (ie timing of use over a period).
- A new rule that would require AEMO to publish market information on
representative consumer sector load profiles. Broader market information would
assist parties to develop products and services and improve the efficiency of
the energy services they offer to consumers.
The committee agrees with those submitters and witnesses who argued for
better quality and more readily available information for consumers. Relieving
pressure on electricity consumption and prices can only be enhanced by giving
consumers access to data and information which subsequently enables them to
make more informed decisions about retail electricity offers best suited to
their circumstances, as well as understand how they can change their individual
pattern of consumption to reduce their electricity costs.
Therefore, the committee supports calls for the quality and availability
of information and data for consumers to be improved.
Other mechanisms to reduce demand
Mechanisms by which consumers' electricity consumption and bills could
be reduced were the subject of much discussion during the course of the
inquiry. In particular, submitters and witnesses raised:
- in-home displays, dashboards and web portals;
- direct load control;
- energy efficient appliances and housing; and
- technological advances, such as embedded generation.
These are discussed in the following sections of this chapter.
The importance of protecting consumers generally, and low income and
vulnerable consumers specifically, was considered in the context of these
mechanisms during the course of the inquiry. Some ways in which consumers could
be protected were also raised: for example, opt-in cost reflective pricing, a
social tariff and the energy efficiency of appliances and housing—together with
federal and state and territory government assistance programs—were proposed as
components of a possible solution and are discussed elsewhere in this report.
In-home displays, dashboards and
The committee noted the development of technologies such as in-home
displays, dashboards and web portals that potentially give consumers instant
and more dynamic access to their energy data (in comparison to that available
on their bills). As discussed above, Mr McConnell suggested that '[w]e
need dashboards, in-house home displays, price signals and whatever else—we
need to do all of that'. 
The ERAA highlighted the introduction of in-home displays in Victoria
and the benefits these can offer consumers:
In Victoria there are things called "in-home
displays" being distributed which help to give information inside about
pricing at particular times of the day. I think this whole area of technology,
if you see how the digital economy has revolutionised so many industries, puts
us on the cusp of the digital industry really changing the range of product
offers and options for consumers in the electricity game.
The PoC report demonstrated the positive impact smart meters together
with technology such as in-home displays and web portals can have on reducing
peak demand usage (Figure 5.5):
[The] figure...shows a summary of peak demand reduction results
of seasonal time of use (STOU) and dynamic peak pricing (CPP in this case)
trials recently conducted by Ausgrid, Endeavour and Essential Energy. It shows
that potential impact on peak demand of applying more time varying tariffs in
the NEM. It also shows that the impact can be greater where the tariffs are
supported through better communication channels (for example, webpages or in
home displays (IHDs).
Figure 5.6: Summary of peak demand
reduction results from DSP trials in Australia – use of web and in-home
However, it was also brought to the committee's attention that
implementation of in-home displays and web portals may encounter some
complications with the competition principles under the NEL:
Allowing distributors to offer new contestable services, such
as DSP, may be inconsistent with the Competition Principles Agreement’s
objectives and could create risks for the National Energy Retail Law (NERL).
This is of particular concern where distributors provide direct information to
consumers about specific products related to energy use such as direct load
control, in-home displays, smart appliances and home area networks.
While advocating the use of smart meters and dashboards,
Mr Christopher Zinn from One Big Switch also noted some challenges
that need addressing in the implementation of such technologies:
We would advocate smart metering and dashboarding—first of
all, the cost was laid directly to the consumer without any benefit being
explained to the consumer, as I understand it. We believe there is a benefit
that flows to most consumers through smart metering. In a way you cannot hold
back technology. Quite how that is paid for, there are various ways to slice
and dice it. In the retailers' submission they have given various scenarios for
that. I would not like to think that the fact that there are difficulties in
working out how it is going to be paid for is going to hold us back from the
bigger impetus that the technology is really going to help. Unless people can
measure and understand it, how on earth can they save it?
But I hasten to say you can have all the
smart meters and dashboards in the world but you have got to build in some
incentives for people to actually use them. One concern would be, and I know in
Victoria under various schemes there are various people doorknocking and
handing over dashboard style devices to people, how you get people to use
devices. How do you make them appreciate that there are real savings and
benefits for them from that? It is not always straightforward.
During its site visit to the Smart Grid, Smart City Centre on 24 October
2012, the committee heard that uptake of in-home displays and web portals by
consumers participating in the Smart Grid, Smart City trial had been high. With
regard to web portals, the committee was also informed that once the required
IT systems had been put in place it was a straightforward process to give
consumers access to their consumption data in real time.
Direct load control
Direct load control describes the capability of an energy provider to
control consumers' electricity directly by turning-off or cycling electrical
appliances (typically air conditioners and pool pumps). This activity is
targeted at moving demand away from peak periods and is usually applied to
residential consumers to ensure an energy provider has enough power to meet
demand. Direct load control is typically voluntary, with energy providers
offering bill credits to consumers who participate.
The CALC informed the committee that:
In our view, there are significant opportunities to be found
in other non-price-based solutions that are less dependent on, or indeed work
with, consumer behaviour. For example, we strongly believe that demand load
control must be considered for appliances such as air conditioners and pool
pumps. Demand load control involves arrangements between a supplier and a
residential consumer where equipment is installed that allows the supplier to
manage an electricity appliance owned by the consumer for a specified amount of
time in return for a payment to that consumer. For example, an air conditioner
might be cycled off during hot periods for, say, 10 minutes every hour. This is
the policy equivalent of putting the alarm clock on the other side of the room. 
CALC also suggested that different approaches may be preferable for
appliances with smaller loads:
For smaller loads relating to appliances such as dishwashers,
washing machines and dryers we do believe that educational campaigns can
provide an effective and efficient alternative. Simple campaigns calling on consumers
to do the right thing are a safe and inexpensive way to reduce consumption or
load shift. There are simple messages to be conveyed why households should aim
to use dishwashers and washing machines after 10 pm and how they would benefit
by doing so. We would note the significant success of the recent Save Water
Target 155 campaign here in Victoria. The three metropolitan water retailers
have stated that that campaign saved 60 billion litres of water.
The ESAA voiced its support for direct load control among other
approaches to demand management but noted the importance of careful management
of these options in the future:
In terms of demand side management, direct load control,
which is the ability of the network to turn down air conditioners and compensate
those households through a different pricing arrangement, is a very valuable
technology that can make material savings to household bills. We think that
there is a very high likelihood of the rise of distributed generation and
storage, and not just solar PV but other technologies complementing that, and
that process will continue. How we manage that will be crucial to the
affordability of energy in the future.
Direct load control trials
A number of network businesses are currently exploring direct load
control devices. For example, South Australian distributor SA Power Networks is
conducting a trial of direct load control devices in air conditioners which
turn off the compressor but not the fan to ensure comfort is maintained.
Consumers in this trial are given payment in return for giving the SA Power
Networks authority to limit their use of air conditioners at certain times
during the summer.
To date, the trial suggests a 19–35 per cent reduction in peak load.
Queensland distributor Energex is also running trials offering
residential consumers an incentive payment in return for installing an energy
management device in pool pumps, air conditioners and hot water units.
The committee also notes that a trial of direct load control air
conditioners in Perth showed that reductions in peak demand of 20 per cent were
achievable through cycling air conditioners.
Using energy more efficiently can reduce consumers' electricity
consumption, subsequently reducing overall demand and placing downward pressure
on electricity prices. Improvements in energy efficiency are often considered
to be the "low hanging fruit" of electricity consumption and emission
reduction efforts, as they are arguably the easiest, simplest and most cost
efficient ways of doing so.
For example, in 2007 the Australian Bureau of Agricultural and Resource
Economics and Sciences (ABARES) estimated that 55 per cent of Australia's
emission reduction target to 2050 could be met through energy efficiency
The positive contribution of energy efficiency was supported by
submitters to the inquiry:
Energy efficiency is the low hanging fruit in the price rise
challenge. Indeed, energy experts worldwide agree that it is by far the best
option of cheaply reducing emissions and dealing with rising bills
Energy efficiency has a downward impact on electricity prices
in two ways. First it defers the need to invest in new generation and network
capacity. Second it has a downward impact on wholesale electricity prices due
to a reduction in demand. Energy efficiency is also likely to lead to a
reduction in peak demand.
ESAA flagged that further reductions in electricity consumption can
still be derived from improvements in energy efficiency but voiced:
One of the frustrations we have is that the perception of
energy efficiency is things like low-energy light bulbs and televisions which
are relatively second- or third-order ways to save energy. Frankly, the cost of
the related systems—whether Foxtel or other things—is far more substantial than
the energy used to run those appliances. By contrast where you really do want
to focus households' attention is on energy savings in heating air and
water—so, heaters, air conditioners and hot-water systems. With the current increases
in energy bills, households almost invariably benefit from going to our
five-star solar hot-water system or a gas five-star system and spending a bit
extra to get the payback a lot quicker. It is the same with buying much more
efficient heating and cooling for their houses, whether they rent or own, by
spending more on an air conditioner if they can afford to. We are trying to
change that focus from being on things that are symbolic and small rather than
things that actually make a material difference. It will become an issue that
the upfront capital cost of more efficient technologies by definition tends to
be more expensive and it at least explains what the payback is and why it is
still a prudent investment. It may be that from work on this issue, it will
drop out how we can trigger that smarter purchase.
The Commonwealth and state and territory governments currently have
various strategies in place to assist consumers to improve their energy
efficiency. Some of these programs are discussed below.
As part of its climate change plan, the Commonwealth government noted
that 'increased energy efficiency will have multiple benefits: lowering carbon
pollution, improving energy security, and helping households and businesses
cope with rising energy prices'.
Figure 5.7 provides an overview of government energy efficiency measures.
Figure 5.7: Overview of government
energy efficiency measures
Greenhouse and Energy Minimum
The Greenhouse and Energy Minimum Standards came into effect on
1 October 2012.
The framework, developed jointly with New Zealand and Australian states
and territories, delivers consistent information and energy standards to
consumers by combining all state and territory regulations into one framework,
overseen by a single national regulator.
National Energy Savings Initiative
In October 2010, the Prime Minister's Task Group on Energy called for
'the introduction of a transitional energy savings initiative to replace
existing and planned state energy efficiency schemes, subject to detailed
consultation on its design'. The Commonwealth government agreed to undertake
detailed policy analysis and economic modelling to 'expedite the development of
a national energy savings initiative' (ESI) in consultation with the public and
In line with this commitment, the government established an ESI Working
Group comprising officials from the Department of Climate Change and Energy
Efficiency (DCCEE) and the DRET. The working group is assisted by an advisory
group comprising state and territory government officials and representatives
from industry, energy, community and environmental groups.
The ESI Working Group is currently examining the costs and benefits of a
national ESI and intends to release a draft Regulation Impact Statement for
consultation in the second half of 2012. Following this, the ESI Working Group
will present final recommendations to the government.
Energy efficiency programs
In addition to the ESI working group, there a number of government
energy efficiency programs on a national level currently underway. These
- Energy Efficiency Opportunities (EEO) program – encourages large
energy-using businesses to improve their energy efficiency by requiring them to
identify, evaluate and report publicly on cost effective energy savings
opportunities. Participation in the program is mandatory for corporations that
use more than 0.5 petajoules (PJ) of energy per year (equivalent to the energy
used by 10 000 households);
there are more than 220 corporations (incorporating around 1200 subsidiaries)
registered for the program (representing more than 60 per cent of the total
amount of energy used by businesses, and around 45 per cent of all energy used
- Energy Efficiency Information Grant – $40 million over four years
allocated to industry and not-for-profit associations to assist them to provide
information on the smartest ways for small to medium sized enterprises to
reduce energy costs.
- Community Energy Efficiency Program – over $42 million in matching
funding distributed to 63 local councils and non-profit organisations to
undertake energy efficiency upgrades and retrofits to buildings, facilities and
- Low Income Energy Efficiency Program – to provide grants to
government, business and community organisations to trial approaches to improve
the energy efficiency of low income households.
State based energy efficiency
There is a range of state energy efficiency policies encompassing a
variety of initiatives, including:
- the provision of information to consumers;
- regulation of minimum standards;
- rebates and grants and the use of state based targets.
State schemes that offer incentives to adopt energy saving measures
these include the:
- Energy Savings Scheme (ESS) in NSW;
- Residential Energy Efficiency Scheme (REES) in South Australia;
- Victorian Energy Efficiency Target (VEET) scheme;
- the ACT will commence a scheme in 2013.
The committee shares the enthusiasm voiced about energy efficiency and
its role in reducing consumption of electricity during the course of the
inquiry. The committee supports the federal and state and territory
governments' ongoing commitments to improving energy efficiency via the
Greenhouse and Energy Minimum Standards (GEMS), energy savings initiatives and
a range of energy efficiency programs and grants.
The role of embedded generation
such as co- and tri-generation was discussed during the course of the inquiry.
Co-generation is the simultaneous production of electrical energy and
thermal energy, and is also referred to as combined heat and power.
Tri-generation is the simultaneous production of electrical energy, thermal
energy and cooling.
Co-generation and tri-generation can use a variety of fuels however the
majority of co-generation and tri-generation facilities in Australia use
natural gas due to its availability, cost and greenhouse intensity.
Co-generation and tri-generation is most attractive at sites with a large
heating or cooling load, and can produce energy with a third of the emissions
associated with coal-fired power.
Embedded generation, such as co- and tri-generation, also has the
ability to reduce electricity prices because electricity does not have to be
transmitted over long distances along expensive infrastructure. The EEC
The value of cogeneration is when it is being supplied and
where it is being supplied. It is very expensive to transmit electricity, but
you are often just transmitting it next door at a very low cost....At the moment
there is not a good way to capture the value. You are often paying a very
inflated distribution use of system charge, which does not reflect that you are
carrying it only this far as opposed to all the way from Hunter Valley or
Playford B, or wherever you are bringing the electricity from.
The Clean Energy Council (CEC) described co-generation and
tri-generation as providing distributed power generation at or near the point
of consumption which lessens the need for expansion of the grid: 'This reduces
transmission losses, stabilises the electricity grid and lessens the impact of
rising electricity prices'.
The simultaneous generation of electrical and thermal energy provides
greater energy efficiency than systems providing power and heat separately:
Less fuel is required to produce a given amount of energy
because the conversion and transmission losses associated with the separate
production of power and heat are avoided. This reduces the demand and costs
associated with providing power and heat to a facility.
Australia has a number of sites operating co- and tri-generation
facilities, with hospitals being a good example where co-generation can offer
additional benefits like improving the security of electricity supply.
Low Carbon Australia advised the committee that because there are
different regulatory arrangements in each state and territory, each project for
co- or tri-generation must be dealt with on a case-by-case basis:
...every single case really involves quite a complex regulatory
set of approvals for every proponent, which does act as a detractor for a
number of the operators. It is the same for any of the large manufacturing
plants that are putting in biogas operations, for instance. These approvals
really do need to be streamlined, but we have not documented individual cases;
we just know that it adds significantly to the cost and also to the project
time lines around getting approvals to install and connect, let alone actually
being able to feed back into the grid.
The Energy Efficiency Council (EEC) also raised some issues connected
with co- and tri-generation:
Any embedded generation in a building that runs in parallel
with the grid—so it is contributing electrons to the building while the grid is
contributing at the same time—can technically export. The equipment that is in
place can physically send electrons out of the building for the betterment of
the outside world. There are a couple of locations in Australia where the
network company has prohibited an on-site generator from running in parallel,
for a number of reasons. So we have sites where engines run and supply specific
load in the building. There would need to be technical equipment put in to
allow them to export, and some agreement with the network company, but the vast
majority of the embedded generators in green buildings, as a generic term,
would be synchronised with the grid.
The problem was described as being '...a situation where, if you have
energy in a building and it is exporting into the market, the money you are likely
to get back from your retailer for the electricity that you export does not
cover the cost of you generating it, even though it is probably being used in
the building or next door at a much higher rate'.
The EEC further highlighted some of the barriers to uptake of embedded
generation. According to the EEC:
...the NEM was designed around the ongoing operation of an
electricity system that predominantly consisted of large generators in a small
number of regions and extensive transmission and distribution networks. As
such, the rules, regulations and technology that are in place have created many
anticipated and unanticipated barriers to the uptake of distributed generation.
The committee understands that as soon as the generating organisation
exports the electricity, it becomes very expensive to do so.
The EEC described the current system as 'a very expensive and inappropriate way
to integrate that generation into the network'
and alerted the committee to the systemic disadvantage to the 'first-mover' who
initiated the first connection to the distribution network:
...with cogeneration if you are the first unit into an area
there is a cost to augment the network, but for the three or four who come
after you it is free—there are no augmentation costs. And then it goes again,
and the next person has to pay a huge fee. It is a completely inappropriate
system that was not set up for distributed generation...
The CEC believed that connecting to the network was a significant
impediment and alleged that transmission businesses block access to new
The CEC acknowledged that the AEMC had 'recognised it is a problem' and as a
result was conducting the Transmission Frameworks Review.
Mr Russell Marsh, Director of Policy at the CEC, stated:
One of the things we say is that a lot of the time the
generators—the guys who are trying to put in the renewable energy plant—are
effectively negotiating with one hand tied behind their backs because they do
not have access to information that the transmission companies have. Whilst the
transmission companies and the regulator will insist that it is a level playing
field, if you talk to some of the developers one of the biggest problems they
have is that transmission companies—and it is the same in the distribution
network—have all the data as to the process, what the benefits or otherwise are
and what the cost of the connection would be. It is very difficult for the
developer to get access to that information, so they are not able to have a
negotiation with the transmission operator or the distribution operator on what
they would call a fair basis because they effectively have one hand tied behind
As you know, the transmission framework review is going on,
and one of the things that is looking at is how to improve the connections
process. To the credit of the AEMC, they have recognised it is a problem. We
have some concerns as to some of the proposals they are putting forward to try
to solve that. We are not sure that their proposals at the moment solve the
problem that has been identified but it is clear that they have identified that
there is an issue around the connection process, particularly for renewable
energy technologies. We are working quite closely with them to try to
understand a bit more about the proposals have come up with quite recently, and
why we do not think that they necessarily do the job that the AEMC think they
are. Hopefully, as the transition framework review process moves forward we may
get some clarity and some improvement in that process.
In order to try to fix some of these problems, the committee heard that
a major review of the current model was required, including a review of the
revenue model that currently operates.
The EEC called for 'barriers to distributed generation, including access
and cost sharing arrangements' to be addressed
and argued that:
Removing the barriers to DG distributed generation would
contribute to many of the NEO’s goals. For example, appropriately sited, sized
and managed distributed generation can:
- Reduce electricity prices by avoiding or deferring investment in
supply-side infrastructure; and/or
- Improve safety in regional areas by obviating for the need for
long-distance distribution systems that create bushfire and other safety
The EEC went on to recommend:
- a long term process to set up systems to ensure distributed
generators can secure a fair return for the value of embedded generation;
- streamlining and regulating the process for connecting
co-generation to the grid; and
- targeted support for innovative applications of embedded
In addition, the EEC was eager to ensure that embedded generators are
supported and provided incentives to reduce network investment. To achieve
this, the EEC put forward two proposals: a requirement for network businesses
'to provide robust and timely data on upcoming network constraints and the
value of deferral'
and '...a transparent, location-specific network support payment [to embedded
generators] where they reduce or defer expenditure on the grid'.
Residential and other solar
The committee received information about residential and other solar
programs and wants to draw attention to several key points as they relate to
As noted in Chapter 3, there are differing views about the impact of
residential solar PV systems on the cost of electricity. Some of the generous
feed-in-tariffs (FiTs) in the early state and territory programs may have
contributed to price increases, but more recent arrangements, together with a
potential reduction in demand and the potential savings on networks costs may
lessen the price impacts of residential solar PV and even lead to savings:
It is important to make a distinction with feed-in tariffs.
Most governments had premium feed-in tariffs in place up until early this year
or last year, and they gave consumers who installed solar panels a greater
subsidy, if you like, than the inherent value of that energy onto the market.
Those consumers received money for that, and that resulted in rises in other
consumers' bills. Those rises are now locked in. Those consumers are now
assured of their income, and since then all of those governments have removed
premium feed-in tariffs. Now the feed-in tariffs that are on offer are at a
lower rate. The rate that the feed-in tariffs are offered at now is in most
cases less than the benefit that is produced by those solar panels—in other
words, the benefit of solar panels in terms of the value of distributed energy,
the wholesale market value, the reduced losses in the network, the downward
pressure on wholesale prices and so on.
Particularly within Australia, we are seeing falling domestic
and commercial consumption because of self-generation through electricity from
solar panels. We are seeing improved energy management systems in businesses
and households that are reducing consumption as well.
One of the decisions we are making right at the moment is
more investment in poles and wires at a time when electricity consumption is
falling, and that electricity consumption is falling at least in good part
because of distributor generation from solar that is reducing the impact or the
likely impact of need for more poles and wires into the future.
The Alternative Technology Association (ATA) held a similar view, informing
the committee of some interesting developments in South Australia:
AEMO has concluded that rooftop solar in South Australia
contributes significantly towards meeting peak demand.
As is well known, energy efficiency, such as the South
Australian energy efficiency scheme, both reduces wholesale energy prices and
is cheaper than network investment as a cost passed through to all consumers.
The prevalence of increasing levels of energy efficiency, solar PV and wind
power in South Australia have resulted in only yesterday a draft decision by
the South Australian regulator to reduce the regulated tariff by 8.1 per cent
in response purely to price reductions at the wholesale level.
It was suggested that some of the new arrangements for installing and
connecting solar panels are much simpler for households:
Our view is that, with the rapidly reducing price of solar
panels, many of the schemes that are being promoted to offer subsidies directly
to a household can be simply delivered by installing solar panels in those
households and, in some cases, delivering a third or a half of their energy for
free once those solar panels are in place, and offering some certainty in
supply that does not rely on direct supply from a retailer in that context.
Professor Ray Wills of the Sustainable Energy Association of Australia
also explained how solar panels could assist vulnerable consumers and family's
in remote areas:
We have not done any technical modelling of it but certainly
in terms of the concept we have discussed it widely, and I guess the key
example is that, in today's market, a one kilowatt system, which could
potentially produce 20 per cent of a household's electricity, would cost a
little more than $1,000 in the current market. If you take that to a slightly
bigger system to supply more of that particular customer's needs, 1½ or two
kilowatts, then you may be able to source that en masse for in the range of
$1,500 to $2,000. To offer a tangible example of that, currently in the debate
within the Western Australian market, the opposition leader has suggested the
sum of $200 million might be required to help families in the bush to meet
payments on electricity so that we keep the price of electricity in the bush
the same as that in the city, while still relieving the city customers of that
payment that currently is a cross-subsidy through community service obligation
payments. That sum of $200 million is about 100,000 households in the bush.
That means that you could put solar panels on every one of those houses for around
Mr Ric Brazzale from the REC Agents Association was equally positive
about the prospects of solar PV generation supplying electricity during periods
of peak demand in the late afternoon in NSW.
However, the committee remains mindful of the limitations of solar systems in
relation to meeting residential peak demand, even when new storage technologies
are deployed, as explained by Mr McConnell:
[I]n South-East Queensland, if you look at generation here—we
heard figures before about South Australia—solar particularly does not really
lend itself to mitigating peak demand. The peak demand in Queensland and
South-East Queensland is between four and 8 pm. At seven or eight o'clock at
night, solar does not work.
I am happy to talk a little bit about storage, because there
are a lot of things happening in that area in terms of solar storage. For
example, the University of Queensland have 1.2 megawatts of solar PV on the
roof at St Lucia.
It is wonderful. Professor Paul Meredith and we worked collaboratively
together on that at the time. They were looking for some assistance from us,
and I was involved with those discussions. I said: 'Paul, thanks very much but
no, because solar is not going to impact on peak demand. But, if you then
decide to put some battery storage in, yes, we would work with you.' To make a
long story short, they did. They have put in, I think, about 400 kilowatts of
battery storage. It is prohibitively expensive, and that is the problem.
Storage is going to have an impact on networks going forward. That is a fact of
life. The problem is that we have to learn about what storage does to the
network and what the most cost-effective type of storage to use is, because at
this stage it is still very expensive to install. That 400 kilowatts was, I
think, about $2½ million or $3 million. So storage is going to make a
The committee also noted the need to potentially redesign electricity
networks, to better cope with embedded generation systems, such as solar PV:
But, when you get to larger embedded generation, technical
issues arise because the system is not designed to just automatically take
it—you just cannot put a large embedded generator anywhere in the system and
expect it to work. So it becomes a case-by-case issue and I am sure we can
improve and get faster and more responsive at that. The
AEMC's Power of choice paper again goes to trying to help enable the
frameworks and promote these things more widely, because this is a part of our
new business. We recognise that it needs to be a part of our business going
forward, but we have to get better at it.
The committee recognises the positive contribution that embedded
generation can have on reducing electricity consumption with equally positive
flow-on effects for the environment. The committee was particularly heartened
by the current research activity in this area, as demonstrated to the committee
at its site visit to the Commonwealth Scientific and Industrial Research
Organisation (CSIRO) Energy Centre on 24 October 2012: for example, the direct
injection coal engine, renewable energy integration systems and solar cooling.
The committee hopes that mainstream residential and commercial application of
these projects will be a reality in the near future.
The committee is sympathetic to the concerns raised during the course
of the inquiry about impediments to embedded generation, including solar PV,
associated with network design, connection and costs, and payments for energy
generated and fed into the grid (that is, feed in tariffs). However, the
committee also notes that the impacts of embedded generation on the electricity
network and centralised generation need to be better understood: both CSIRO and
the Smart Grid, Smart City trial are examining these impacts and the committee
is supportive of this.
As the interaction between embedded and centralised generation are
better understood, and given the positive impacts of embedded generation, it is
the committee's view that barriers to its wider implementation—both
residentially and commercially—should be removed.
Similarly, consideration should be given to standardising embedded
generation connection processes across jurisdictions in the NEM. The committee
therefore recommends that SCER examine current barriers to embedded generation,
particularly those related to network design, connection and costs, and FiT
payments. The committee also recommends that SCER consider standardising
connection processes for embedded generation in the NEM, including a standard connection
protocol and licencing regime for embedded generation. In the committee's
opinion, relevant state and territory energy ombudsmen and / or tribunals
should also be empowered to intervene where embedded generators and NSPs are
unable to resolve matters associated with connecting these generators to the
The committee is also receptive to the EEC's proposals to support and
offer incentives to embedded generators where they reduce network investment:
that is, the release of annual maps of network constraints and their value, and
location-specific network payments to embedded generators. The committee
therefore recommends that SCER direct the AEMC to develop rule changes to
implement these two proposals.
The committee recommends that SCER:
- examine current barriers to embedded generation, particularly
those related to network design, connection and costs, as well as FiT payments;
- empower relevant state and territory ombudsmen and / or tribunals
to intervene where embedded generators and NSPs are unable to resolve disputes;
- standardise connection processes for embedded generation in the
NEM and include a requirement for a standard connection protocol and licencing
regime for embedded generation within the NEM;
- direct the AEMC to develop a rule change requiring the release of
annual maps of network constraints and their value by network businesses; and
- direct the AEMC to develop a rule change to establish a default
system of location-specific network support payments for embedded generation.
More broadly—and as discussed by the EEC—the committee recognises the
cost-savings that can be derived where electricity is generated closer to the
point of consumption by reducing the need for expensive transmission
infrastructure. For this reason, the committee recommends that the AEMC
implement changes to the regulatory framework so that network charges for
embedded generators reflect the cost of using only the relevant section of the
network and provide incentives for generators to build in locations where the
costs associated with transmission are reduced.
The committee recommends that SCER direct the AEMC to:
- review the NER so that network charges for embedded generators
reflect the cost of using only the relevant section of the network; and
- implement changes to the regulatory framework in order to provide
incentives for generators to build in locations where the costs associated with
transmission are reduced.
Similarly, the committee is sympathetic to the concerns raised by the
CEC regarding negotiations between generators and transmission businesses: the
committee agrees that all generators, irrespective of the source of generation,
should be able to negotiate on a 'fair basis'.
To address this concern, the committee recommends that the AEMC investigate
ways to introduce greater transparency in negotiations between transmission
businesses and all generators.
The committee recommends that the AEMC investigate ways in which
greater transparency can be introduced in negotiations between transmission
businesses and generators.
Other strategies to support
business and industry
The committee heard from CSIRO's Energy Transformed Flagship that it is
employing a range of strategies to be able to offer solutions for business and
industry to reduce their electricity use:
...we have developed a retrofit technology for commercial
buildings that can reduce overall energy consumption of commercial buildings
and we have demonstrated in trials between 10 and 20 per cent and a peak demand
reduction of up to 30 per cent.
In addition, CSIRO is undertaking research to understand energy flows in
buildings with a view to improving building design to reduce electricity
consumption, and removing barriers to co- and tri-generation plants that can be
installed in the base of a building. CSIRO advised that they had rolled out one
of the first tri-generation systems in Australia, using a heat driven cooling
CSIRO also provided advice in relation to commercial office buildings
where air conditioning is typically 60 per cent of energy use. CSIRO has
developed technology to reduce 30 per cent of energy in air conditioning. In a
more industrial setting, CSIRO is also working on 'optimal refrigeration
control, which helps everyone in the cold chain, from people with large-scale
apple storage through to supermarkets.'
CSIRO provided a specific example of a project at Castlemaine involving
a small goods manufacturer, a large motor company, a hospital and a couple of
other very traditional industrial-style businesses to assist them understand
how to reduce peak demand and how that may affect their business operations.
The committee was told by the Australian Chamber of Commerce and
Industry (ACCI) of the importance of the price of energy on the Australian
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...low-cost energy is an important source of comparative
advantage for the Australian economy. Access to efficient, reliable energy
underpins the international competitiveness of industry, and the efficient
supply of energy is a key factor underlying a high-wage, high-productivity