Closing the CER gap

Hey Reader, welcome to The Energy's weekly data newsletter. This week we explore consumer energy resources and a new report showing the gap between grid and consumer benefits.

CER is finally having a moment

Flexible consumer energy resources could deliver $14 billion of annual system benefits by 2050 according to a report prepared by consulting firm Energeia for the Australian Energy Market Commission.

But who wins and loses in this multi-billion dollar value grab is likely to come down to market reforms being decided in coming months.

The report was prepared as the rule maker consults on the role of electricity pricing in supporting consumers as they play a bigger role in the grid.

It shows batteries (with capacity up to 150 kWh) would account for 60% of this value, and comes as the West Australian government launches a residential battery scheme with the aim of bolstering energy security, offering rebates of up to $7,500 predicated on recipients being part of a Virtual Power Plant (VPP).

*Total annual potential flexible CER by resource type Source: Energeia*

Australia is about to get a big spike in batteries due to the federal government’s subsidy package, but the role they’ll play in the grid could prove messy (or underwhelming) if the incentives are not right.

The stated $14 billion benefit is only available if CER can participate in wholesale and frequency control ancillary service (FCAS) markets and network demand response.

The report’s authors join others in pointing out CER has largely operated independently of what’s happening in the wholesale energy market.

“Currently, most CER is not signalled by the grid or market and/or is incapable of reacting to these market or network signals. In other words, CER assets are not always operated in coordination with the power system’s needs.”

NEM review chair Tim Nelson has also acknowledged this problem as he and his fellow panel members grapple with how to incentivise capacity from VPPs in a way that ensures it’s visible to the market operator.

AEMO has indicated about $4 billion in capex could be rendered effectively redundant if the market doesn’t better coordinate resources.

Expert view

“We see what we're calling invisible participants, participants that are doing things in response to price that no one really knows about. If we don't address that particular issue, we're going to see inefficient prices, and that will result in too much investment.

And in an extreme scenario, you can see many gigawatts of batteries charging while many gigawatts of batteries are discharging because they weren't forming part of the price, which would be an unfortunate outcome for the market.

We don't want a situation where you would have a whole bunch of batteries injecting into the market through a VPP that's not visible to anybody else.”

Tim Nelson
Chair, Expert Panel, NEM Wholesale Market Settings Review

The Energeia report also recommends reform to encourage network service providers to better utilise CER to resolve growth-related constraints on the network, which would enhance the value of CER flexibility.

What about consumers?

The benefits to the system with proper market orchestration are clear, and Energia’s modelling found more than 80% of it would come from the residential sector.

*Annual system benefits per device (NSW residential consumer example). Small customer battery assumed to be 10kWh Source: Energeia*

But Energeia’s report also puts weight behind concerns consumers could be significantly penalised as they connect more batteries, EVs and solar panels, due to the gap between actual system costs and retail tariffs.

Small consumer example impact: Maximise system benefits vs. Minimise retail bill
Source: Energeia

Energeia’s modelling found consumers who provide this value (under a scenario of full orchestration) would be slugged by hundreds of dollars on their retail bills, and recommends the rules ensure cost-reflective network and retail pricing.

It also argues a need for levelling the playing field for third parties like aggregators, given retailers have an upper hand in accessing the value of CER flexibility through existing access to the wholesale value.

Craig Memery, energy specialist at the Justice & Equity Centre, recently broke down what’s behind this issue in more detail at the Energy Efficiency Council's annual conference.

Expert view

“Retailers do three things particularly well. They manage wholesale risk, they transact from the supply side and energy consumers, and they manage wholesale risk. Now, in the process of managing wholesale risk, they actually de-incentivise themselves from doing the flexible demand stuff. They contract with and own generators, and that is a really sensible thing to do…it helps to reduce our exposure to higher prices. But in the course of doing that, it means they're not exposed to the pointy end of prices, which is where the value of demand response can be monetised.

So in terms of spreading the market, spreading the benefit more widely, and there being a bigger slice of the pie to share of the supply side revenue coming to the participants on the demand side, I think aggregators offer a really important value proposition that we're not taking advantage of at the household level in the way that we are now at the large-scale level.

To maximise the benefit of demand response for households, you need to look beyond the current arrangements. You've got the WDRM (Wholesale Demand Response Mechanism), but it doesn't apply to households. You've got the IPRR (Integrating Price Responsive Resources into the NEM), but it doesn't apply to aggregators. So there's this gap in consumers getting what they want, which is their electric car provider or the battery provider to be the interface with this system, not the retailer in a lot of cases.

Retailers who are doing stuff and for the consumers who it works for, that's great. The longer we do that, the more that will mature. But if we're talking about a flourishing, competitive market, it's actually quite uncompetitive to restrict the parties who can give consumers what they want from doing so in a way the mechanisms do now.”