Accelerating commercial & industrial demand side participation in NSW

The NSW Government in collaboration with the Federal Government has made significant progress in accelerating the clean energy transition in NSW. In particular, NSW has delivered measurable progress by supercharging the Capacity Investment Scheme (CIS) with NSW specific tenders to shore up supply, and by accelerating the planning approvals for important energy projects that had been held up.

According to AEMO’s latest Energy Security Target Monitor Report, by December 2023 NSW had already secured sufficient new capacity to keep the NSW system reliable following Eraring’s closure. Only if there were significant delays in the delivery of this new generation, storage or transmission, additional actions would be necessary to provide surety that the Eraring power station can close on time in August 2025.

The ‘Accelerating Commercial & Industrial Demand Side Participation in NSW’ report highlights an underutilised opportunity: Demand Side Participation (DSP), which is an “energy resource” that could not only provide additional “insurance” over the coming years to allow the timely closure of Eraring but also deliver lower costs and higher reliability to consumers.

Accelerating Wholesale Demand Response Mechanism (WDRM) in NSW

The Australian Energy Market Operator (AEMO)’s Energy Security Target Monitor in NSW (ESTM) clearly demonstrates that the timely implementation of federal and state schemes will ensure NSW will remain within its reliability standard.

AEMO’s ESTM shows that the outcomes of AEMO Service’s Tender Rounds 2 and 3 alone (now complete with successful projects announced) will address any capacity shortfalls. As such, delivering the projects under Round 2 and 3 will mean that NSW will meet its Energy Security Target.

DSP represents an underutilised tool with significant potential of ~3,100 to 6,000 MW in the National Electricity Market (NEM).

If any of the Tender round 2 or 3 projects were delayed, DSP could provide insurance to ensure NSW would remain within its reliability standard.

Implementing a well-designed DSP program would not only provide insurance for Eraring’s impending phased closure but also support lower cost outcomes for NSW consumers more generally.

DSP is a lower cost resource than supply-side capacity because it utilises the capability of existing assets. The capex required to activate 1,000 MW of DSP capacity in NSW is a fraction of what is required to build 1,000 MW of supply-side capacity.

Existing mechanisms fail to unlock DSP’s full potential. Participation rates in the Wholesale Demand Response Mechanism (WDRM) are well below its anticipated potential. Since its inception in 2021, the WDRM has only facilitated 33 MW of DSP in NSW, despite the state having the potential for over 1,000 MW of largely untapped DSP from the business sector alone. It currently lacks the right incentives and market mechanisms to support meaningful engagement and participation.

NSW’s Peak Demand Reduction Scheme (PDRS) is currently only proposed to be available for C&I DSP through the WDRM mechanism, which has failed to deliver.

There is a critical need for a comprehensive reassessment of current mechanisms and strategies that aim to support DSP in NSW, to ensure effective alignment between demand forecasting and participation in DSP initiatives that cover the broad C&I energy user spectrum.

Recommendations to improve engagement and participation

Undertake an auction focused on DSP in NSW through either the Capacity Investment Scheme (CIS) or Long-Term Energy Service Agreement (LTESA)
The Federal and NSW Governments should extend the CIS/LTESA auctions to include DSP that supports state government reliability needs. The Federal and NSW Governments should extend the CIS/LTESA auctions to include DSP that supports state government reliability needs. This tender should adopt in particular a more flexible baselining approach than the current WDRM.

Modify and broaden eligibility of the Peak DSP Scheme (PDRS) to maximize benefits.
The current PDRS proposal is limited to DSP delivery of C&I customers through WDRM. The NSW government should include a more flexible mechanism (not limited to WDRM) that allows a much broader range of C&I customers to participate in the PDRS. Specifically, the PDRS should be enhanced to provide solutions for the majority of C&I customers who can’t take on exposure to the wholesale spot price.

Enhance pricing signals such as “critical peak”

Incentives and price signals are key to rewarding better participation and incentivising the behaviour change required. Price signals create the business case for making investments and operational decisions that improve energy performance and reap the reward for effective participation.

Education and Outreach

Establish comprehensive education and outreach programs to raise awareness of C&I stakeholders about the benefits of DSP, which are critical to building experience and trust.

Technology advancements
Accelerate the rollout of smart meters and smart energy management devices which provide a low-cost avenue for increasing available data, visibility of energy use, and options for control.

Use lessons learnt elsewhere
Incorporate the findings of a number of studies which underline the immense potential for DSP into the PDRS scheme design, enhancing the effectiveness of NSW's efforts.

Mandatory disclosure scheme
Consider introducing a mandatory disclosure scheme for demand side opportunities, similar to the Energy Efficiency Opportunities scheme.

Recommendations to improve the WDRM

Review the WDRM baseline eligibility thresholds

A review of the baseline eligibility is critical to assess if the thresholds are appropriate after two years of implementation, and to do so through an open, transparent and consultative public process.

Broaden the eligibility under the WDRM
Many C&I customers have sites with multiple electrical connection points such as data centres.

Detailed recommendations are further explored in the report, which can be accessed here.