Demand Management Incentives Review
Demand Management: The missing link in Australian electricity reform
Electricity Demand Management (DM) is deliberate action by power utilities to encourage consumers to reduce or shift their electricity use as an alternative to providing new electricity supply. The absence of balanced incentives for efficient DM has been a major gap in Australia’s National Electricity Market (NEM) since its establishment in 1998. The cost to energy consumers of this gap has likely run to hundreds of millions dollars or more, due to unnecessarily high electricity bills and excessive generation and network infrastructure spending.
To illustrate, if the NEM had access to the same proportion of DM as the average for states of the USA, it would have about 3000MW of DM. This is almost twice the total capacity of the recently retired 1600 MW Hazelwood coal fired power station, and is more than the total combined capacity proposed in the recent announcements by the South Australian Government, Our Energy Plan (up to 350 MW1) and the Australian Government’s Snowy 2.0 (estimated 2000 MW).
Following a change to the National Electricity Rules in 2015, the Australian Energy Regulator (AER) is required to develop a Demand Management Incentive Scheme (DMIS) and the Demand Management Innovation Allowance (DMIA). This crucial reform represents the best chance in the history of the Australian electricity supply system to facilitate widespread, efficient and cost-effective DM by distribution network businesses.
To support the AER in developing the new DM Incentive Scheme, the Australian Renewable Energy Agency (ARENA) commissioned the Institute for Sustainable Futures at UTS (ISF) to undertake this DM Incentives Review. The review’s purpose is, for the first time, to assess and quantify the financial barriers to DM created by existing economic regulatory incentives for distribution network businesses.