The Demand Management Incentive Scheme

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Last month we talked about Australian Energy Market Operator (AEMO) and Australian Renewable Energy Agency (ARENA) funding of the ‘Innovative Demand Response Initiative’ trials https://compliancequarter.com.au/innovative-demand-response-initiative/. In today’s article, we look at the recent release of the Australian Energy Regulator’s (AER) Demand Management Incentive Scheme (the Scheme). Like the Innovative Demand Response Initiative, the Scheme is also aimed at reducing network pressure by the pro-active management of electricity demand, rather than electricity supply. This scheme focuses on incentivising demand management for Distribution Network Service Providers (DNSPs) only.

demand management incentive

Background to the Demand Management Incentive Scheme

The Independent Review into the Future Security of the National Electricity Market (the ‘Finkel Report’), released earlier this year, recognised the effect the continuing retirement of older energy generators will have on the National Energy Market (NEM). This was made particularly evident in the 28 September 2016 state-wide blackout in South Australia, as well as load shedding during the February 2017 heatwave in South Australia and New South Wales (see Finkel Report p29).

The Commonwealth and State Governments are coming up with a range of measures designed to deal with this issue including the National Energy Guarantee (see https://compliancequarter.com.au/national-energy-guarantee-mean-energy-industry/) and the Demand Response Initiative.

The Scheme is aimed at just one actor in the NEM, DNSPs, and how they might contribute to reducing pressure on the NEM. While DNSPs develop their network infrastructure with the goal of satisfying peak demand, these networks usually only hit that peak for a tiny fraction of time each year – sometimes as little as a few hours. Demand management can be a more cost-effective alternative to network investment. Through demand management DNSPs seek to develop projects that will shift or reduce consumer demand so as to ease pressure on the network.

The Demand Management Incentive Scheme

Clause 6.6.3 of the National Electricity Rules requires the AER to develop a demand management scheme, after consultation, which will meet a certain objective: providing DNSPs with an incentive to undertake efficient expenditure on relevant non-network options relating to demand management (the scheme objective). The key elements of the Scheme developed by AER (with the final release on 14 December), are[1]:

  1. Application to particular DNSPs: The DNSP will be required to submit a regulatory proposal describing how it proposes the scheme will apply over the period and how the AER will determine whether the Scheme is to apply to that DNSP.
  2. Identifying and committing eligible projects: The DNSP will identify, referring to minimum project evaluation requirements, preferred and non-preferred projects for managing demand
  3. Determining the incentive for eligible projects: The DNSP will work out the project incentive for a committed project that will deliver a net benefit to retail customers.
  4. Compliance reporting: The DNSP will report data for the past regulatory year, including incentives accrued, how eligible projects were identified, and the costs, benefits and outputs of committed projects.
  5. AER review: AER will review the total financial incentive a DNSP has accrued with reference to the compliance report and the total incentive cap.
  6. Application of incentive payment: The total financial incentive a DNSP accrues for a year is included in the DNSP’s total annual revenue for the regulatory year.

To read the Scheme and accompanying explanatory statement go to https://www.aer.gov.au/networks-pipelines/guidelines-schemes-models-reviews/demand-management-incentive-scheme-and-innovation-allowance-mechanism.

[1] See Demand Management Incentive Scheme, p7.

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