Demand Side Management, WEM Reforms – Where are we now?

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Reforms to WA’s Wholesale Electricity Market (WEM) have been ongoing since 2014. Given the length of time and the change in Western Australian government, it is easy to lose track of the various reforms and their progress. This article traces the history of reforms in relation to Demand Side Management (DSM) and outlines the current recommendations published by the Public Utilities Office (PUO) in March this year.

What is Demand Side Management

The Wholesale Electricity Market (WEM), located in the South West Interconnected System (SWIS), consists of two key components:

  •  a Reserve Capacity Mechanism to ensure that there is adequate capacity available in the SWIS to meet demand; and
  •  a wholesale market where participants interact to supply and purchase electricity.

Demand Side Management or DSM forms part of the Reserve Capacity Mechanism.

“Reserve capacity” refers to both electricity generation capacity and demand side management, which is a way of managing demand for the use of electricity. Essentially, DSM refers to the capability of a facility to reduce its consumption of electricity when called upon (e.g. factories, supermarkets and other large users).

DSM plays an important role in an electricity system as it can be used to reduce peak demand which in turn mitigates electrical system emergencies, reduces blackouts and increases reliability. If used effectively, DSM can provide significant economic, reliability and environmental benefits.

Demand Side Management and the WEM

In April 2016, the then Minister for Energy, Dr Mike Nahan, announced a number of reforms that sought to address the inefficiencies caused by excess capacity in the electricity system. It was estimated that the cost of excess reserve capacity in 2016 – 2017 would be $116 million dollars, which would ultimately be borne by consumers.

One aspect of the reform package was focused on DSM. The WEM Rules were amended to price DSM capacity differently for an interim transition period. After this period, DSM providers would then receive the same price as other generators but would be subject to more rigorous availability requirements.

Following the implementation of the reforms, the price paid to DSM providers was changed from the reserve capacity price (an administered price derived from a pricing formula under the WEM Rules) to be a significantly lower “expected value” price (approximately 10% of the previous capacity price). It was believed that differential pricing would shift the market to a closer supply-demand balance based on a view that some DSM capacity may be over-compensated if it was never in fact dispatched. The availability requirements for DSM participants was also harmonised. It was predicted that the reforms would lead to approximately 310MW of capacity exiting the market.

EnerNOC Decision

The DSM reforms sparked polarising views. DSM providers argued that the reforms unfairly targeted DSM providers and would cause the exit of DSM participants whereas others believed the reforms did not go far enough, and that DSM should be removed from the capacity market altogether. EnerNOC Australia Pty Ltd, a DSM participant, sought judicial review in the Supreme Court of the Minister’s decision to make the amending rules implementing the DSM reforms, arguing that the amendments were void or otherwise had no effect. This action was unsuccessful. The court held that the amending rules were validly made.

Consequences of the reforms

As a result of the reforms, many DSM providers did not apply for and no longer received capacity credits. Other larger DSM providers continued to provide DSM and receive capacity payments.  Overall, the exit of some DSM providers and the forced retirement of old Synergy generation assets caused excess capacity to be reduced from 25% in 2016 to 2017 to 5% in 2018 – 2019.

Proposed Reforms

The PUO’s 2019 reserve capacity market reform package is predominately focused on the design for an effective capacity auction. Alongside the auction, and as previously flagged in the 2016 reforms, it is proposed that DSM will receive the same price as other forms of capacity. However, with that equal pricing the DSM providers will be subject to more stringent requirements in line with the existing requirements for new capacity providers. DSM participants will be required to provide a Reserve Capacity Security deposit each capacity certification and be subjected to annual random testing. The rationale is that the more onerous requirements will ensure DSM providers are available when required and will prevent DSM participants from moving in and out of the market and affecting the capacity price. 

What does the new reforms mean for DSM Providers?

In their submissions responding to the latest proposal, DSM providers generally supported the new pricing methodology and suggested that it was likely to incentivise mothballed demand side capacity resources back into the market. Participants also appeared comfortable with the more stringent testing and security requirements provided that they were designed appropriately and did not disrupt the efficient dispatch of generation.

Implementation of the above reforms will occur alongside the development of other initiatives by the PUO. Based on the indicative timing published by the PUO this could be anytime from now until 2020. 

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