1 | P a g e Suite 2, 490 Spencer Street, West Melbourne VIC 3205 ABRN 136 469 291 ABN 63 136 469 291

ProfessorMaryO’KaneACChair,NSWEnergySecurityTaskforceEmail:energy.taskforce@chiefscientist.nsw.gov.au23March2017Re. NSWEnergySecurityTaskforce

DearProfessorO’Kane

ThankyoufortheopportunitytoprovideasubmissiontotheNSWEnergySecurityTaskforce.GiventhelinkagesbetweentheroleoftheTaskforceandtheIndependentReviewintotheFutureSecurityoftheNationalElectricityMarket,IhaveattachedoursubmissiontotheReview,whichhighlightskeyissuesfortheTaskforcetoconsider.

TheEnergyEfficiencyCouncilisthepeakbodyforenergyefficiency,demandmanagementandcogenerationinAustralia.TheCouncilisanot-for-profitmembershipassociation,anditsgoalistomakesensible,cost-effectiveenergymanagementmeasuresstandardpracticeacrosstheAustralianeconomy.Ourmembersincludeindependentexperts,energyefficiencyprovidersandvariouslevelsofgovernment.

Thesupply-sideanddemand-sideofNSW’senergysystemandarenotseparatestories-theyaretwohalvesofthesamestory.Themostcost-effectivewaytomeetNSW’sdemandforenergyservicesisabalanceofinvestmentinsupply-sideanddemand-sideactivities,includinggeneration,networksanddemand-management.

However,theNationalElectricityMarket1(NEM)hasastrongsupply-sidebias,whichmeansthatAustraliaiscurrentlytappingjustafractionofitsdemand-sidepotential.Australia’senergyefficiencyandrateofenergyefficiencyimprovementarewellbelowtheOECDaverage,andthelevelofdemand-responseissubstantiallybelowglobalbestpracticeforprovisionofbothcapacityandFrequencyControlAncillaryServices(FCAS).Thisreducesenergysecurity,increasesenergybillsandinflatesgreenhousegasemissions.

Improvingthewaythatweuseenergyisessentialtosupporttheshifttonewformsofgeneration,andwilldeliverbenefitstoeveryaspectofthe‘EnergyTrilemma’:

• Security:Demandresponsecandeliverbothshort-termcapacityandFCAS,typicallyatmuchlowercoststhansupply-sidesolutions.Demandresponseisparticularlycriticaltosupporttheintegrationofintermittentgeneration,asitallowsdemandtoberapidlyadjustedtovariablesupply.

• Affordability:Energyefficiencyanddemandresponsewilllowerthecostofsupplyandenableconsumerstogetmoreoutofeachunitofenergythattheyconsume.Thiswilllowerconsumers’billsandboostproductivity.

• Sustainability:EnergyefficiencycanrapidlyandaffordablydeliveraroundhalftheemissionsabatementpotentialinAustralia’senergysector.

1Inthissubmissionthe‘NEM’isusedtorefertothefullsuiteofregulations,marketsandinfrastructurethatcomprisetheelectricitysectorintheNEMregion,notjustthewholesaleelectricitymarket.

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However,significantenergymarketreformsandcomplementarypolicieswillberequiredtoaddressthebarrierstodemand-sideactivitiesandunlocktheirfullpotential.

Energymanagementisnotasilverbullet,andwillneedtobecoupledwithsupply-sidereformstoensurethattheNEMisassecure,affordableandsustainableaspossible.However,demand-sidereformswouldenabletherapiddeploymentofmaturetechnicalsolutionsthatwouldprovidebothshort-andlong-termbenefitstotheNEM.Thesereformswouldprovideimmediaterelieftosecurityissuesbutalsoavoidunnecessaryinvestmentandbuytimetoenableamorecomprehensivesuiteofdemand-andsupply-sidereforms.

TheEnergyEfficiencyCouncilhasdevelopedacomprehensiverangeofrecommendationstoimprovedemand-sideactivity,whicharesetoutintheAustralianEnergyEfficiencyPolicyHandbook(www.eec.org.au/policy-advocacy/handbook).However,itiscrucialthattheReviewmakerecommendationsonfourkeymatters:

1. EnergymanagementiscriticalforthefutureoftheNEM

Demand-sideissueshavehistoricallybeengivenmuchlessattentionthansupply-sideissues.Toensurethatgovernmentsdirectsufficientattentiontodemand-sideissues,theTaskforceneedstoexplicitlyemphasisethatenergymanagementisessentialtothesecurity,affordabilityandsustainabilityoftheNEM.

2. COAGEnergyCouncilestablishanurgent‘DemandResponseReview’

ThemosturgentissueforbothsecurityandaffordabilityintheNEMisthedeploymentoftransparentdemand-responseforemergencycapacity,FCASandaffordablepeakdemand.IftherehadbeenaneffectivemarketfortheseservicesinFebruary2017,broad-scaleload-sheddinginSouthAustraliaandtargetedload-sheddinginNSWcouldhavebeenavoided,andpricesacrosstheNEMmoderated.

TheDemandResponseReviewshouldaimtoidentifyanddesignarangeofnationalandstate-basedoptionstounlockthepotentialofdemandresponse,andrecommendpreferredoptionsforrapidimplementation.TheReviewshouldbesupportedbyaroundtableincludingrepresentativesofenergyconsumers(e.g.EnergyConsumersAustralia,EnergyUsersAssociationofAustraliaandAustralianIndustryGroup),energymanagementexpertsandthebroaderenergysector.

IftheCOAGEnergyCouncildoesnoturgentlysetupasuitableDemandResponseReview,werecommendthatNSWestablishitsownReview.ThiscouldbelinkedtoworkcurrentlybeingundertakenbytheNSWGovernmentundertheClimateChangeFundDraftStrategicFund2017-22(Action3.7–Reducepeakdemandthroughbatterystorageandenergyefficiency).

3. COAGEnergyCouncilestablishaseparate‘EnergyProductivityTaskgroup’

ThereisabroadrangeofenergymanagementissuesthatareimportantbutlessurgentthanthosethataDemandResponseReviewneedstoconsider,includingelectricitytariffstructures,demand-managementtolowernetworkcostsandcogeneration.ThesemeasuressitundertheNationalEnergyProductivityPlan(NEPP)butrequireongoingfundingandattentionfromtheCOAGEnergyCounciltorealise.AswiththeDemandResponseReview,thisTaskgroupshouldbesupportedbyaroundtableofconsumersandenergyexperts.

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TheNSWGovernmentiscurrentlyconsideringarangeofenergyproductivitymeasuresasitfinalisestheDraftPlantoSaveNSWEnergyandMoney.TheEECstronglyendorsestheDraftPlanandencouragestheNSWGovernmenttomaintainandbuildontheambitionsetoutintheDraftPlanasitisfinalised.

4. Governancereform

TheNEM’sgovernancestructuresarenotdesignedtofacilitatetherapidreformsthatarenecessarytorespondeffectivelytoongoingtransformationinenergytechnologiesandmarkets.TheTaskforceshouldrecommendsubstantialgovernancereform,includingincreasingkeyinstitutions’demand-sidecapabilityandfocusandestablishingaNationalEnergyEfficiencyandProductivityAgency.

Theattachedsubmissiondiscussestheseissuesinmoredetail.

TheEnergyEfficiencyCouncilseeksameetingwithyouandtheTaskforcetodiscusskeydemand-sideissues.Ilookforwardtodiscussingthesematterswithyousoon.Yourofficecancontactmeon0414065556orviarob.murray-leach@eec.org.au.

Yourssincerely

RobMurray-Leach

HeadofPolicyEnergyEfficiencyCouncil

4 | P a g e Suite 2, 490 Spencer Street, West Melbourne VIC 3205 ABRN 136 469 291 ABN 63 136 469 291

EnergyEfficiencyCouncilsubmissiontotheIndependentReviewintotheFutureSecurityoftheNationalElectricityMarket

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TableofContents1.Energyefficiency,demandresponseandcogeneration...............................................6

2.Demand-sideactivitiesarecriticalfortheNEM..........................................................7

3.TheNEMurgentlyneedsmoredemand-sideactivity..................................................9

4.Demand-sideissuesareanintegralpartofenergyreforms.......................................11

5.Keyrecommendations..............................................................................................13

5.KeyareasforNEMreform........................................................................................14

6.KeyissuesoutsidetheNEM......................................................................................16

7.Keygovernanceissues..............................................................................................17

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1.Energyefficiency,demandresponseandcogeneration

‘Demand-side’servicesincludeenergyefficiency,demandresponseandcogeneration.Theterm‘demandmanagement’isanumbrellatermthatincludesenergyefficiencyanddemandresponse.

Energyefficiencymeansgettingmoreservicesforlessenergyandcanreducebothenergyconsumptionandpeakdemand.Homesandbusinessesdon’tdirectlyconsumeelectricityandgas-theyuseitfor‘energyservices’suchaswarmshowers,coolhomesandcomputing.Thecheapestwayforahomeorbusinesstomeetitsneedforenergyservicesisthroughacombinationofsupply-sideanddemand-sideinvestments.

Forexample,thecheapestwaytokeepanoff-gridhomecoolinsummerisamixofinvestmentinsupply(agenerator)anddemand-sidemeasures(e.g.insulationandanefficientairconditioner).Iftheownerunder-investsininsulationandairconditionerefficiency,theywillneedtoinvestmuchmoreinenergysupply.It’salsopossibletoover-investinefficiency–it’sallaboutfindingtherightbalance.

Whileitismorecomplextoachievetherightbalanceofinvestmentsacrossthemanyenergyusersandgeneratorsconnectedtothegrid,theprincipleisthesame.Wewantthemostcost-effectivemixofinvestmentinsupplyanddemand-sidemeasurestodelivertheservicespeoplewant.

Demandresponsemeansadjustingenergyusepatternstolowercosts,andincludes:

- Movingenergyusefromperiodsofhighdemandorlowsupplytotimeswhensupplyisplentiful.Thisensuresthatsupplyismaintainedforcriticalneedswhilstreducingtheneedforexpenditureonnetworksandpeakinggenerators.Forexample,inmuchoftheUS,largeenergyusersareofferedpaymentstoreducedemand(e.g.duringheatwavestoaccommodateair-conditionerloads).

- Smallrapidchangesindemandtoprovideservicestostabilisethegride.g.FrequencyControlandAncillaryServices(FCAS).

Recentadvancesintechnologyhavesignificantlyincreasedthepotentialfordemandresponse.Inthepast,demandresponsewasoftenlimitedtoeithersingletechnologies(e.g.off-peakwaterheaters)orverylargeenergyusers.DuringarecentheatwaveinNSW,asmelterhaditssupplyreducedbyaretailerinordertoavoidwidespreadinvoluntaryloadshedding.

Newtechnologiesallowmuchmoresophisticatedandsubstantialdemandresponse.Forexample,automatedsystemsenablenetworksandaggregatorstoremotelyreduceenergyuseacrosshundredsofcommercialsitesinwaysthatdon’tmateriallyimpactanysites(e.g.rapidlycyclingrefrigerationcompressorsonandoff).Aggregatorscancombinemanydifferentformsofdemandresponsefrommanysitestogetherinto‘portfolios’thatprovideflexible,secureandstabledemandresponse.Demandresponseisthereforeabletocompetewithstorageandgenerationforarangeofsophisticatedservices.

Cogenerationistheprocessofgeneratingbothelectricityandthermalenergy(heatingand/orcooling).Cogenerationissignificantlymoreefficientthanstandardgenerators,becausethe‘waste’thermalenergyisusedtoprovideservices.Inaddition,cogenerationsystemsaretypicallywithinthedistributionnetwork,sotheysignificantlyreducetheloadonthenetwork,andtypicallyhaveaveryrapidramprate.

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2.Demand-sideactivitiesarecriticalfortheNEMIncreasedlevelsofenergyefficiency,demandresponseandcogenerationinAustraliawouldhelprespondtoeveryaspectofthe‘EnergyTrilemma’,improvingsecurityandaffordabilitywhilereducingemissions.Energyefficiencyanddemandresponsealsodeliverbenefitsforhealth,productivity,economicgrowthandemployment.

SecurityandreliabilityDemandresponsecanprovidebothemergencycapacityandFCAS,bothofwhicharecriticalforreliability.Energymarketsrequireamixtureofsupply-anddemand-sideservicesforreliability,anddemandresponsehasanumberoffeaturesthatmakeitanessentialpartofthismix:

- Availability:manyformsofdemandresponsearealmostpermanently‘ready’andhighlyreliable.Incontrast,significantinvestmentisrequiredtokeepgeneratorsready,eveniftheyarecalledonforjustafewhoursayear,andgeneratorsneedtoalreadybespinningtoprovideFCAS.Itisnotablethatsomegas-firedgeneratorsinSouthAustraliawerenotabletoprovidecapacityon8February.

- Speed:Manyformsofdemandresponsecanbedeliveredrapidly(lessthanonesecond),incontrasttolongerramptimesforgenerationservices.

- Affordability:asdemand-responseservicesareeffectivelyanadjustmentofequipmentthathasanotherpurpose,itistypicallymuchcheapertodeploythanbuildingandmaintaininggenerationthatisonlyusedforafewhoursayear.

AffordabilityEnergyefficiencyreduceshouseholds’andbusinesses’energybillsbyreducingboththequantityofenergythattheyuseandtheirpeakdemand.Forexample,whileCaliforniahasarelativelyhighpriceperunitofelectricity,thestate’slowpercapitaconsumptionofenergymeansthattheiraveragehouseholdenergybillisamongstthelowestintheUS.

Demandresponsealsohasacriticalroleinloweringthecostoftheelectricitysystembyprovidinglow-costFCASandcapacity.Thisreduceswholesalecostsbybothavoidingtheconstructionanddeploymentofhighercostpeakinggenerators,butalsobyincreasingcompetitionduringperiodsoftightdemand-supplybalance.WhiletherearemultiplecausesforrecentincreasesinwholesaleenergypricesinQueenslandandSouthAustralia,reducedcompetitionlikelyhadasignificantrole.

Inaddition,demandresponsecanalsolowernetworkcostsbyreducingtheexpenditurerequiredonthegridtomeetcriticalpeakdemand,whichoftenonlylastsforafewhoursayear.Thefailuretofacilitatedemand-responseintheNEMhassignificantlyincreasedthecostofmeetingdemand.Forexample,in2010roughly25percentofretailelectricitycostsinNSWwerederivedfrompeakeventsthatoccurforlessthan40hoursperyear2.

Inaddition,demand-sideinvestmentstypicallyhaveamuchshorterpaybackperiod,whichreducestheriskofstrandedassets.Meetingourcurrentenergyneedswithdemand-sideinvestmentswillthereforereducetheriskofwastedexpenditureduringthisperiodoftransitionanduncertainty. 2AustralianGovernment2012EnergyWhitePaper2012,originallyfromapaperdeliveredbyRossFraser‘Demandsidemanagement’attheAustralianInstituteofEnergysymposium24May2010,Sydney.

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EmissionsreductionEnergyefficiencycanrapidlyandaffordablydeliveraroundhalftheabatementpotentialintheNEM(Figure1).Forexample,appliancestandardsareexpectedtodeliverabatementataroundminus$118pertonneofavoidedemissions.

Whiledemandresponsedeliversmoremodestamountsofdirectabatement,itiscriticaltofacilitatetheshifttolow-emissionformsofgeneration,suchaswindandsolarPV.

Figure1.AbatementpotentialinAustraliato2030Source:ClimateWorksAustraliaandWWF2015,Aprosperous,netzeropollutionAustraliastartstoday

Otherbenefitsofenergyefficiencyanddemandresponse• Productivityandeconomicgrowth:Improvingenergyefficiencybyjustoneper

centayearhasbeenestimatedtoexpandAustralia’seconomyby$26billionby20303.Smartenergyusedriveseconomicgrowthbyimprovingstaffproductivityandresourceefficiencywhileloweringenergycosts.Forexample,improvingtheefficiencyofofficesdeliversanincreaseinstaffproductivitythatisworthmuchmorethantheenergysavings.

• Jobs,investmentandinnovation:Theglobalmarketforsmartenergyproductsandservicesisworthmorethan$290billionperannumandisgrowingrapidly.4IfAustraliacapturedjustonepercentoftheglobalmarketitwoulddeliver$2.9billioninincomeeveryyearandcreatethousandsofjobs.Californianowhasmorethan321,000peopleemployedinenergyefficiency,withemploymentgrowingsixpercentperannuminrecentyears.5

• Consumerprotectionandhealth:Minimumstandardsandratingsforhomesandappliancesprotectconsumersandensurethattheygetwhattheypayfor.Whenbuildersandmanufacturerscutcornersitcanincreasehouseholds’energybills,reducecomfortandevenaffecttheirhealth.Buildingefficiencyimpactswintermortalityrates,whichareasignificantcauseofdeath-morethan26,000deathseachyearinAustraliaareassociatedwithcoldweather.6,7

3ClimateInstitute2013,BoostingAustralia’sEnergyProductivity.4InternationalEnergyAgency2016,EnergyEfficiencyMarketReport2016.5AdvancedEnergyEconomyInstitute2016,AdvancedEnergyJobsinCalifornia.6InternationalEnergyAgency2014,CapturingtheMultipleBenefitsofEnergyEfficiency.

19Australian Energy Efficiency Policy Handbook

5. Greenhouse gas reduction policies

Energy efficiency is one o t e largest and c ea est sources o green ouse gas e ission reductions and t is as been con r ed by ulti le studies ro organisations suc as t e nternational Energy Agency and li ate orks Australia

n addition to directly reducing green ouse gas e issions better energy anage ent is also critical to reduce t e cost o t e transition to clean energy as it can

• o e eaks in energy de and to coincide it eriods o eak su ly ro sources suc as solar

P and ind i ro ing grid stability and reducing su ly costs and

• educe t e total olu e o energy consu ed reducing t e a ount o in est ent re uired in generation energy storage and electricity net orks

is is articularly critical no as Australia is entering a a or ne ase o in est ent in generation.

Energy efficiency is a no regrets easure to deli er green ouse gas abate ent as it sa es oney strengt ens t e econo y and deli ers social

outco es ost o t e olicies in t is docu ent s ould be introduced e en i Australia didn t a e targets to reduce its e issions Ho e er Australia s international co it ents to reduce its e issions ean t at

• t is e en ore ital to introduce t e energy efficiency olicies t at s ould be introduced to deli er outco es suc as consu er rotection and

• Australias suite o olicies to reduce green ouse gas e issions ust dri e energy efficiency our olicy res onse to cli ate c ange ails to dri e energy efficiency t e cost o eeting our targets ill be substantially ig er

e current designs o t e coalition s E issions eduction und and a eguard ec anis and t e

A P s ro osed E issions rading c e e ill dri e li ited energy efficiency ese olicies need to be re ned and acco anied by s eci c olicies t at dri e energy efficiency

Recommendations:• Ensure that Australia’s suite of climate change

policies drive energy efficiency

Australia ill need a suite o olicies to address cli ate c ange ile any o t ese olicies ill not directly su ort energy efficiency e g t e

ene able Energy arget t e suite o olicies as a ole s ould dri e a cost e ecti e balance o energy su ly and de and reduction ro ects to reduce e issions

• Align and integrate energy market and climate change policies

e current lack o integration bet een cli ate c ange and energy olicy creates con icting incenti es t at raises t e cost o bot energy and

itigation etter aligning energy and cli ate c ange olicies ill deli er lo er costs and ore abate ent

Figure 1. Abatement potential in Australia to 2030Source: ClimateWorks Australia & WWF 2015 A prosperous, net-zero pollution Australia starts today.

19Australian Energy Efficiency Policy Handbook

5. Greenhouse gas reduction policies

Energy efficiency is one o t e largest and c ea est sources o green ouse gas e ission reductions and t is as been con r ed by ulti le studies ro organisations suc as t e nternational Energy Agency and li ate orks Australia

n addition to directly reducing green ouse gas e issions better energy anage ent is also critical to reduce t e cost o t e transition to clean energy as it can

• o e eaks in energy de and to coincide it eriods o eak su ly ro sources suc as solar

P and ind i ro ing grid stability and reducing su ly costs and

• educe t e total olu e o energy consu ed reducing t e a ount o in est ent re uired in generation energy storage and electricity net orks

is is articularly critical no as Australia is entering a a or ne ase o in est ent in generation.

Energy efficiency is a no regrets easure to deli er green ouse gas abate ent as it sa es oney strengt ens t e econo y and deli ers social

outco es ost o t e olicies in t is docu ent s ould be introduced e en i Australia didn t a e targets to reduce its e issions Ho e er Australia s international co it ents to reduce its e issions ean t at

• t is e en ore ital to introduce t e energy efficiency olicies t at s ould be introduced to deli er outco es suc as consu er rotection and

• Australias suite o olicies to reduce green ouse gas e issions ust dri e energy efficiency our olicy res onse to cli ate c ange ails to dri e energy efficiency t e cost o eeting our targets ill be substantially ig er

e current designs o t e coalition s E issions eduction und and a eguard ec anis and t e

A P s ro osed E issions rading c e e ill dri e li ited energy efficiency ese olicies need to be re ned and acco anied by s eci c olicies t at dri e energy efficiency

Recommendations:• Ensure that Australia’s suite of climate change

policies drive energy efficiency

Australia ill need a suite o olicies to address cli ate c ange ile any o t ese olicies ill not directly su ort energy efficiency e g t e

ene able Energy arget t e suite o olicies as a ole s ould dri e a cost e ecti e balance o energy su ly and de and reduction ro ects to reduce e issions

• Align and integrate energy market and climate change policies

e current lack o integration bet een cli ate c ange and energy olicy creates con icting incenti es t at raises t e cost o bot energy and

itigation etter aligning energy and cli ate c ange olicies ill deli er lo er costs and ore abate ent

Figure 1. Abatement potential in Australia to 2030Source: ClimateWorks Australia & WWF 2015 A prosperous, net-zero pollution Australia starts today.

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3.TheNEMurgentlyneedsmoredemand-sideactivityAustralia’slevelofenergyefficiency,demandresponseandcogenerationarewellbelowoptimallevels,andthishasanegativeimpactonenergyaffordability,securityandprices.

EnergyefficiencyAustralia’senergyproductivity8(ameasureofenergyefficiency)was14percentbelowtheOECDaveragein2012.9Australia’senergyproductivityhasalsobeenimprovingatamuchslowerratethatmanyofourcompetitors,increasingbyjust1.48percentin2014-15.Thisrateofimprovementislowerthantheaverageof1.69percentoverthepreceding15years,andwellbelowthe2.26percentrequiredtomeettheAustralianGovernment’stargettoincreaseenergyproductivityby40percentby2030.10

Thedecreasedrateofenergyproductivityimprovementisparticularlyconcerningsinceithasoccurredduringaperiodofrapidincreaseinelectricityandgasprices.ThissupportsthefindingfrommanystudiesthattherearemajorbarrierstoenergyefficiencyinAustralia,andthismateriallyaffectshouseholds’welfareandbusinesses’competitiveness.

DemandresponseThelevelofdemand-responseoccurringintheNEMismuchlowerthanboththepotentialinAustraliaandtheleveloccurringinotherkeyeconomies.

Capacity: Inahealthymarket,demandresponsecanregularlydeliveratleast10percentofcapacity.IntheNEM,demand-responseprobablyonlydeliversafewpercentofcapacity.11However,thepotentialfordemandresponseinAustraliaissignificant,withindustrialusersaloneestimatedtobeabletoofferatleast3.1Gigawatts(GW)ofdemandresponse.Thisisequivalentto42percentofthe7.6GWtheseusersdrawduringsummersystempeaks.12

FCAS: Demandresponseprovidesaround75percentofFCASinNewZealand,butunder2percentintheNEM.ThisindicatessubstantialpotentialtosecuremoreFCASfromdemand-responseintheNEM.

RecentloadsheddinginSouthAustralia,supplyconstraintsinNSWandpricespikesinQueenslandcouldhavebeensignificantlymitigatedwithdemandresponse.

CogenerationAustralia’slevelofcogenerationiswellbelowtheequivalentinothermajordevelopedeconomies.WhileAustralia’stemperateclimatedoesaffecttheeconomicsofcogeneration,themajorfactorconstrainingdeploymenthasbeenthelackofasupportiveregulatorycultureandtherecentrapidjumpingasprices.

7GasparriniA.etal2015‘Mortalityriskattributabletohighandlowambienttemperature:amulticountryobservationalstudy’,TheLancet,Vol386,No.1991,p367-375.8GDPperunitofprimaryenergy.9AustralianAlliancetoSaveEnergy2014,2XEP–Australia’sEnergyProductivityOpportunityFramingPaper.10COAGEnergyCouncil2016,NationalEnergyProductivityPlanAnnualReport2016.11Itisdifficulttopreciselydeterminethequantumofdemand-responseinAustraliaasmuchofitsoccursthroughprivatecontractsbetweenretailersandlargeenergyusers.12ClimateWorks2014,IndustrialDemandSideResponsePotential.

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FuturemarketsAshighlightedabove,thelevelsofenergyefficiency,demandresponseandcogenerationintheNEMarewellbelowoptimumlevelsforourcurrentenergysystem.However,demand-sideactivitieswillbeevenmorecriticalincomingyears.

• Intermittentgeneration:demandresponsecansignificantlyreducethecostofensuringsecurityofsupplydespiteanincreaseinintermittentrenewablegeneration,byprovidingbothfast-responsecapacityandFCASatmuchlowerpricesthaneithergas-firedgenerationorstorage.Aportfoliothatincludesgas-firedgeneration,storageanddemand-responsewillberequiredtomeettheNEM’sneedforcapacityandFCAS.Excludingthelowest-costformofcapacity(demandresponse)fromthisportfoliowillsignificantlyraisecosts.

• Flexibilityanduncertainty:Thesignificantuncertaintyaroundtechnologydevelopmentpathwaysandconsumerpreferences(e.g.disconnectionfromthegrid)createsariskofstrandedassets.Thismeansthatinvestorsarewaryofsysteminvestmentswithlongpaybackperiods(e.g.networkinfrastructure).Whilesomenetworkserviceprovidershavearguedforaccelerateddepreciationtoensuretheirreturns,thissimplytransferstheriskofstrandedassetstoenergyusers.Demand-sideactivitiestypicallyhaveamuchfasterpaybackperiodandcansignificantlydelaytheneedforexpenditure,whichcreatesflexibilityandenablesustomeetourcurrentenergyneedswithoutlockingininfrastructurethatcouldpotentiallybestranded.

• Efficientinvestment:Australianeedstomakesignificantinvestmentsinsupplyinthecomingdecades.Failingtoproperlybalancedemandsideandsupplysideinvestmentduringthisperiodcouldresultinexpensiveoverinvestment.

ThemythofoversupplyThereisamyththatincreasedenergyefficiencywillresultinexcesscapacityinthemarketandthereforeincreasedelectricitybills.Therearethreeclearcounterstothis:

- Sunknetworkcostsarefixed.Thetotalcostofsupplywouldnotbeincreasedbyreducedconsumption.Whileadecliningnumberofenergyuserswouldmeanthatthesecostsaresharedbetweenfewerusers,reducedconsumptionbythesamenumberofuserswouldnotincreasethecostperuser.Itistruethatthewaynetworkchargesarestructuredchangesthewaythatcostsaresharedamongstenergyusers,howeverthissimplyhighlightstheimportanceoftariffdesign.

- Reduceddemandreducestheneedfornetworkaugmentation.Decliningpeakdemandwillreducethepressureforfurtherinvestmentinthenetwork(includingthesizeofreplacementassets),reducingnetworkcostsovertime.

- Short-termperiodsofover-orunder-supplyshouldnotdictatepolicy.In2014somecommentatorsarguedthattheoversupplyingenerationmeantthatinvestmentinrenewablegenerationandenergyefficiencyshouldbewoundback.TwoyearslaterAustraliaisfacingundersupplyissues.Fuelswitchingandtheemergenceofnewtechnologies–suchaselectricvehicles–couldresultinevenmoresignificantundersupply,makingenergyefficiencyevenmorevaluable.Thishighlightsthatenergymarketpolicymustbebasedonfirstprinciplesandlong-termcostsforenergyusers.

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4.Demand-sideissuesareanintegralpartofenergyreformsTheEnergyEfficiencyCouncilstronglyarguesthatanyreviewoftheNEMmustconsiderdemand-sideissues.Supplyanddemandandarenotseparatestories-theyaretwohalvesofthesamestory.Improvingthewaythatweuseenergyisessentialtoensurethattheshifttonewformsofgenerationisfastandaffordable.

ThecheapestwaytomeetAustralia’senergyneedsistobalanceinvestmentinenergysupplywithsmarterenergyuse.Thebalanceofinvestmentisaffectedbyoverlappingmarketsforenergy,products(suchasfridges),andservices(suchasbuildingdesign).

Australia’selectricitysystemsarenotnaturalmarkets.Networksarerunbyregionalmonopolies(NSPs)and,whilethereissomecompetitioninelectricitygenerationandretail,thosemarketsarealsohighlyregulatedtoprotectbothconsumersandgridstability.Thismeansthatthequestionisnotwhethergovernmentsregulateenergymarkets,buthowtheyregulatethem.

Therules,regulationsandgovernanceoftheNationalElectricityMarket(NEM)haveresultedinoverinvestmentinsupplyandunder-investmentindemand-sideactivities.Forexample:

• Electricitynetworkshavesignificantincentivestoinvestingridaugmentation,butweakincentivesfordemand-management.Theroleofnetworksistolinkgeneratorstoenergyusers,andaggregatemultiplegeneratorsandconsumerstoboostreliabilityandreducecosts(e.g.combiningmultipledemandprofilescreatesamorestableloadprofile).Theoretically,networksshouldinvestinacombinationofsupply-sideanddemand-sideinvestmentsthatdeliverconnectionservicesatlowestcost,butinpracticetheyhavelargelyfocussedonsupply-sideinvestment.

• Thelackofaclear,simpleandstablemarketfordemand-responseandFCASunderminesthepotentialforvoluntarychangesindemandtoprovidegridservices.Inmanyenergymarketsdemand-responseprovidesaround10percentofcapacity.

• Electricitytariffsandchargesdon’treflectthereallong-termcostsofsupply,whichreducestheincentiveforenergymanagement.Forexample,ithasbeenestimatedthata2kWairconditionerthatcostsaconsumeraround$1,500toinstallwouldimposesystemcostsofupto$7,000,whicharespreadacrossallconsumers.13Thelackofanappropriatepricesignaltoreflectthetruecostsofairconditioners(suchasachargeatthepointofinstallationoracriticalpeakcharge)wasamajorcontributortorapidgrowthinpeakdemandinthelate1990sandearly2000s.

Theseissuesarewell-known.In2002WarwickParer,aformerCoalitionEnergyMinister,ledareviewoftheNEMforCOAG14,whichconcludedthat:

“...thereisarelativelylowdemand-sideinvolvementintheNEMbecause:• TheNEMsystemsaresupply-sidefocussed• Thedemand-sidecannotgainthefullvalueofwhatitbringstothemarket• Residentialconsumersdonotfacepricesignals.”

13AustralianGovernment2012,EnergyWhitePaper2012.14COAGEnergyMarketReview2002,TowardsaTrulyNationalandEfficientEnergyMarket.

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Arangeofotherdistortionsinourelectricitysystems,includingsupplysidebiases,havebeenidentifiedintheProductivityCommission’s‘InquiryintoElectricityNetworkRegulation’andSenateCommitteeInquiriesin2012into‘ElectricityPrices’andin2014into‘ThePerformanceandManagementofNetworkCompanies’.

Thesedistortionscontributedtorecentincreasesinelectricitybills.Ofparticularnote,between2008and2013NSPsspentover$35billiononnetworkinfrastructure,whichcontributedtoelectricitybillsrisingbymorethan70percentinmanypartsoftheNEM.Thesebiaseshavestillnotbeenresolved,andsomehaveactuallybecomeworse.

Forexample,tariffstructuresarecriticaltoencouragethemixofinvestmentsingeneration,networksanddemandreductionthatdeliveraffordableenergy.Thereisastrongcaseforreformingelectricitytariffstoencourageconsumerstoreducetheirelectricityatpeaktimes.However,severalNSPshaveusedrecenttariffreviewstointroducetariffstructureswithmuchhigherfixedcomponents.ThesehighfixedchargesincreaseNSPs’revenuecertaintybutdonotreflectthegenuinelong-runcostsofinfrastructure,whichdiscourageseconomicallyefficientlevelsofinvestmentindemandreduction.

Therapidglobaltransformationintheenergysectorhasaddedfurtherpressureforenergymarketreforms.Changesinconsumerpreferencesandthecostsofvarioustechnologies(suchasenergystorage)meanthatourenergysystemwilllookradicallydifferentin2030.Governmentsmustensurethatthetransitiontorenewables,storageandenergymanagementoccursinawaythatiscosteffective,fairandbenefitsconsumers.Thiswillrequirefundamentalchangestothewaytheelectricitysectoroperates.

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5.Keyrecommendations

AfulldiscussionofenergymarketreformisoutsidethescopeofboththissubmissionandtheReview.Instead,theEnergyEfficiencyCouncilstronglyrecommendsthattheReviewmakefourhigh-levelrecommendations:

1. EnergymanagementiscriticalforthefutureoftheNEM

Demand-sideissueshavehistoricallybeengivenmuchlessattentionthansupply-sideissues.Toensurethatgovernmentsdirectsufficientattentiontodemand-sideissues,theReviewmustexplicitlyemphasisethatenergymanagementisessentialtothesecurity,affordabilityandsustainabilityoftheNEM.

2. COAGEnergyCouncilestablishanurgent‘DemandResponseReview’

ThemosturgentissueforbothsecurityandaffordabilityintheNEMisthedeploymentoftransparentdemand-responseforemergencycapacity,FCASandaffordablepeakdemand.IftherehadbeenaneffectivemarketfortheseservicesinFebruary2017broad-scaleload-sheddinginSouthAustraliaandtargetedload-sheddinginNSWcouldhavebeenavoided,andpricesacrosstheNEMmoderated.

TheDemandResponseReviewshouldaimtoidentifyanddesignarangeofnationalandstate-basedoptionstounlockthepotentialofdemandresponse,andmakearecommendationonapreferredoptionforrapidimplementation.TheReviewshouldbesupportedbyaroundtableincludingrepresentativesofenergyconsumers(e.g.EnergyConsumersAustralia,EnergyUsersAssociationofAustraliaandAustralianIndustryGroup),energymanagementexpertsandthebroaderenergysector.

Nosingleenergymarketbodyhasboththeskillsandthetermsofreferencetoprovideaholisticassessmentoftheseissues.Therefore,itiscriticalthatthisreviewiscarriedoutbyanindependentsecretariatthatreportstotheCOAGEnergyCouncil,ratherthantheAustralianEnergyMarketCommission(AEMC).

3. COAGEnergyCouncilestablishaseparate‘EnergyProductivityTaskgroup’

ThereisabroadrangeofenergymanagementissuesthatareimportantbutlessurgentthanthosethataDemandResponseReviewneedstoconsider,includingelectricitytariffstructures,demand-managementtolowernetworkcostsandcogeneration.ThesemeasuressitundertheNationalEnergyProductivityPlan(NEPP)butrequireongoingfundingandattentionfromtheCOAGEnergyCounciltorealise.AswiththeDemandResponseReview,thisTaskgroupshouldbesupportedbyaroundtableofconsumersandenergyexperts.

4. Governancereform

TheNEM’sgovernancestructuresarenotdesignedtofacilitatetherapidreformsthatarenecessarytorespondeffectivelytoongoingtransformationinenergytechnologiesandmarkets.TheReviewshouldrecommendsubstantialgovernancereform,includingincreasingkeyinstitutions’demand-sidecapabilityandfocusandestablishingaNationalEnergyEfficiencyandProductivityAgency.

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5.KeyareasforNEMreformWhiletheEnergyEfficiencyCouncilrecommendsthattheReviewmakefourhighlevelrecommendations,wealsorecommendthattheReview’sfinalreportdiscussanumberofpriorityareasforNEMreform.

Effectiveincentivesfordemandresponse

ThemostcosteffectivewaytoprovidecapacityandFCASinenergymarketsistopayforamixofgenerationcapacity,storageanddemandresponse.Tofacilitatethis,governmentsneedtointroducemechanismsthatprovideclear,transparentandstablepaymentsfordemand-response.Whileretailersareabletodirectlycontractwithenergyusersarounddemand-response,inpracticethisadhocapproachhasnotunlockedthefullpotentialfordemand-responseandtheamountofavailabledemandresponseisnottransparenttothesystemoperator(theAustralianEnergyMarketOperator(AEMO)

TheAEMCrecentlydecidedtonotproceedwithaspecificdemandresponsemechanismthatwaslargelydesignedtoaddresswholesalecosts(ratherthanemergencycapacity)basedonbothdisputedmodelingandtenuousstatements.However,theAEMCdeclinedtoproposeanalternativemechanismtounlockdemand-sidepotentialintheNEMdespitetheclearandpressingneed.FollowingrecenteventsinSouthAustraliaandNSWitisclearthatdemand-responseisessentialtoprovidereliableandaffordableelectricity.Assuch,theCouncilrecommendsthatanindependentReviewbeestablishedtolookacrossthefullrangeofissuesfordemandresponse.

Theeconomicefficiencyofelectricitynetworksanddemand-sideinvestment

Thecurrentregulatoryframeworkforelectricitynetworkshasresultedinoverinvestmentinnetworks,highreturnsforNetworkServiceProviders(NSPs)andrapidincreasesinenergybills.TherulesandregulationsoftheenergymarketneedtoensurethatNSPsplan,investandoperateefficientlyandareremuneratedatanappropriatelevel.

Inadditiontogeneraleconomicefficiency,therulesshouldensurethatNSPsinvestinreducingdemandwhenitischeaperthannetworkaugmentation.ThenetworkplanningprocessshouldrequireNSPstoreportonoveralllevelsofdemand-sidemanagement.NSPsshouldbesettargetsfordemand-sideinvestmentandtheDemandManagementIncentiveSchememustbeagenuineincentivetoreducedemand(e.g.encouragingdemand-sideworkswhentheycanreducethecostofreplacingageingassets).

IndependentoversightofNSPs’interactionswithconsumersandotherparties

NSPsaremonopoliesbutindividualconsumers,generatorsanddemand-sideprovidersareexpectedtonegotiatewithNSPsonthecostsforconnectiontothenetworkand/orpaymentsforprojectsthatreducetheneedfornetworkexpenditure.Governmentsshouldappointanindividual(potentiallywithinanexistingmarketbody)toprovideactiveoversightofinteractionsbetweenNSPsandthirdparties.ThiswouldincludegatheringandreviewinginformationonthespeedofNSPnegotiationsonmatterssuchasconnectionandthechargesor

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paymentsresultingfromnegotiations.

Trialnewenergymarketstructuresinanumberofregionaltowns

TryingtochangetheNEMrulesandregulationsincrementallywillbeextremelyslowandchallenging.Werecommendthatgovernmentstrialnewbusinessmodelsinsmallregions,inconjunctionwithcommunities,regulators,NSPs,retailers,generatorsandotherparties.Theaimwouldbetodevelopmoreeconomicallyefficientmarketstructuresthatbettersuitnewtechnologies(e.g.PV,storageandmini-grids).Duetothehighercostofsupplyinregionalareas,trialsintheseareasarelikelytooffersubstantialbenefitstoconsumers.Whilesomegovernmentfundingwouldberequiredtosupportinnovationandde-riskthesetrialsforconsumers,theaimwouldbetodevelopeconomicallyefficientmarketstructuresthatdonotneedgovernmentfunding.

Fairandefficientelectricitytariffstructures

Tariffstructuresmustbefairandencouragetherightbalanceofinvestmentinenergysupply,networksanddemandreductioninordertodeliverlowerbillstoconsumers.However,thereisverylittleguidanceaboutwhattariffsshouldlooklike.TheCOAGEnergyCouncilshouldsetupanationalprocess,similartoCSIRO’sFutureGrid,tobringawiderangeofconsumers,suppliersandNSPstogethertodevelopmodeltariffstructuresthatarefairtoenergyconsumersandencourageeconomicallyefficientinvestment.Thesemodeltariffstructuresdon’tneedtobemandatorybutshouldguidetariffdesignbyNSPsandreducetheduplicationresultingfromeachNSPhavingtoconsultfromscratchwithconsumers.

Energyretailerobligations

Energyretailerobligationsareoftenreferredtoas‘energyefficiencycertificateschemes’and‘energyefficiencyschemes’.

Australiahasestablishedwholesalemarketsandelectricitynetworksthatallowaggregationofsupplysideinvestment,butnotdemandsideinvestment.Topartiallycorrectthis,governmentsinNSW,Victoria,SouthAustraliaandtheACThaveintroducedobligationsforretailerstofundenergyefficiencyactivities.Thesecreatesmallmarketsforaggregatedenergyservices.Governmentspecifyhowmuchenergyvariousactionswillsave(e.g.replacinghalogendownlightswithLEDs)andretailersneedtoshoweachyearthattheyhavefundedacombinationofactionsthatmeettheirtarget.

Theassessmentsoftheseprogramsshowthatthebenefitsoftheseschemessubstantiallyoutweightheircosts.However,thereissubstantialopportunitytodeliverevengreaterbenefitsthroughtheseschemesbyextendingthemtoQueensland,WesternAustralia,TasmaniaandtheNorthernTerritory,harmonizingthemandmodifyingthemtoensurethattheysupportlargeenergyusers.

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6.KeyissuesoutsidetheNEM

TheEnergyEfficiencyCouncilrecommendsthattheReviewdiscussanumberofkeyissuesforenergyproductivitythatlieoutsidetherulesandregulationsoftheNEM.

Asnotedbefore,thebalanceofinvestmentinenergysupplywithsmarterenergyuseisaffectedbyoverlappingmarketsforenergy,products(suchasfridges),andservices(suchasbuildingdesign).ThedistortionsintheNEMinteractwithdistortionsinothermarkets.Forexample:

• Whenconsumerscan’tcomparetheefficiencyofbuildingsandappliancestheycan’tselectmoreefficientoptions,reducingtheincentivetosupplybettergoods.Thisisknownas‘AdverseSelection’.

• Landlordsownbuildings,buttenantspayelectricitybills.Thiscanmakeitverychallengingtoupgradetheefficiencyofrentedhomesandoffices;and

• Mosthouseholdsandbusinesseslackthekeyskillstheyneedtobuildabusinesscasearoundenergyefficiency,findtrustedexpertsandimprovetheirefficiency.

TheEnergyEfficiencyCouncilrecommendsawiderangeofactionstoaddressthesebarriers.Addressingthesebarrierswillimprovetheaffordability,reliabilityandemissionsprofileofAustralia’selectricitysectorbyimprovingthebalanceofinvestmentinsupply-sideanddemand-sideactivities.Actionstoaddressthesebarriersinclude:

• EstablishprogramstoupgradegovernmentfacilitiesinalljurisdictionsliketheNSWGovernmentResourceEfficiencyPolicy.

• Transformofficesbyinvestingatleast$10millionayearovertenyearsthroughtheCOAGEnergyCounciltoengagebuildingowners,provideincentivesforbuildingupgradesanddevelopminimumstandardsforrentedoffices.

• Developanationalresidentialenergyefficiencydisclosurescheme;and

• Minimumstandardsforbuildingsandappliances.

TheCouncil’sfulllistofrecommendationscanbefoundintheAustralianEnergyEfficiencyPolicyHandbook,whichcanbeaccessedat:www.eec.org.au/policy-advocacy/handbook.TheCouncilrecommendstheReviewdiscuss:

SettingupanEnergyProductivityTaskgroupandfundingtheNEPP

InordertodriveNEPPmeasures,theEnergyEfficiencyCouncilrecommendsthattheAustralianGovernmentandStateandTerritorygovernmentssetupahigh-profileEnergyProductivityTaskgroupwithastakeholderpanelandsubstantiallyincreasefundingfortheCOAGEnergyCouncil’sNationalEnergyProductivityPlan(NEPP).NEPPprogramscouldpotentiallybefundedbyasmallsurchargeonenergybills,asthebenefitsoftheseprogramsinreducingenergybillswouldvastlyoutweighthesizeofthesurcharge.

Californiahasachievedsignificantimprovementsinenergyefficiencyanddeployedextensivedemandresponsethoughbothutilityregulationandenergymanagementfundthatsitsalongsidetheirenergymarket.https://energy.gov/eere/femp/energy-incentive-programs-california

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7.Keygovernanceissues

TherehavebeennumerousindependentreviewsoftheNEMoverthepast20yearsthathaveconcludedthaturgentactionisrequiredtoincreasedemand-sideparticipation.However,fewsubstantialchangeshavebeenmadetoaddressdemand-sidebarriers,largelyduetothegovernancearrangementsintheNEM.

AgoodexampleofthisisthedebacleovertheDemandResponseMechanism(DRM).Inmid2012theAEMCproposedaspecificdesignforaDRM.Inlate2012COAGindicatedsupportfortheDRMandinearly2013theCOAGEnergyCouncildirectedAEMOtodesigntheDRMindetail.However,followinglast-minutelobbyingbysomeorganisations,inDecember2013theCOAGEnergyCouncildecidedtodefersubmittingtheDRMRuleChangeproposalpendingacost-benefitsanalysis.AsaRuleChangereviewshouldincludeacost-benefitanalysis,theoreticallythisadditionalcost-benefitanalysiswasunnecessary.

Afterthecost-benefitanalysisconcludedthataDRMwoulddelivernetbenefits,theCOAGEnergyCouncilaskedtheAEMCtoconsidertheDRMRuleChangeproposal.Inlate2016theAEMCdeterminednottoproceedwiththeDRMbasedongroundsthattheCouncilstronglydisputes,anddeclinedtoputforwardanalternativeDRMdesigntounlockdemandresponse.

Inotherwords,ittookmorethanfouryearsfromtheAEMCproposingafairlystraight-forwardRuleChangetotheAEMCrejectingtheproposal.ThishighlightsthatNEM’sgovernancesystemisnotdesignedtofacilitaterapidreforms,particularlybecausemajorchangesrequirethesupportofmultiplegovernmentsandproposedreformsoftenbouncebetweenmultipleorganisationsbeforetheyareimplemented.ThesestructuralissuesareexacerbatedbytheAEMC’slackofcapacityarounddemand-sideissues,andasupply-sidebiasamongstsomepolicymakers.Theviewofsomeindividuals,thatmarketbodieshavenoresponsibilityfordemand-sideissues,demonstratesaprofoundlackofunderstandingabouthowenergymarketsfunction.

TheseproblemspartlystemfromsomeorganisationstakinganarrowmisreadingoftheNationalElectricityObjective(NEO).TheNEOis:

“topromoteefficientinvestmentin,andefficientoperationanduseof,electricityservicesforthelongterminterestsofconsumersofelectricitywithrespectto–price,quality,safety,reliability,andsecurityofsupplyofelectricity;andthereliability,safetyandsecurityofthenationalelectricitysystem.”

AnappropriateunderstandingoftheNEOwouldincludedemand-sideactivitiesintheterm‘electricityservices’,butinpracticesomepolicymakershavetaken‘services’tosimplymean‘supply-sideservices’.Asaresult,theAEMCandothershavelargelyignoredthedemand-sideand,whiletheAEMCregularlyconsiderstheviabilityofelectricitysuppliersduringitsdeliberations,itpaysvirtuallynoattentiontotheviabilityofdemand-sideproviders.

WhiletheNEOisbroadlyappropriate,thefocuson‘price’isnot.Ultimately,consumersareconcernedaboutthesizeoftheirenergybill,whichisaffectedbyfixedcharges,variablecharges,energyconsumptionandpeakdemand.Asnotedearlier,CaliforniahasamongstthehighestpricesforelectricityintheUS,butthelowestbills,largelyduetohigherlevelsofenergyefficiency.Byfocusingon‘price’theNEOdoesn’ttakedemand-sidemattersfullyintoaccount,whichleadstosub-optimaloutcomes.Evenjust

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consideringsupply-sideissues,thecomplexityofhow‘prices’areset(includingfixedandvariablecomponents)meanstheterm‘price’isdeeplyproblematic.

Wholesalegovernancereformislikelytobenecessary(includingchangingtheNEOtofocusonthe‘costtoconsumers’ratherthan‘price’),butataminimumtheCouncilrecommendsthattheReviewdiscuss:

EstablishingaNationalEnergyEfficiencyandProductivityAgency

AnewagencyshouldbeestablishedtoadministernationalprogramsfortheCOAGEnergyCouncil,suchasappliancestandardsandtheNEPP.

Increasingkeyinstitutions’demand-sidecapabilityandfocus

TheAEMC,AustralianEnergyRegulator(AER)andAEMOmusthavethecapacityanddirectionstogiveappropriateregardtoenergyproductivity.Asapriority,boththeAEMCandAERandshouldhaveonepart-timeCommissionerappointedwithaspecificfocusondemand-sideissues,andtheCOAGEnergyCouncilshoulddirecttheAEMC,AERandAEMOtohaveregardtothenationaltargettoimproveenergyproductivityby40percentby2030.