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Time to reform the NEM

The Climate Spectator has a look at the potential for reducing infrastructure costs associated with meeting demand peaks by market based demand shaving mechanisms - Its time to reform the NEM.

Ross Fraser chairs a company called Energy Response, which makes money by encouraging large energy customers to cut their electricity consumption at times of peak load. It is the country’s only Australia-wide demand aggregator of electricity, but it shouldn’t be. And it can’t even operate on a daily basis in any other state than Western Australia, because the National Electricity Market (NEM) won’t allow it.

Energy Response has contracts with commercial and industrial business that account for 73MW of capacity in WA, and has the rights to another chunk about the same size. Basically the deal is this: when peak load soars and puts stress on the network and on wholesale prices, these consumers agree to reduce their demand by the agreed amount. Fraser won’t say how much they get paid, but it’s clearly lucrative, because it’s likely to be around 10 times more than what they are paying for the electricity if they were consuming it, and it is lowering costs for other energy consumers.

Fraser says about 2200MW of supply-side capacity exists in the NEM only to service the maximum peak loads that occur on just a few days of the year. It costs $2 billion to build that capacity and much more to put it into operation. “Why do we invest $1 million per MW to meet these occasional peaks when there is 3000MW of commercial and industry capacity that is already built and could be and reliably available if we have the right market mechanism?” he asks.

The NEM, a market that has been widely praised for delivering cheap and reliable energy, is now criticised because it is inflexible, is skewed towards suppliers simply producing more energy, and worst and most ironic of all – it adds unnecessarily to rising electricity costs. “There is no environmental objective and no demand management objective in the national electricity law, and that’s quite surprising,” says Mark Lister, head of the Alliance to Save Energy.

Fraser, who was the project leader in the implementation of the NEM, says even the efficiency of the NEM is now in doubt. “I don’t see how you can call it efficient,” he says. “It is simple for generators to build new generators and supply new energy. But it is not efficient for the end-use consumer – they are having to cope with the cost of this waste each year.” And the scale of this “waste” is enormous: around $6 billion in costs – a quarter of the annual retail cost of electricity, which is caused by servicing the extreme peaks in wholesale prices and network demand for just 40 hours a year.