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DWS Investors

Lights Out! The dark side of demand management

Another week and another government announcement.  But before we get into the latest political fudge on the National Energy Guarantee, just a quick recap on last week’s key events in the ever changing spiral of national energy debate and policy.

Amongst the orgy of hand wringing and political finger pointing that was last week’s AFR Energy Summit, you could be excused for missing one of the most self serving and tactless comments from a pride of CEOs who seem collectively to have agreed it was all someone else’s fault.

Admittedly when you’re struggling at slot 26 on the speaking roster, you need to say something that might relieve the torpor and rouse the post lunch snoozers on day 2. But the self serving and misleading comments from the CEO of one of the country’s iconic energy businesses need to be held up as a shining example of how this talk fest forgot about one key person: the customer.

Paul Broad is a veteran of the energy markets and CEO of Snowy Hydro, one of the country’s iconic energy businesses. His comments illustrate why the industry leadership is still far too inwardly focused on preserving its status quo, rather than embracing new, disruptive technology which will deliver a more reliable and lower cost product to its customers.

“Mr Broad said the energy industry should be aiming to meet all demand, and that “demand response” measures were little better than cutting customers off that would prefer to be using power.

“You know what demand management really is? Blackouts. That’s what happens – you turn it off,” Mr Broad said.

This is simply incorrect. Demand management is what sophisticated energy industries of the 21st century do to best optimise their business model from a cost, reliability and sustainability perspective.  It’s also what, later in the week, AEMO and ARENA sensibly committed over $25 million to, in order to avoid extreme peak demand this summer.

There is a significant global industry in demand management. Very smart mathematicians and software engineers have developed algorithms which use real time demand management at a C&I customer level to “firm up” intermittent renewables generation.

At a very basic level here in Australia retailers have for years been paying large industrial users to dial back consumption on peak demand days.  In fact, this has become an important source of recurring revenue for the nation’s large aluminium smelters.

So why would someone so knowledgeable about the electricity markets make such a statement about an established practice which relieves peak energy demand constraints and contributes to lower customer energy costs?

Well, the answer lies in those customer costs.  Snowy Hydro has one of the largest portfolios of generation in the NEM.  But this isn’t 24 hour, baseload generation like Loy Yang or Bayswater, it’s peaking generation.  As a peak generator Snowy has two key sources of revenue.

It makes a bit of money from selling generation during times of peak demand, but it makes a whole lot more from selling insurance.

Insurance is sold to electricity retailers in the form of price caps, which guarantee a maximum price which retailers need to pay for their generation on the wholesale market. Not surprisingly, this cost gets passed on to the customer.

If you are a small retailer with no generation – as rod Sims has reminded us, the “Big 3” control the majority of our generation – you are horribly exposed to the risk of high electricity wholesale prices. These prices can soar to $15,000 per MWh in times of peak demand, while your retail customers are paying you less than $100.

If you had to buy this generation on the open market, you would go out of business pretty quickly.  Here’s where Snowy comes in, with a “cap contract” that insures you pay no more than $300 per MWh for your energy.

The reason Snowy can sell these price cap products – and they make a lot of money from selling them – is that they effectively control the peak prices.  Like many markets, the wholesale electricity market is based on supply and demand.

When demand is high, suppliers can push up prices. Snowy has the largest portfolio of rapid start generation which can provide supply at peak times and therefore push down electricity prices.  This allows them to manage the underlying price risk behind the cap contracts they sell.

It’s a very efficient market which, over the past 20 years, has led to low wholesale prices and widespread availability of low cost price caps.  However, over the past year there have been some key events which have distorted this market in favour of Snowy.

The withdrawal of so much baseload capacity, combined with chronic gas shortage and a capital strike on new, non-renewable generation, has moved the market significantly in favour of suppliers.  Prices have soared and price volatility has dramatically increased, both of which play in to the hands of a portfolio and business model like Snowy Hydro.

With little hope of any clear, near term government policy to stimulate new generation this looks like a winning hand for Snowy, at least for the next decade until more generation comes on line, conveniently in the form of Snowy 2.0.

That is unless some annoying new technology arrives to upset the apple cart by restoring the supply-demand balance and reducing wholesale prices.  Demand management is the disruptive technology which threatens to do just that.

Overseas markets have been able to reduce customer demand through energy saving technology and government sponsored energy efficiency programs.

Low cost, smart technology which automatically switches off appliances or automatically regulates the flow of power to ensure you use the minimum necessary to run your appliances is available now.  Australia needs to embrace this technology, not vilify it.

Demand management is not the blackouts Mr Broad suggests.  It’s the smart way for customers to protect themselves from the increasing energy prices which are providing such a boon to Snowy’s shareholders (who incidentally comprise the Federal, NSW and Victorian governments).

We have big problems in our domestic energy industry and it’s great to talk about these things, but there was too much self pity at last week’s AFR Energy Summit.  Misery loves company, but to be fair, this train left the station almost a decade ago.  If you haven’t prepared for the current environment, someone should be asking questions.

I took a walk through the All Energy conference in Melbourne last week and saw a host of tried and tested technologies, both international and Australian designed, which are available now to help you manage your own peak demand and reduce your energy costs.

They weren’t for sale at the Snowy Hydro stand, but they will save you a lot of money, while helping to lower overall energy costs across the country.

Published by Richard McIndoe – 19th October 2017 – New Economy

Richard is the head of Edge Electrons and a former head of EnergyAustralia.

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