ESB paints future of two-sided electricity market – but what does it mean for consumers?

The wheels of progress continue to turn, slowly, on the evolution of Australia’s grid, with the publication this week of the Energy Security Board’s consultation paper on moving to a two-sided wholesale electricity market.

The 47-page document, produced at the request of the COAG Energy Council, presents a “high-level discussion” on the benefits and opportunities of moving to a two-sided market, and how it might come about.

But what, exactly, is a two-sided wholesale electricity market? And will it really be good for consumers, or just sound like it?

In general terms, a two-sided market model involves direct interaction between suppliers and customers, each creating value for the other through an intermediary platform.

In terms of the National Electricity Market (NEM), this would mean “quantity and price inputs” to the grid from both consumers and producers of electricity, to facilitate “more efficient participation in the market by even small consumers like homes and small businesses.”

In the paper, the ESB describes the shift to a two-sided market – where consumers are encouraged to join the party, rather than go it alone with solar and storage – as the “clearest opportunity” from Australia’s low-carbon energy transition.

That’s because a lot of the hard work is already done, by the millions of Australian homes and businesses that have been investing in rooftop solar – and will likely follow suit with batteries – in a world-leading fashion.

Creating a two-sided energy market would also unlock data on consumer energy demand that is hidden ‘behind the meter’ and which is needed to help keep the power system reliable and secure, the ESB paper says.

The Australian Energy Market Operator agrees, and just two months ago launched the nation’s first detailed database on distributed energy resources, to log new rooftop solar, battery storage, electric vehicles and other equipment that has until now been largely invisible to the grid operator.

This capability has been considered critical to the effective management of the grid, which over the coming decades will likely source up to half of all its power from rooftop solar installed by households and businesses, and stored by solar batteries and batteries in electric vehicles.

Indeed, AEMO’s Electricity Statement of Opportunities notes customers already own 8.1GW of solar PV and in the next 20 years this could triple, residential battery storage could be six or seven times higher, and battery EVs could be 25 per cent of the vehicle fleet. And these are considered by many to be conservative estimates.

As the ESB paints it, the two-sided wholesale market of Australia’s future – the aim is for it to be in place after 2025 – would be one in which there is “full participation” of all consumers, be they “actively” or “passively” involved.

That is, customers with or without distributed energy resources (DER) would be actively involved in the demand for, and supply of, electricity, via technology that can actively control the way in which they can reveal their intentions in the market.

“Ideally,” says the paper, “a two-sided market would have all the participants ‘scheduling’ their intentions themselves or through a third party. This would improve the price discovery process and eliminate the need for central forecasts.

“Full participation in a two-sided market can support higher levels of flexible capacity from both consumers and DER and facilitate greater innovation in services for customers.

“Greater flexibility through exposure to price for all participants can enhance the efficiency and robustness of the market. A two-sided market could help address key system issues related to the integration of DER. Over time, this creates significant opportunities to reduce system costs and therefore, consumer prices.”

How would this be done? The paper says it would mean rethinking some key market fundamentals – such as shedding traditional views of how certain participants act and how the rules should apply to them.

The ESB suggests replacing the diverse arrangements that exist today around retailers, generators, aggregators etc with two simple categories – those who use electricity and those who sell it on behalf of end-users.

This would mean market rules could be streamlined to make it easier for new types of traders to enter the market. It could also mean that single end-users could be their own trader for some services – and use other traders to buy or provide other services for them, the paper explains.

“Individual customers would be able to choose their preferred level of engagement by either participating directly in the market or by participating through a trader,” the paper says.

“Passive customers would still be able to benefit from increased participation in scheduling without needed to change their behaviour or operation.”

The levels of technology already available would also mean that consumers wouldn’t be expected to monitor electricity prices and decide how or when to participate, as these decisions could be set up to happen autonomously or in an agreed way via a retailer or aggregator.

But how will all this actually shape up for consumers? And will the benefits of a two-sided market really come out more or less even?

In principle, yes. Which is why organisations like the Public Interest Advocacy Centre, Total Environment Centre and The Australia Institute have been calling on state energy ministers to prioritise households being given access, through a provider of their choosing, to a two-sided market.

“Household demand drives high energy prices and households are eager to participate in demand response,” said the TEC’s energy market advocate, Mark Byrne, in comments last month, when the Australian Energy Market Commission announced rule changes to open up the wholesale demand-response market, but excluded households.

“The fact that the issue of household participation is still not resolved is disappointing, especially when the rule change was proposed by groups representing household consumers,” added Dan Cass, the energy policy and regulatory lead at The Australia Institute.

“We agree with the Commission’s analysis that demand response will reduce costs for all consumers in the short term by suppressing high wholesale spot prices, and over the long term by providing a cheaper resource for getting through peaks than expensive gas peaking power stations,” said Cass.

Byrne added this week that one of his top concerns about these sorts of “high level” discussions around the future two-side market, was that they made it very hard to tell how it would affect households.

“They need to clarify whether the two-sided market is a fancy name for stuff that is happening/evolving anyway, or represents a genuinely new market design (every market is inherently two-sided – balancing supply and demand).

“In particular, (they should clarify) whether and how it has any relevance to non-DER (distributed energy resource) consumers (eg via incentives to shift the load as part of an aggregated demand response program, which possibility was excluded from the final design of our wholesale demand response mechanism rule change).

“I am also concerned about onerous scheduling and data requirements that might add so much complication and cost that it will drive prosumers to engage less rather than more with the market,” Byrne said.

AEMO, meanwhile, appears to be pretty confident that a large portion of the benefits of a two-way market will flow the way of consumers.

“A two-sided market will fundamentally change the way energy is traded to benefit consumers,” said AEMO chief Audrey Zibelman in the ESB media release accompanying the consultation paper.

“As the energy system transitions, we have the opportunity to harness technology and establish a new market framework which empowers and rewards all energy system users, from small customers to large generators – to ensure the supply and demand mix is being orchestrated in the most efficient manner, while providing the services needed to keep the system safe, secure and reliable.

“This will involve establishing a framework which values the full breadth of essential system services and scheduling them in a coordinated way ahead of the time to ensure they are there when the system needs them.”

Clare Savage, the chair of the Australian Energy Regulator, has stressed that the key to realising the potential benefits to consumers will be in the design of the system, and the user-friendliness of the supporting technologies.

“A key success factor for these markets will be ensuring that the consumer experience is a positive one and consumers can leverage the benefits of new technology and services through products that are simple to understand and engage with,” Savage said in the same release.

Kerry Schott, the chair of the ESB, argues that consumer participation in the electricity market is already happening, but in a fashion that is of little real benefit to anyone.

“Consumers are already participating in the electricity market through their use of things like solar panels, electric vehicles and smart devices – but this information is largely hidden, making it very hard for the Australian Energy Market Operator (AEMO) and other market participants to know whether supply will meet demand,” Schott said on Monday.

“A two-sided market will change all that because consumers and those who participate in the wholesale market on their behalf will be active in responding to price.

“When prices are high, they can conserve their own use and supply electricity to the market and when prices are low, they can increase their use.

“Because this behaviour will be transparent and in real-time the information itself becomes a tool to keep the power system operating securely and reliably and can fill gaps when the sun isn’t shining and the wind isn’t blowing.”

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