Demand Management and Energy Policy Development: a Case Study of New South Wales

DEMAND MANAGEMENT AND ENERGY POLICY DEVELOPMENT: A CASE STUDY OF NEW SOUTH WALES

A REVIEW AND PROPOSALS FOR THE FUTURE

Total Environment Centre Inc www.tec.org.au May 2010

INTRODUCTION AND SUMMARY

This brief review examines policy development and political will exists and energy industry and regulator opportunities for demand management (DM) in New myopia about DM has been overcome or South Wales at two levels. It should be noted that overridden. The recommendations can be fashioned key findings have relevance to other states as well for reform of the National Electricity Market (NEM) as Commonwealth action. Rules and also in some circumstances via NSW action. Firstly, on the economic plane in relation to ‘cost effectiveness’. It should be noted there are differing Recommendations interpretations of this concept. This is partly influenced by which economic methodology is 1 Expand the NSW or national Energy Savings applied - traditional or broader economic Scheme to distributors to incorporate peak approaches; and also how economic concepts are demand reduction targets and the surrender of expressed in legislation and used by regulatory certificates with priority for constrained areas. agencies. In some ways ‘cost effectiveness’ is in the 2 Allocate a percentage of utility revenue to DM. eye of the beholder. 3 Require implementation of DM prior to Secondly, while barriers to demand management augmentation of the transmission and distribution have been long acknowledged – and the solutions network systems through explicit terms and to overcoming these increasingly well known – there associated planning and revenue provisions in have been highly influential political issues, the NEM and state government directions. embedded cultural attitudes and regulatory 4 Development of a risk-reward system to establish approaches that have impeded their clear incentives for utilities. implementation. These need to be exposed in order to devise the next strategic attempt to mainstream demand management for baseload and peak power consumption which in turn will alleviate energy bill pressures on consumers and assist climate change policy. While there is some evidence that a few of the recent DM policies have the potential to make a moderate degree of difference, we suggest a suite of recommendations that if implemented would firmly embed DM into our energy system with significant financial, social and environmental benefits. This will however only occur where the

Demand Management and Energy Policy Development: a case study of New South Wales. Page 1 01 THE DEMAND MANAGEMENT CHALLENGE 01

Demand growth has two components: baseload Components of Integral Energy’s Capital and peak. Both forms of growth have direct financial Expenditure Program3 impacts on household, social service and business Renewal consumers; and, depending on the energy source, 27% increase greenhouse gas emissions. When the financial and environmental costs rise, society, individuals and organisations now and in the future, Growth are worse off. NSW and the National Electricity 46% Market (NEM) are facing a number of very significant pressures to expand generation, Reliability transmission and distribution capacity which, if not 2% curtailed, will entrench the worst aspects of our electricity system. Compliance 14% Around a third of total NSW distribution network expenditure over the next five years is for growth Non System 11% alone.1 As significant parts of demand growth and subsequent infrastructure expansion are largely 1.1 Peak Demand optional, as opposed to a foregone conclusion, this represents over several billion dollars of avoidable A particularly serious problem is peak demand. costs for which NSW electricity consumers will have About 10 percent of network capacity is required to to pay, not including the costs of additional meet peak demand that occurs only 1 percent of 4 generation and transmission infrastructure or the year. Integral Energy notes that this is typically 5 resulting future carbon costs. about 85 hours per year. Peak demand in the TransGrid/EnergyAustralia area of Inner Sydney Networks such as Integral Energy have even higher Metropolitan indicates how infrequently maximum rates of growth related capital expenditure. The capacity is exceeded: graph below shows that 46% of Integral Energy’s $2,953 million capex spend is just to meet new Peak Demand in the Inner Sydney Metropolitan growth.2 Area6

Year Top 50 MW Top 100 MW 2005/06 1 day, 4 hrs total 2 days, 7 hrs total

2006/07 1 days, 0.5 hrs total 2 days, 3 hrs total

2007/08 1 days, 2.5 hrs total 2 days, 9 hrs total

2008/09 4 days, 8.5 hrs total 6 days, 21.5 hrs total

Such peak demand spikes not only occur infrequently, but are growing disproportionately compared to overall energy consumption. For 2009-

Demand Management and Energy Policy Development: a case study of New South Wales. Page 2 01 THE DEMAND MANAGEMENT CHALLENGE

2014 Integral forecasts peak demand growth (3.6% pa) to be three times higher than both growth in customer numbers and energy consumption (1.2% and 1.3% pa respectively), as illustrated below. 7 As Integral admits, the differing growth rates between peak demand compared to customer numbers and energy consumption contribute to upward pressure on tariffs.8

Integral Energy Average Yearly Growth 2009-20149

In the residential sector, EnergyAustralia forecasts an even greater disparity between peak demand and consumption, with consumption growing at only 0.1% and peak demand growing at 3.7%, as illustrated below.

Demand growth in EnergyAustralia’s network area (2009-14)10

Energy Growth (percent) Peak Demand Growth (percent)

Residential 0.10 Residential 3.70

As IPART has noted, the cost of providing distribution peak load can be around 400 times the cost of baseload.11

Demand Management and Energy Policy Development: a case study of New South Wales. Page 3 02. COST EFFECTIVENESS OF NETWORK DM 02

One of the key barriers that must be overcome to actual experience has demonstrated DM’s cost- transform regulator and network myopia on DM is effectiveness in NSW and elsewhere. The following the way in which cost-effectiveness is defined. graph demonstrates the cost-effectiveness of NSW Australian distribution network companies and network DM. regulators currently calculate the cost-effectiveness Research conducted by the Institute for Sustainable of DM on the most narrow of terms. Excluded from Futures in 2007 for Total Environment Centre has their calculations are: shown that actual distribution network DM Avoided transmission costs undertaken with IPART’s ‘D-Factor’ between 2004 Avoided generation costs and 2006 was almost four times more cost-effective than augmentation, delivering a benefit to cost ratio Avoided carbon costs of 3.8 to 1. DM costs were $5.1 million, while the Instead, the only value recognised is that of expected avoided network cost was reported as deferring or avoiding an upcoming, local $19.3 million.13 augmentation compared to estimated build costs. Even when defined within such narrow boundaries, In 1999-2000 DM investments by all the NSW Cost-effectiveness of Network DM Since 200012

25 24

15 12

10 Benefit-cost Ratio Benefit-cost

3.8 5 2.7 1.8 1.7 1.7 1.6 1.99 0 California '06-'07 California '07-'08 California EA '03-'07 EA '08-'09 '08-'09 Integral CE '08-'09 All NSW 2000 2000 Integral 2006 Factor) All NSW (D- All NSW

(Any value greater than one indicates that benefits have exceeded costs)

Demand Management and Energy Policy Development: a case study of New South Wales. Page 4 02. COST EFFECTIVENESS OF NETWORK DM

distributors delivered a benefit to cost ratio of over 12 to 1. This involved $5 million of expenditure that delivered $62 million in operating and capital cost savings.14 A highlight was in 1999-2000 when Integral Energy’s DM achieved a benefit to cost ratio of 24 to 1, with DM costs of $1.2 million for $29 million of capital investment deferral.15 DM carried out by NSW networks in 2008-09 shows more moderate benefits.

Cost-effectiveness of NSW Distribution Network Demand Management

Network Year DM spending $m Opex and Capex Benefit to Cost Ratio Tonnes GGE Savings Reductions All 1999-00 5 62 12 :1

Integral 2000 1.2 29 24 : 1

All (D-factor only) 2004-06 5.1 19.3 3.8 : 1

EnergyAustralia16 2003-07 5 9 1.8 : 1

IntegralEnergy 2004-07

EnergyAustralia17 2009 7.9 13.4 1.7 : 1 2,421 - 1 yr 2,201 - 9 yrs IntegralEnergy18 2008-09 1.3 2.2 1.7 : 1 2,762 pa

Country Energy19 2008-09 10.3 27.9 2.7 : 1 40,538 – 20 yrs Californian Utilities 2006-07 1,353 2,190 1.6 : 1 3,417,782 Verified20 Californian Utilities 2006-08 2,724 5,419 1.99 : 1 1,419,025 Projected21

The experience in California demonstrates that MetroGrid Cost of Augmentation versus DM energy savings still deliver almost double the return 450 on the investment after 30 years of aggressive 400 49 MVA Build for $400m 167 MVA DM for $26m energy efficiency activity. This indicates that there 350 would still be exceptionally good value DM available 300 250 118 MVA DM for $14m in NSW and across the NEM for many years. 200

$ millions $ 100 MVA DM for $10m NSW transmission networks, EnergyAustralia (EA) 150 and TransGrid (TG) are currently not required to 100 50 report DM expenditure and savings. This makes it 0 difficult to assess the cost-effectiveness of their 49 MVA 100 MVA 118 MVA 167 MVA programs. However, as part of the current MetroGrid MVA project, EA and TG have undertaken analysis of DM opportunities. The following graph illustrates the Based on 2 years of investigations, TG and EA have radically superior financial benefits that DM is concluded that compared to a 49MVA projected to deliver compared to the augmentation augmentation to meet the summer demand in 2012- alternatives. 13 costing $400 million, DM could deliver double the amount of DM for one year at a mere 2.5% of this cost, 100MVA for $10 million. 22 Charles River Associates go further to project 118 MVA of DM for $14 million or 167 MVA of DM for $26 million, using a variety of DM techniques.23

Demand Management and Energy Policy Development: a case study of New South Wales. Page 5 03 BARRIERS TO DEMAND MANAGEMENT 03

There has been much work done on identifying End-user preferences for simplicity, convenience, barriers to demand management.24 One of the most reliability, ‘luxury’ significant has been IPART’s (2002) Inquiry into the These are a real reflection of value perceptions role of Demand Management and other options in and preferences of end-users the provision of energy services which highlighted Not all apparently ‘wasteful’ or sub-optimal the following key barriers and provide a useful energy choices would be changed if end- summary: users had perfect information and efficient Full economic costs of energy use are not prices. included in prices Appendix 2 of their report reviews additional barriers For example, greenhouse gas emissions, including: locational peak demand costs Financial Weak price signals – tariffs Up-front cost of equipment, long paybacks Regulated tariffs are ‘flat’ tariffs that provide no and lack of price certainty. information / incentive related to peak prices Regulatory to end-users Lack of penalties in retail licence conditions Weak price signals – metering/profiling and certainty for treatment of DM cost Standard meters for smaller customers do not Information and capacity allow charges / incentives for load management during peak periods. Standard Of end users assessing savings profiles do not differentiate between ‘high’ and Structural ‘low’ cost consumption patterns (eg those with Split incentives in building area; lack of and without air conditioners) influence by consumer on appliance Imperfect information standards End-users do not have easily accessible or Cultural credible information on energy-saving Utility attitudes and preference for ‘tried and technologies or processes, suitable suppliers, tested’ technologies and practices or case studies Technical Risks and Transaction costs Cost of conversion to new technology and These can be real costs and valid assessment integration of embedded generators. of uncertainties, but are frequently ignored in It should be noted that the National Electricity Law assessments of DM costs and potential and Market was only just evolving its regulatory Includes marketing and signing-up architecture and the national grid connections by participants, investigating options and the time the IPART report was published, however supporting decision-making, monitoring and NEM simply absorbed key barriers rather than evaluation, payments and processing, etc resolve them – and in our view developed significant Risks include unknown performance, costs or additional ones. lifetime of new technologies or processes

Demand Management and Energy Policy Development: a case study of New South Wales. Page 6 03 BARRIERS TO DEMAND MANAGEMENT

Research by TEC and its consultants has exposed a Particular regulatory barriers related to the way in number of NEM derived barriers. In our 2004 report, which network revenue is regulated have also been The National Energy Market Environmental and highlighted in the Headberry/Lim 2008 report, Does Social Issues - NGO position paper, we wrote: Current Electricity Network Regulation Actively Minimise Demand Side Responsiveness in the The Parer Report recognised the importance of NEM?28 The report shows how the building block DM and recommended several measures to form of regulation creates significant disincentives improve demand-side participation, including the to demand management. In addition, price caps as establishment of a demand-side bidding pool, opposed to revenue caps on network revenue, the roll-out of interval meters, the removal of retail adopted in NSW by IPART in 2004, further price caps and improving access for embedded discourage DM by rewarding networks for increased generators to the grid. However, underlying these sales of electricity to consumers. recommendations was the assumption that the market would naturally lead to a demand-side Despite these findings, the Australian Energy Market market able to compete with the supply-side. Commission (AEMC) recently claimed that, What Parer and others have failed to recognise is ‘…network businesses regulated under a price cap that the market that they are attempting to have private incentives to contract in a way that is develop is a market to sell electricity. This is in consistent with socially efficient levels of DSP.’29 The sharp contrast to a market that aims to save reasoning behind this claim appears to be that not electricity. consuming electricity is automatically seen as a In the same year TEC commissioned NextEnergy to social cost, as opposed to a benefit.30 review demand management in the NEM and In an important recent review , the CSIRO (2009) compare DM policies in other jurisdictions, including points to institutional problems generated by several Australian case studies of network specific policy/regulatory barriers, including31: expansion.26 The consultants reported additional barriers, including: Short term policy horizon, creating difficulty in setting policy frameworks that have a consistent the lack of funding to help establish DM capacity long term horizon in the marketplace; Lack of understanding by policy makers of the invisibility of proposals to expand the system the value of energy efficiency, in part driven and thus the timely opportunity to develop by lack of data on the value of energy efficiency alternatives; Separation of energy policy from social and the failure of utilities to consider DM before environmental policy embarking on planning and construction of The failure of market policies to internalise additions to the system; and, social and environmental benefits the absence of an ‘intensive’ national framework The last two barriers are noted in MMA’s 2009 for energy efficiency. report for TEC, Role of the NEM in responding to Next Energy stated: climate change policies32. It is notable that The unfortunate truth is that in practice, no exceptions to this problem such as California and substantial demand management market has the UK have energy policies that are aligned with evolved in the first five years of the NEM and it is climate goals. highly unlikely to do so without the types of TEC has also identified the lack of social and changes recommended in this document. The environmental objectives as a key barrier with the two case studies reviewed in this paper (Sydney NEM which instead draws its focus from a narrowly CBD Transmission Augmentation and the Latrobe and explicitly defined economic objective which Valley to Melbourne Augmentation) clearly reads: demonstrate this point. Unless prompt and decisive action is taken, economic demand The national electricity market objective is to management opportunities will continue to be promote efficient investment in, and efficient use lost.27 of, electricity services for the long term interests of consumers of electricity with respect to price, quality, reliability and security of supply of electricity and the reliability, safety and security of the national electricity system.

Demand Management and Energy Policy Development: a case study of New South Wales. Page 7 03 BARRIERS TO DEMAND MANAGEMENT

Our 2006 report, Gilbert and Tobin How should existing culture of the electricity industry focussed environmental and social policies be catered for as on sales not saving. Asymmetrical negotiations the regulatory framework for electricity becomes relationships also made connection for embedded increasingly national?33 highlighted the problem of generation complex, time consuming and the objective, quoting NEMMCO’s (the original impossible to overcome for some suppliers. system operator) interpretation: Australia’s key consumer, community and environment groups have called for the insertion of Under the Rules, NEMMCO’s charter focuses environmental and social sub-objectives in the specifically on efficiency, security and reliability of National Electricity Law.35 power supply, and excludes favouring one fuel source over any other. Consequently, NEMMCO Overlaying and reinforcing this bias is the clear has neither the power nor the authority to make political sensitivity about ‘the lights going out’. decisions based on considerations of TEC’s believes that the traditional energy industry sustainability and balance in resource and regulatory allies use this theme in their management.34 discussions with energy ministers and governments The NEM objective was deliberately simplified to generally, as well as in public statements, at avoid conflicting goals and overly complex decision strategic times - to influence decisions. making. But while this may have been administratively easier, it introduced a deep seated bias into its processes. It embedded the pre-

Demand Management and Energy Policy Development: a case study of New South Wales. Page 8 04 POLICIES IN RESPONSE TO DM BARRIERS 04

There have been a wide range of policies 2009-2020; PM’s Taskforce on Energy Efficiency implemented to address the problem of low (2010); the Australian Energy Market demand management take-up. Some examples are Commission’s Review of Demand Side below and the immediate question we will Participation in the NEM (ongoing);. subsequently address is whether they have led to a 4 Rebates, grants, audits, revenue recovery – mainstreaming of demand management and made 1998 NSW rebates for low income housing and substantial in-roads into planning for expanded appliances, this instrument extended to a variety generator capacity and distribution networks. Have of energy efficient purchases for all consumers the central barriers been addressed? by successive governments; SEDA Energy Smart The policies fall into a number of categories with the Business Program offered free audits; politically and financially easier options used initially introduction of the ‘D-factor’ by IPART in 2004 to over the last two decades or more. allow distributors to recover costs for DM;the Australian Energy Regulator’s ‘Demand 1 Information – NSW Energy Information Centre in Management Innovation Allowance’ Energy the early 1990s, then SEDA Energy Smart Savings Fund introduced in 2005 to support Information Centre; brochures and rudimentary various DM projects. The most ambitious has energy use information about some appliances; been the Commonwealth Government’s recent now detailed web based information and guides; insulation program. Energy Efficiency Opportunities Act. 5 Agency targets and business plans – in 1998 2 Codes, ratings and ‘consideration’ – model NSW public sector was required to reduce codes for energy efficient housing (SEDA); energy consumption by 15% by 2001 and 25% licence conditions via the Electricity Supply Act by 2005 along with energy performance contracts 1995 for distributors ‘to conduct investigations and purchasing 5% GreenPower; Energy Savings into the cost effectiveness of implementing Action Plans (2005) to be produced by largest demand management strategies that permit business consumers and councils under the distribution network augmentation to be deferred Energy Savings Order. or avoided’, resulting in the Demand 6 Regulation - NSW Greenhouse gas Abatement Management for NSW Distributors - Code of Scheme specifying reductions in carbon intensity Practice; NaTHERS rating tool for house designs. of power generation (including by use of offsets 3 Inquiries, reports, strategies – MCE’s Energy and energy efficiency) introduced as a Efficiency Working Group which has auspiced the mandatory measure in 2003 after failure of National Framework on Energy Efficiency (est voluntary targets; converted to Energy Savings 2001); IPART inquiry (2002); establishment of Scheme (ESS) in 2009 with targets on retailers Demand Management and Planning Project for consumption reductions. BASIX in 2004 with subsequent to and with $10m funding from targets for greenhouse gas reduction for new MetroGrid decision in 2002; Productivity housing and (later) renovations. Minimum energy Commission to Inquiry into the Economic and performance schemes – energy ratings for a Environmental Potential of Energy Efficiency range of appliances (ongoing); new reporting (2005); National Strategy on Energy Efficiency

Social Research and the Business Case for Corporate Sustainability Page 9 04 POLICIES IN RESPONSE TO DM BARRIERS

requirements from the AEMC’s for annual ‘…there are substantial cost-effective Distribution Annual Planning Reports, including opportunities to use DM in NSW that are not Demand Side Engagement Strategies that are being pursued. It also believes that the need to intended to “provide transparency on how capture these opportunities is becoming more DNSPs assess and consider non-network urgent.’36 alternatives, and promote a clear and transparent These opportunities remain untapped. Various process for DNSPs to engage with non-network desktop estimates have repeatedly projected these proponents.” potentials, for the NEM for example: A number of NSW policies such as the ESS and National Framework for Energy Efficiency37 – IPART’s ‘D-factor’ have shown state leadership and 70% reductions in residential and commercial can be confidently transferred to the national level energy consumption (with average 4 year pay- action as they have proven administrative and back); 9% reduction in total stationary energy use methodological practices. (213PJ) Notably steep increases in prices have not been DM and the National Electricity Market38 – advocated strongly (even time-of-use pricing is not 2800 MW high on the list) as government policy was to Demand Management and Planning Project39 moderate prices for consumers and business. This – 500MVA (Sydney only) policy appears to have been abandoned with the 40 recent announcement of a 60% price rise due to Energy Reform Implementation Group - network expansion and a potential carbon price. 3000MW About one third of the rise is due to system growth, There are a range of potential DM strategies that much of which TEC estimates could be alleviated by deliver DM capacity to the consumption sector. For DM. It may serve as a price shock that could open example (and as noted above) pricing has been the way for more ambitious DM policies which if largely ignored and one particular instance of implemented early could reduce the annual price untapped potential is dynamic pricing. Trials rises. continue to demonstrate the extraordinary potential to reduce peaks along with average energy use. An 4.1 Has DM Potential Been Achieved? example is Integral Energy’s Western Sydney In its landmark Report on Demand Management, Pricing Trial over 2 years which achieved the the Independent Pricing and Regulatory Tribunal significant reductions illustrated below, saving $3 41 (IPART, 2002) stated that it believed: million in electricity bills.

Integral Energy Western Sydney Pricing Trial

Demand Management and Energy Policy Development: a case study of New South Wales. Page 10 04 POLICIES IN RESPONSE TO DM BARRIERS

The remote cycling of air-conditioners can also be done without smart meters. In the summer of 2007- 08, Energex (QLD) retrofitted 954 air conditioners with a CYCLEit™ device for its Cool Change trial. Peak reductions of 17% were delivered.

Energex Cool Change Trial

Even simple time-of-use tariffs without any other There were two more substantial recommendations intervention can deliver meaningful reductions, as that had the potential to retard energy consumption EnergyAustralia has found. EA’s time-of-use tariffs growth. IPART proposed mandating greenhouse have delivered a 1.1 percent drop in total summer gas benchmarks with penalties and foreshadowed peak demand, compared to regular tariffs.42 the ‘D-factor’. On the one hand GGAS was regulatory intervention for retailers and on the other, Such significant reductions could be occurring the ‘D-factor’ for networks attempted to compensate across the NEM, but not without significant network for sales foregone and make inroads into the ‘sell incentives or mandates. According to Energy more, make more’ mentality of the industry. They Futures Australia (2007) the accelerated roll-out of were directed at the culture of the industry. smart meters across the NEM could deliver an Australia-wide reduction of 10% of electricity A review of ‘D-factor’ by the Institute of Sustainable consumption and emissions, but as Energy Futures Futures (2007)44, commissioned by TEC found that: Australia reported to TEC, not without significant …although the D-factor is an important engagement of consumers through in-home precedent in supporting DM and should be built displays, dynamic peak pricing and other upon, the D-factor is not a cure-all for DM and, methods.43 without reform and complementary measures, it In general, demand management has been an is very unlikely to deliver an efficient level of DM ‘add-on’ to energy policy particularly in the early activity. 45 years. An examination of the recommendations The report advocated a number of other measures, proposed by IPART in 2002 while well targeted in a as the ‘D-factor’ was regarded as insufficient to fully relatively narrow sense (and some were adopted by change traditional attitudes and expand the savings. government) try to bolster only the option of demand management. Undoubtedly the combination of GGAS (and now ESS) with BASIX has impacted on demand growth. For example, a demand management fund, A significant portion of the GGAS certificates were in improving customer access to information, use of the area of demand side abatement. This should standard offers in the DM Code of Practice, review have contributed to a reduction in consumption; of the smart meter policy and trials of congestion while BASIX should have reduced expected growth pricing try to raise the profile of DM but don’t due to the take-up of solar hot water and housing guarantee it occurs. achieving over 4 star NaTHERS ratings.

Demand Management and Energy Policy Development: a case study of New South Wales. Page 11 04 POLICIES IN RESPONSE TO DM BARRIERS

In 2007, the Owen Inquiry into the state’s electricity expenditures under $5m of any cost-benefit analysis supply concluded that: which if approved would kill off potential for demand management options to compete more fully with ‘TransGrid forecasts that total energy supply. consumption in New South Wales in 2016-17 will be some 2,000GWh lower than it would have With the NEM agencies taking over much of the been if energy consumption growth continues at regulation from state-based bodies such as IPART, the pre 2001 rates. Despite data limitations, this governments will face difficult decisions about is at least in part due to energy efficiency. For keeping their best DM policies directed at energy indicative purposes this is equivalent to around utilities operating in their state or continuing to cede half the maximum annual output of one 660MW control to a national approach that may result in a coal fired unit at the Vales Point power station. lowest common denominator approach. This is in addition to the reduction in forecast While some recent policy initiatives such as the ESS scheduled generation in 2016-17 following the have potential, today’s challenges require more to 4,000GWh contribution from renewable energy help abate climate change and the increasing price and embedded generation.’46 burden on households and business. Owen also noted the current difficulty of forecasting and lack of inclusion of the contribution of future In terms of the future shape of the electricity system, programs. However, the ESS with its specific targets demand management should play the primary role and the experience gained from other key policies in delaying investment in expanding the system by may help alleviate this problem. Additionally the creating sufficient time for: Commonwealth insulation program was at such a new peak and baseload generation requirements scale that its energy savings should be able to be for population and economic growth to be met accounted for in demand projections. Retrofitting by clean and green technology including DM ceiling insulation is equivalent to increasing the star replacement of current centralised power plants rating of a previously uninsulated home from around by clean and green generation at the end of their 0.5 stars to 2 stars. This represents an energy lives. saving of between 25 to 50 per cent, depending on The financial and environmental benefits to the climate region in Australia.47 consumers and society as a whole should be There have been suggestions that a ‘rebound’ prioritised above building more ‘old’ generation that effect, or comfort creep takes up energy savings embeds pollution and inefficiency for decades into and that this needs to taken into account.48 the future and prejudices the choices and success However this was specifically allowed for in the of climate change and efficiency policies. Department of Climate Change analysis of the Consumers should be afforded greater control over insulation program. A 66 per cent ‘comfort factor’ their energy supply and bills rather than being was used when estimating the potential energy captured in a fossil fuel growth paradigm. efficiency savings per previously uninsulated house. Compared to the literature on this topic, this is an extremely conservative estimate. DM as a mainstream policy has only begun to attract attention. Whether this can be taken further will depend on the policies that government adopts for DM and in relation to the NEM. One of the key problems in recent years has been that while governments have begun to be interventionist with various regulations, the NEM continues to advance in the opposite direction creating unnecessary tension between policies and efficient implementation. DM is not a prerequisite in the NEM (because this would counter the ‘level playing field’ between energy sources) and in fact the AEMC has recently tried to relieve distribution

Demand Management and Energy Policy Development: a case study of New South Wales. Page 12 05 RECOMMENDATIONS 05

5.1 Political Will and Regulatory Context investigation and reporting on DM opportunities, The conjunction of public concern about climate even supplemented with the ‘D-factor’, has not change and steep price rises should elicit a delivered significant reductions. substantial demand management response from Expanding what is now the Energy Savings Scheme governments. With the collapse of the CPRS, the to complete the policy would be one option if peak only substantial policy is energy efficiency; with demand reductions are to be sought and expensive price rises mainly influenced by energy supply augmentation avoided. Subsequent to the system expansion. The best response is to make modelling of peak demand management energy consumption more efficient. opportunities available to NSW distribution However there appears to be a ‘hands-off’ networks, the ESS could be expanded to include a approach from government ministers when it comes peak demand reduction target on NSW networks. to the National Electricity Market which is driving the Networks would be required to acquire or create price rises over the next few years. Governments reduction certificates, just as NSW retailers currently need to talk about unnecessary expansion (in fact, are. The difference would be that a higher value energy waste) as a problem and elevate efficiency could be attributed to peak demand reduction as a multi-benefit solution. certificates from highly constrained areas, to ensure that the value of avoiding or deferring expensive Changes in NEM regulatory decisions would be augmentation was prioritised over general energy more easily accomplished if the National Electricity savings. Law adopted either an environmental sub-objective, allowing regulators to consider wider benefits, or an 5.3 DM Fund, Network DM Plans and Targets energy savings objective, that would allow NSW’s Climate Change Fund (CCF), originally the regulators to prioritise energy savings over Energy Savings Fund established in 2005, is funded augmentation and supply options. by a levy on electricity distributors (and water There is an important role for NSW both in its own utilities for water use savings). This provides the jurisdiction (through state legislation and directions basis for an effective funding mechanism for to government owned utilities) and as a major state focused DM expenditure. The CCF could be partly represented on COAG and the MCE in progressing recalibrated to target more substantial funding to this and the following recommendations. and specific reduction targets and measurable outcomes for NSW networks. 5.2 NSW - DM Targets In determining the size of funding that should be At its inception the intention for GGAS was for it to dedicated to network demand management it is be applied to both retailers and networks. However useful to look at examples in other jurisdictions: at the time the NSW distribution networks argued that a Demand Management Code of Practice In 2006-07 the Californian Public Utilities would be better tailored to deliver reductions. In Commission (CPUC) approved a consumption- effect, only half of the GGAS program was ever based DM levy amounting to $1.97 billion over three delivered. The Code of Practice that requires years. This equates to $131 million pa for NSW.

Demand Management and Energy Policy Development: a case study of New South Wales. Page 13 05 RECOMMENDATIONS

In 2004, the Essential Services Commission of 5. Revenue determinations South Australia (ESCOSA) provided Electricity Revenue determinations for networks to ensure Transmission South Australia (ETSA) with $20 million that demand management is prioritised ahead of over 5 years to deliver DM programs. the construction of more network infrastructure. Revenue determinations are an ideal process to In 2009, EnergyAustralia submitted to the Australian facilitate demand management as they allow Energy Regulator that a DM allowance should be regulators to closely scrutinise and modify future equal to 1 per cent of DNSP revenues, or $10 spending by networks. million per annum49, however, the AER has limited DM spending to:50 6. Acknowledgment of modest DM expenditure $1 million per annum for EnergyAustralia Small scale demand side activities are enabled $600,000 per annum for Country Energy even when unrelated to particular network $600,000 per annum for Integral Energy constraints or when covering relatively modest The Energy Efficiency Council has recommended in amounts of load. Modest but widespread its submission to the PM's Task Group on Energy demand reductions can provide long term Efficiency the networks spend 10% of their planned benefits by reducing the need for a range of $426m expenditure over the next 5 years, on DM possible future network as well as generation augmentations. 5.4 NEM - Requiring DM Implementation Before 7. Effective prudency reviews Augmentation Prudency reviews by the regulator must assess In 2008, Total Environment Centre became the first past capital expenditure. These should community group to submit and have accepted for specifically and thoroughly assess the extent to consideration a Rule change proposal to the which transmission networks have implemented, AEMC.51 The basis of the Rule change was to and not ignored, an adequate level of demand require transmission networks (and by extension, management. Such reviews are critical to ensure distribution networks) to implement DM before that transmission networks do not ignore considering augmentation approaches. The Rule demand management solutions at the expense change comprised the following components: of electricity consumers. 8. Regulatory Test 1. Transmission network planning The Rules should specify that the Regulatory Test Regulators to ensure that demand management require demand management options to be solutions are prioritised and properly investigated investigated before augmentation options. This is in the planning stages of network development. likely to ensure that a more appropriate level of 2. Annual Planning Reports transmission networks’ resources and attention Networks be required to publish robust data on are directed to DM before augmentation planning upcoming constraints that are relevant and useful is underway. to demand management service providers. This 9. Short-term and long-term price for DM would inform the demand management market of A price is set for demand management within the upcoming opportunities and enable it to respond market pool. Setting a price for demand to these in an effective and timely manner. management will encourage greater investment 3. DM Incentive in and facilitate growth of demand management An explicit provision for the Australian Energy aggregation as a market commodity. A market Regulator to develop and implement a demand mechanism that provides the opportunity for side incentive scheme. This should address the proponents to bid into the market would chronic failure of networks to invest in cost- encourage new demand management entrants effective demand management. and promote competition for existing demand 4. Financial cover for DM investments management businesses. Energy regulator to clarify the circumstances in After a consultation period in which networks which networks can recover spending on vociferously opposed these proposals, the AEMC demand management. This would create more approved approximately 5% of the Rule change certainty for networks regarding their ability to proposal. Unless there is an explicit directive from investigate, implement and recover demand COAG and the Ministerial Council for Energy and management expenditure.

Demand Management and Energy Policy Development: a case study of New South Wales. Page 14 05 RECOMMENDATIONS

the NEL objective is targeted to DM reductions, it is 2. Set savings goals (MW and MWh reductions), unlikely that other similar attempts to capture the full incentive payments and penalties for each potential of DM will be successful. network business a ensuring that penalties are taken out of 5.5 NEM - Risk Reward Incentive Scheme revenue above that required for approved A system of rewards and penalties linked to specific capital and operating costs – ie: profit DM targets is an approach that the Australian b with a ‘dead-band’ range between 65% and Energy Regulator, with the approval of the AEMC, 85% of goals where no benefit or penalty could take. In California, the Risk Reward Incentive applies Mechanism (RRIM) seeks to align consumer and c earnings and penalties capped at a certain network interests with incentives for achieving and amount. penalties for failing, to meet energy efficiency goals, which includes reduction of peak demand.52 Based 3. Measurement and verification to determine on this methodology, the AER could apply these level of payment or benefit. incentives in a three stage process: The diagram below indicates the reward-penalty system. 1. Establish the potential DM reductions available to transmission and distribution networks through a However, as with the requirement for networks to combination of: innovative pricing (including implement DM before augmentation, unless there is smart meters and ToU pricing); demand an explicit directive from the COAG/MCE and the reduction projects (eg retrofitting shopping malls, NEL objective is targeted towards DM reductions, it factories etc); power factor correction; and is unlikely that this approach will be acceptable to demand-side response (using aggregators to the current regulatory mindset. contract interruptible loads).

Risk Reward Incentive Scheme

Earnings Capped

100% Reward $ 85%

0% 65% % of AER Goals

Dead-band area – no Penalty $ reward or penalty Penalty Capped

Demand Management and Energy Policy Development: a case study of New South Wales. Page 15 06 END NOTES 06

1 Australian Energy Regulator, New South Wales distribution 15 IPART, Inquiry into the Role of Demand Management and determination 2009–10 to 2013–14, April 2009, p. 119-123, at: Other Options in the Provision of Energy Services, Final http://www.aer.gov.au/content/item.phtml?itemId=728110&no Report, October 2002, p. 61. deId=4f4df21a216baa4054a6f28966bcd40f&fn=NSW%20DN 16 Energy Australia, EnergyAustralia, Regulatory Proposal SPs %20final%20decision.pdf 2009-20014, p. 104, at: 2 Integral Energy Presentation, Regulatory Proposal to the http://www.aer.gov.au/content/index.phtml/itemId/728473 Australian Energy Regulator 2009 to 2014, 30 July 2008 P. 28 17 EnergyAustralia, Network Performance Report, 2008-09, p. 3 Integral Energy, Regulatory Proposal, 2009, p. 104 IPART 78, at: http://www.energyaustralia.com.au/Common/Network- (Independent Pricing and Regulatory Tribunal of New South Supply-and-Services/Network-regulation-and - Wales) (1999) Regulation of network service providers, reports/~/media/Files/SPR/Network%20Reports%20and%20Pl Discussion Paper DP-34, IPART, Sydney; IPART (2002) Inquiry ans/0809NetworkPerformanceReportFinal.ashx into the role of demand management and other options in the 18 Integral Energy, Electricity Network Performance Report, provision of energy services, Interim Report, review report no. 2008-09, Nov 2009, p. 41, at: 02-1, IPART, Sydney. http://www.integral.com.au/wps/wcm/connect/6b981200405ac 4 IPART Inquiry into the Role of Demand Management and 16eb201badccb7f5ab5/ENPR+2008 - Other Options in the provision of Energy Services, Final 2009++FINAL+FOR+DWE.pdf?MOD=AJPERES Report. 2002, p5 19 Country Energy, Electricity Network Performance Report, 5 Integral Energy, Regulatory Proposal, 2009, p. 336 Energy 2008-09, p. 27, at Australia and TransGrid, Demand Management Investigation http://www.countryenergy.com.au/wps/wcm/connect/0396f080 Report- Sydney Inner Metropolitan Area, Nov 2009, p.4, at: 40b59982a6c1f7d4a66842a1/CE_NPR_2008_09.pdf?MOD=A http://www.transgrid.com.au/network/nsdm/Documents/Dema JP ERES nd%20Management%20Investigation%20Report%20- 20 California Public Utilities Commission, Energy Efficiency %20Sydney%20Inner%20Metropolitan%20Area.pdf and Conservation Programs: Report to the Legislature, July 7 Integral Energy, Regulatory Proposal, 2009, p. 9 2009, p. 27-28 at: 8 Integral Energy, Regulatory Proposal, 2009, p. 9 http://docs.cpuc.ca.gov/PUBLISHED/GRAPHICS/104470.PDF. Cost-effectiveness includes avoided generation, transmission 9 Integral Energy, Regulatory Proposal to the Australian and distribution costs. Benefits are costs of supply-side Energy Regulator 2009 to 2014 30 July 2008 p 18 resources avoided or deferred and costs include measures 10 EnergyAustralia, Regulatory Proposal, p. 43. and installations as well as administration of programs. 11 IPART (1999) Regulation of network service providers, Programs are cost-effective when the value of total energy Discussion Paper DP-34, IPART, Sydney; IPART (2002) Inquiry savings for ratepayers is greater than the total cost to into the role of demand management and other options in the ratepayers. provision of energy services, Interim Report, review report no. 21 California Public Utilities Commission, Energy Efficiency 02-1, IPART, Sydney, p. 6 and Conservation Programs: Report to the Legislature, July 12 Benefits for NSW network DM do not include the benefits 2009, p. 20-21 at: of avoided generation or transmission infrastructure. NSW and http://docs.cpuc.ca.gov/PUBLISHED/GRAPHICS/104470.PDF. Californian DM benefits do not include avoided carbon costs. 22 Energy Australia and TransGrid, Demand Management See table on next page. Investigation Report- Sydney Inner Metropolitan Area, Nov 13 Institute for Sustainable Futures for Total Environment 2009, p.22, at: Centre, Win Win Win 2008 p. 5 http://www.transgrid.com.au/network/nsdm/Documents/Dema 14 IPART, Inquiry into the Role of Demand Management and nd%20Management%20Investigation%20Report%20- Other Options in the Provision of Energy Services, Final %20Sydney%20Inner%20Metropolitan%20Area.pdf Report, October 2002, p. 62.

Demand Management and Energy Policy Development: a case study of New South Wales. Page 16 23 Energy Australia and TransGrid, Demand Management 40 http://www.erig.gov.au/assets/documents/erig/Financial_ Investigation Report- Sydney Inner Metropolitan Area, Nov markets_review_KPMG20070413120316.pdf 2009, p.3-4, at: 41 Integral Energy, Regulatory Proposal to the Australian http://www.transgrid.com.au/network/nsdm/Documents/Dema Energy Regulator – 2009-2014, Presentation, July 2008 nd%20Management%20Investigation%20Report%20- 42 EnergyAustralia, Regulatory Proposal, p. 104. %20Sydney%20Inner%20Metropolitan%20Area.pdf 43 Energy Futures Australia, Advanced Metering for Energy 24 For example, NextEnergy, Demand Management and the Supply in Australia, 2007 at: www.tec.org.au National Electricity Market, 2004 at www.tec.org.au; CSIRO Energy Transformed Flagship, Intelligent Grid: A value 44 Institute for Sustainable Futures for Total Environment proposition for distributed energy in Australia, 2009, at: Centre, Win Win Win: Regulating Electricity Distribution www.csiro.au; Institute for Sustainable Futures for Intelligent Networks for Reliability, Consumers and the Environment Grid, Institutional Barriers to Intelligent Grid, 2009, at: Review of the NSW D-Factor and Alternative Mechanisms to http://igrid.net.au/sites/igrid.net.au/files/images/IGrid%20Instit Encourage Demand Management, 2007 p. 5, at utional%20Barriers%20(Working%20Paper%204%201)%20Jun www.tec.org.au e %2009.pdf 45 Institute for Sustainable Futures for Total Environment 25 Total Environment Centre, The National Energy Market Centre, Win Win Win p. 5, at www.tec.org.au Environmental and Social Issues - NGO position paper, 2004, 46 Note at the time NSW had a state based target of 15% p. 10, at: www.tec.org.au renewable energy by 2020. This has now been overtaken by 26 NextEnergy, Demand Management and the National the Commonwealth 20% target. Owen Inquiry p4–2 Electricity Market, 2004 at www.tec.org.au 47 Per comm., Department of Climate Change. 23 March 27 NextEnergy, Demand Management and the National 2010 Electricity Market, 2004, p. 6, at www.tec.org.au 48 See UK Energy Research Centre, 28 Headberry Partners and Bob Lim & Co, Does Current http://www.ukerc.ac.uk/support/tiki- Electricity Network Regulation Actively Minimise Demand Side index.php?page=0710ReboundEffects Responsiveness in the NEM? 2008, at www.tec.org.au 49 Australian Energy Regulator, Final Decision Demand 29 Australian Energy Market Commission, Review of Demand- management incentive schemes for the ACT and NSW 2009 Side Participation in the National Electricity Market, Final distribution determinations, February 2008, p. 18, at Report, November 2009, p. viii http://www.aer.gov.au/content/item.phtml?itemId=717775&no deId=247f1d7c52963146e999a79405e55678&fn=Final%20de 30 Australian Energy Market Commission, Review of Demand- cisi on%20- Side Participation in the National Electricity Market, Final %20ACT%20and%20NSW%20demand%20management%20i Report, November 2009, p. 133-134 ncentive%20scheme%20(29%20February%202008).pdf 31 CSIRO Energy Transformed Flagship, Intelligent Grid: A 50 Australian Energy Regulator, Final Decision Demand value proposition for distributed energy in Australia, 2009, management incentive schemes for the ACT and NSW 2009 175-176, at: www.csiro.au distribution determinations, February 2008, p. 19-20. 32 Commissioned by Total Environment Centre with support 51 http://www.aemc.gov.au/Electricity/Rule- from the National Electricity Consumers Advocacy Panel changes/Completed/Demand-Management.html McLennan Magasanik Associates, Role of the NEM in 52 California Public Utilities Commission, Energy Efficiency responding to climate change policies, June 2009, p. 3, at and Conservation Programs: Report to the Legislature, July www.tec.org.au 2009, p. 12 33 Gilbert + Tobin, How should environmental and social policies be catered for as the regulatory framework for electricity becomes increasingly national? 2006, at: www.tec.org.au 34 NEMMCO, An Introduction to Australia’s National Electricity Market, June 2005, p 27. 35 Total Environment Centre and 16 other groups, The National Electricity Law Amendment Package, 2004, at: www.tec.org.au; Total Environment Centre and 6 other groups, Power for the People, 2007, at www.tec.org.au 36 IPART, Inquiry into the Role of Demand Management and Other Options in the Provision of Energy Services, Final Report, October 2002, p. i. 37 http://www.ret.gov.au/Documents/mce/energy- eff/nfee/library.html 38 www.aemc.gov.au/.../Total%20Enviornment%20Centre%20a ttachment-257d902e-1917-45ec-95da-195f7d28de94-0.pdf 39 http://www.energy.com.au/energy/ea.nsf/Content/Network +Demand+Management+Planning+Project Total Environment Centre Inc Level 4, 78 Liverpool Street, Sydney, NSW 2000 www.tec.org.au Mailing: PO BOX A176, April 2009 Sydney South 1235 Ph: 02 9261 3437 Fax: 02 9261 3990