10 Addressing peak demand
The Australian Government commitment to investigate a national Energy Savings Initiative
included considering “incentives or requirements to create certificates…in ways which
reduce peak electricity demand”. The Working Group’s investigation of peak demand is
focused only on electricity as the issue is more particular to electricity than gas.
This chapter outlines reasons why the design of a possible Energy Savings Initiative might
include considerations of peak demand and discusses three possible scheme design options to
do so. The relative merits of these three options are considered. The chapter concludes by
discussing the proposed approach to modelling the costs and benefits of adopting a possible
‘peak demand option’ that will be taken in the regulatory impact analysis. The Working
Group has not yet determined that a peak demand option should be incorporated in a possible
national scheme. A recommendation on this issue will be made after further analysis.
10.1 Reasons to address peak demand through an Energy Savings Initiative
There are two important reasons to consider peak demand in a possible Energy Savings
Initiative with a working objective to ‘improve Australia’s energy efficiency in order to help
manage pressure on energy bills and improve productivity’. Firstly, peak demand is a central
driver of electricity price rises and, as such, actions to manage peak demand will place
downwards pressure on energy bills. Secondly, a poorly designed national scheme has the
potential to decrease the productivity of Australia’s electricity infrastructure.
Price rises and impacts
Rising peak demand has been a key aspect of recent electricity price increases, primarily
through new distribution network augmentation projects undertaken to meet this demand.109
The costs of peak demand are forecast to continue to rise, with distribution network costs in
2010/11 comprising 37.3 per cent of the standard residential retail bill, and projected to
increase by 33.5 per cent from 2010/11 to 2013/14.110 One stakeholder noted in its
submissions to the Issues Paper:
A key objective of a National Energy Savings Initiative should be to help reduce peak
load demand and also reduce overall consumption with an objective being to ease
upward pressure on energy prices.
Essential Energy submission
Another stakeholder, while not supportive of a national Energy Savings Initiative in general,
noted that:
The one area where a NESI may have some potential to offer overall benefits is if
targeted towards peak demand. Western Power has estimated that peak electricity
demand could increase by as much as 90 per cent to 2030 in the South West
Interconnected System, at a cost of as much as $7.5 billion.
Chamber of Commerce and Industry of Western Australia submission
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Impact of energy efficiency on infrastructure productivity
Another aspect of peak demand is the underutilisation of electricity network and generation
infrastructure. In Australia, electricity generators and networks are built and augmented to
meet the forecast peak demand, such that they can reliably supply electricity during future
peak periods. One indicator of the reduction in network utilisation is the growing gap
between average and peak demand. For example, in Victoria the ratio of average to peak
demand in 1999/2000 was 68 per cent, in 2008/09 this dropped to 57 per cent and is forecast
to drop to 52 per cent in 2018/19.111
The issue for a possible national Energy Savings Initiative is that a poorly designed scheme
has the potential to reduce infrastructure productivity, and increase electricity unit prices
through higher network tariffs (for further discussion see Appendix D). As raised in
submissions:
If Australia successfully reduces total electricity consumption, but does not reduce peak
electricity demand, total electricity costs will go down but the cost per unit of
electricity will increase.
Energy Efficiency Council submission
10.2 Options for addressing peak demand
The Working Group commissioned analysis on options for how a possible national Energy
Savings Initiative could address peak demand. This work was undertaken in close
consultation with a Peaking Technical Group and Network Modelling Group of various
experts (membership of these groups is at Appendix E). This work has identified three
possible approaches:
Option 1: Reflecting the impact of energy efficiency activities on peak demand
into certificate incentives
Under a national Energy Savings Initiative that used an energy metric but did not target peak,
a certificate could represent a certain quantity of kilojoules. These certificates are then
awarded to eligible energy efficient activities under the scheme. Each activity, however, has a
different impact on peak demand and infrastructure utilisation and can therefore generate
positive or negative effects for other consumers in a shared grid.
Under Option 1, the predicted public benefit or disbenefit from each eligible activity is
incorporated into its certificate value. This is to encourage the uptake of activities which
maximise the positive public benefit outcomes, and disincentivise those that could have
negative outcomes.
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As well as the overall annual savings in energy that an eligible activity is predicted to
produce, certificates awarded under this approach could also reflect the predicted impact on:

wholesale market peaks;

relevant transmission and distribution network peaks; and

energy infrastructure utilisation.112
Option 2: Creating a sub-scheme with peak-specific certificates
Under this option, a separate target and certificate type would be created for peaking-specific
activities. The obligated party would have to annually surrender a number of these ‘peaking
certificates’ to reach a separate peaking target. The peaking target could be based on peak
demand reductions, peak demand reductions in localised zones, or on achieving deferment
activity (for example, by obligating a network business to defer a percentage of its planned
network investment by using non-network options such as load curtailment activities). Given
their unique characteristics, it is unlikely that certificates from a peak sub-scheme would be
fungible with those from a broader Energy Savings Initiative scheme. Depending on the
design features of a peak sub-scheme, the differing value of peak reductions in different
networks may mean that certificates would be non-fungible between network service
territories.
While retailers are commonly the obligation point in market-based energy efficiency
schemes, a separate sub-scheme for peak reductions would provide the option to place a
peaking specific obligation on network businesses. This could be preferable as they are best
placed to identify opportunities to reduce peak demand in their own networks.
Option 3: Establishing a ‘single buyer’ to purchase peak-demand-reducing
activities
This option explores the possibility of establishing a separate entity that would contract with
parties for the option to purchase kilowatt reductions at some point in the future. The single
buyer could aggregate benefits across the supply chain, and purchase demand reductions that
have the highest value in the wholesale market and for network deferral. Currently, it can be
difficult for any one party to monetise or aggregate these benefits.113 This is considered to be
one reason the demand side of the market has traditionally been ‘passive’ towards wholesale
market and network peaks.
This approach would require funding to undertake the requisite contracting, which could
theoretically come from a market levy (on electricity consumers) or consolidated revenue.
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10.3 Stakeholder views
Numerous submissions to the Issues Paper commented on the issue of peak demand. Views
were highly varied, reflecting the complexity of the issue. Given the relationship between
peak demand and energy price rises, many stakeholders were supportive of action to reduce
peak demand. However, a number of stakeholders noted that a possible national Energy
Savings Initiative which targeted peak demand specifically might undermine the current
regulatory and market reform environment. Concerns were raised included:
...demand side management (DSM) is better managed by the electricity market rather
than an ESI.
Amcor submission
as existing regulatory frameworks for monopoly distributors are designed to ensure
efficient network investment, it is important to ensure obligations proposed under the
NESI do not add to these requirements [and costs] without providing additional value.
Western Power submission
...establishing a demand reduction incentive scheme outside of the main energy
regulatory and market frameworks (i.e. the national electricity rules and national gas
rules) would add additional complexity and governance challenges.
Energy Users Association of Australia submission
A separate peak demand scheme would need to be very complex to be effective ...
[and] may adversely impact on networks and energy prices if the Government is to
adopt a separate non-market peak demand reduction scheme.
Energy Networks Association submission
Some stakeholders were supportive of a separate peak demand reduction sub-scheme, similar
to Option 2 above. For example, Green Energy Trading Pty Ltd provided a detailed method
of designing specific peak reduction certificates.114 Other submissions expressed the view
that a cohesive and sensible way to address peak demand through a possible national Energy
Savings Initiative was to amend the incentives given to energy efficiency activities which
reflect their impact on peak demand, similar to Option 1:
Within [an energy efficiency scheme] there is also an ability to identify those
[activities] that will more specifically impact peak demand like air conditioning.
Ecovantage submission
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... some devices in the built environment also provide benefits to peak power
reduction. To encourage the take up of these devices, credit multipliers could be
applied to the certificate calculation to reflect this.
CSR submission
10.4 Analysis
Evidence and submissions raised through the investigation to date indicate that it may not be
sufficient for a scheme to ignore the issue of peak demand and expect to have no negative
impact on network tariffs. This is because some energy efficiency improvements have the
potential to place upwards pressure on energy prices through their influence on network
utilisation. Since a possible national Energy Savings Initiative is expected to incentivise
greater uptake of energy efficiency, and therefore has the potential to adversely impact
network utilisations and tariffs, it is desirable that scheme design should be based on the
principle of ‘do no harm’.
The Working Group’s preliminary view is that dedicated peak demand measures, such as
regulatory reform and the introduction of time of use pricing, are the appropriate primary
mechanisms to address peak demand.115 However, the introduction of a possible national
Energy Savings Initiative may provide an opportunity to encourage activities that reduce peak
demand (and equally discourage those that reduce network productivity) through a national
scheme. Therefore the Working Group intends to further consider ways to reflect potential
impacts on peak demand and network productivity through a certificate creation process
(Option 1).
The issue of peak demand is currently being addressed through a number of reform and
investigation processes, including the new Regulatory Investment Test for Distribution (RITD) and the Australian Energy Market Commission’s Power of Choice Review. As these
market reforms are intended to facilitate more efficient levels of peak demand in the
electricity market, the introduction of a scheme which requires network companies to
undertake peak reduction activities (Option 2) may introduce scheme costs without additional
benefits.
Establishing an entity which purchases and exercises peak demand (Option 3) is a process
completely detached from the operation of a standard white certificate scheme. It would also
require considerable consolidated revenue or a new market levy. The actions of a single
buyer would not be consistent with the current market based reform agenda, which is aimed
at structuring the market such that peak demand response outcomes are achieved through
well-balanced regulation and natural incentives. Based on this analysis, Option 3 is not
viewed as either practical or desirable in the context of a possible national Energy Savings
Initiative.
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Working Group’s view: approach to peak demand
The Working Group considers that a practical approach to address peak demand through a
possible national Energy Savings Initiative could be to weight activity value to reflect the
likely impact of each activity on peak demand and network productivity.
A final recommendation on whether to incorporate an approach to respond to peak demand
will be taken following further analysis through the regulatory impact analysis.
10.5 Approach to modelling a peak demand scenario
As discussed in Chapter 11, the modelling that will be undertaken during the regulatory
impact analysis involves deriving iterative ‘bundles’, or plausible combinations, of energy
savings activities that could be undertaken across households and businesses in order to meet
a scheme target.
The first step for the modelling process is to determine the impact of a scenario without peak
weighted certificates on infrastructure deferments and network tariffs (the central scenario).
This scenario will identify the potential impacts of a possible national Energy Savings
Initiative on different networks. It is quite possible that a well designed scheme which solely
incentivises energy efficiency (rather than targeting peak demand) may in itself reduce peak
demand sufficiently to counterbalance any adverse affects on network productivity and
tariffs.116
For the purpose of comparison, a ‘peaking scenario’ will then be modelled to determine the
possible impacts of an approach in line with Option 1 above on the net outcome of a national
scheme.
To do so, the certificate incentive that each activity receives in the modelling will be adjusted
to represent the assumed impact that the activity will have on peak demand and network
productivity. By applying this approach, the modelling will produce a different bundle of
activities and associated net costs and benefits. The results of this scenario can then be
carefully compared to the central scenario to determine the net costs and benefits, of a
‘peaking scenario’ (including network impacts and pricing) and the distribution of these
impacts.
Working Group’s view: testing the net costs and benefits of a peak demand
scenario
Through the modelling, the net costs and benefits of a possible peak demand scenario will be
quantitatively compared to the central scenario. This and other qualitative analysis will be
considered through the regulatory impact analysis.
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109
Australian Energy Market Commission, ‘Power of choice – giving consumers options in the way they use electricity: Directions Paper’,
2012, p 18-20.
Data from Australian Energy Market Commission, ‘Possible Future Retail Electricity Price Movements: 1 July 2011 to 30 June 2014’,
2011, p 18.
110
111
Australian Energy Market Operator, ‘Submission to Prime Minister’s Task Group On Energy Efficiency – Issues Paper’, 2010, p 9.
112
In regard to modelling the possible peak demand design options, the value of the reduction in network peaks and impact on load factor
will require the calculation of network service territory-wide load factors and $/kVA reduction values.
113
Australian Energy Market Commission, ‘Power of choice – giving consumers options in the way they use electricity: Directions Paper’,
2012, p 102.
114
Green Energy Trading Proprietary Limited (Creating a Community Financial Dividend through Managing Peak Electricity Demand: A
Discussion Paper) submission, p 3.
115
Australian Energy Market Commission, ‘Power of choice – giving consumers options in the way they use electricity: Directions Paper’,
2012, pp 138-9, 54.
116
As noted in the submission from the Australian Sustainable Built Environment Council, ‘a well-rounded package of energy efficiency
measures should reduce the size of the peak’.
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