Energy Source and Distribution catches up with Christian Weeks, managing director of EnerNOC Australia and New Zealand – one of the world’s largest providers of energy intelligence software – about entering the National Electricity Market and taking advantage of regulatory changes.
When Federal Industry Minister Ian Macfarlane stood at the lectern for his opening address at the 2014 Energy Networks conference, he touched on the severe heat wave that swept through Victoria and South Australia in January.
The enormous strain on the energy network caused near record demand not seen since 2009, which Mr Macfarlane said was “a reality check” for the country’s electric power grid operators and utilities.
The network managed to scrape by through sufficient generation and capacity, but Mr Macfarlane signalled it wouldn’t always be the case and that utilities needed to change how they operated. Specifically, they needed to better manage peak demand events and maintain the security of the system.
It’s not a novel concept. For some time now utilities have recognised they needed to think and operate differently. Greater focus has shifted toward squeezing the most out of existing assets and phrases like demand-side management and demand response are now firmly at the forefront of discussions when it comes to developing ways to better manage the energy network.
It’s not hard to see why. A drop in consumer demand, the prospect of people going off-grid, the advent of new technologies and increasing consumer interest in ways to combat sky-rocketing energy prices have bred uncertainty about the future direction and needs of the energy market.
On one hand, it means the traditional long-term strategy of pumping millions of dollars into building more poles and wires has lost its allure. On the other hand, it means the role of companies like EnerNOC have grown in importance.
The US-based firm is one of the world’s leading providers of energy intelligence software (EIS), which is aimed at giving utilities and end users the tools to implement and manage demand response initiatives and other energy savings opportunities.
EnerNOC established its Australian outpost in 2011 and Christian Weeks took over at the helm as managing director in late 2013. The Harvard Business School graduate had been with the company’s US operation since 2009 in a variety of roles including account management, business operations, and strategy.
Acknowledging demand response gives networks an effective alternative to building an expensive asset that may not be needed in the long-term, Christian says. He believes there’s a growing awareness and interest in the services EnerNOC provides.
“It’s an exciting time to be involved in the industry. If you’re not certain what load will do in the next two or three years but you anticipate in the next few years needing some more capacity, a demand response program could be put in place at a fraction of the cost of building a new substation,” he says.
“There’s a great deal of value in having the option of not committing to that 10 or 20-year or even 40-year asset that is very expensive to put in place but may not be needed after a few years.”
GROWING THE CUSTOMER BASE
Since its arrival in Australia three years ago, EnerNOC has steadily grown its customer base. Its local branch, which also covers New Zealand operations, began life through the acquisition of Energy Response and immediately set about nudging its way into Western Australia.
The company’s EIS platform provides emergency capacity to help balance the state’s Wholesale Electricity Market. Companies participating in the program earn payments for agreeing to reduce energy consumption during times of stress on the grid.
EnerNOC has also established partnerships with individual network businesses throughout Australia. It delivered network support capacity to Ausgrid to relieve constraints on its Greenacre Park zone substation and then began work on a demand response program to help the state-owned distributor improve the efficiency of its low voltage network.
During TransGrid’s upgrade of its inner Sydney network to meet demand growth, EnerNOC delivered 35MW of demand response capacity.
“The innovative demand response project supported Sydney’s high voltage electricity grid during the summer period by managing peak demand,” Christian says.
The initiative allowed some of Sydney’s major energy users to shift energy consumption outside peak periods and was recognised with the Energy Efficiency Council’s Best Demand Response Project Award.
Last year, ERM Power brought in EnerNOC to implement demand response for its commercial and industrial customers. Under the scheme, ERM Power pays large energy consumers to reduce consumption when real-time prices for electricity are high.
The aim, Christian says, is to protect ERM Power’s operations against high price volatility in the National Electricity Market (NEM).
“ERM Power’s approach has been to combine demand response with energy management tools, real-time metering and a web-based platform to help customers better manage their energy usage,” he says.
“The demand response product has allowed ERM to engage customers quickly in response to fluctuations in the NEM wholesale energy costs, resulting in a reduction of consumption during high market intervals.”
The partnership with ERM is likely to be one of many involvements EnerNOC will have with companies operating in the NEM in the coming years.
Western Australia gained EnerNOC’s interest early on, but Christian is clear about the company’s long-term aspirations.
“Western Australia was the immediate opportunity when we entered Australia, but we’ve always viewed the eastern part of Australia and the NEM as a larger opportunity in the long term,” he says.
However, the company is currently restricted in the services it can offer in the NEM. Existing regulations mean EnerNOC can only work with individual network companies and energy retailers as opposed to offering capacity directly into the wholesale NEM.
“In Western Australia we participate in a capacity market. The eastern part of Australia does not have a capacity market, it’s an energy only market. Under the current rules we’re not able to participate in that market directly,” he says.
But that is all about to change.
ENTERING THE NEM
EnerNOC expects to soon gain entry into the NEM courtesy of the Australian Energy Market Commission (AEMC), which has recommended the introduction of a demand response mechanism that allows demand response to bid into the energy market directly.
“The mechanism would encourage more demand response by allowing customers to contract for demand response separately from contracting for their retail energy,” Christian says.
“The resulting rule change is currently undergoing a cost-benefit assessment and we are hopeful that it will be implemented in 2016, fixing this longstanding flaw in the market design.”
Christian says a key step to improving the prospects of demand response is making it a separately contestable service to encourage competition.
“As we’ve seen in other markets, competition leads to innovation and results in higher levels of demand side participation. In contrast, markets where only the utility (retailer or network) can do demand response have much lower levels of participation. This is what we see in the NEM,” he says.
EnerNOC’s foray into the NEM stands to be a boon for the company. Christian says the existing level of demand side participation in the market is “well below the efficient level”.
“Given the large (and growing) disparity between peak and average demand in the National Electricity Market – amongst the worst in the world – we would expect to see around 10 per cent of capacity coming from customer participation rather than conventional generation and network investment,” he says.
“Instead we see less than 2 per cent. This has led to excessive investment in the supply side, driving up costs for all customers.”
DOING MORE WITH NETWORKS
Amongst the regulated network businesses, Christian says existing regulations are discouraging networks in the NEM from introducing demand response projects.
“Network regulations create strong incentives to reduce operating expenses, which include demand response projects, and weaker incentives to reduce capital expenses, including investments in new network infrastructure,” he says.
“As a result, demand response projects are less attractive to networks than investing in new network infrastructure.”
However, work currently underway looks set to drastically improve the appeal of demand response.
Christian says the Australian Energy Regulator (AER) is removing the disincentives for demand response projects through a capital expenditure sharing scheme.
He says the intention of the scheme to align capital expenditure incentives with operational expenditure incentives should mean the lowest total cost solution is most profitable for the network, making demand response a more attractive proposition.
EnerNOC is also looking to the reformed Demand Management and Embedded Generation Connection Incentive Scheme (DMEGCIS) to provide a strong incentive for networks to turn toward demand response projects.
“The reformed DMEGCIS scheme should allow networks to keep a portion of the market benefits from their demand management projects,” he says.
EnerNOC plans to act quickly to take advantage of the regulatory changes.
Christian says the company’s focus over the next few years will be on working with network operators to create new opportunities for demand response projects with a focus on improving network efficiency and lowering consumer costs.
But it’s not the only issue that will occupy EnerNOC’s time. Christian says attention will also be spent on pushing for greater use of tariffs that send price signals to consumers. According to Christian, very few customers are currently exposed to price signals, but the AER’s work on adopting revenue caps has the potential to change that.
“Tariff-based measures haven’t been adopted in earnest because revenue recovery for most networks is based on weighted average price caps, which are riskier when tariffs include sharp price signals because lower demand from end-users who respond to price signals leads to lower revenue for the network,” he says.
“Under revenue caps, networks can implement tariffs with price signals without risking short-term revenue recovery.”
Christian believes the use of price signals will encourage consumers to change their consumption behaviour in ways that reduce network costs in the long term.
“Rapidly rising prices have made customers more conscious of their consumption and more willing to implement measures like demand response to manage their energy costs,” he says.
It’s no wonder then that EnerNOC plans to invest time and resources in the coming years raising awareness of its EIS solutions among price-conscious industrial and commercial energy consumers.
Christian says while energy is a major operating expense, many managers do not have the tools needed to understand what is driving costs, how the business can prioritise energy investments and what actions should be taken to yield the greatest return.
“The main challenge is getting all the relevant data – spend, consumption, tariffs, production, weather etc – into one place so that it can be analysed to identify energy saving opportunities. This is the role of energy intelligence software,” he says.
“We believe there is a significant opportunity to help enterprise customers in Australia gain more insight into how they’re buying energy, how much energy they’re using and when they’re using energy.”
EnerNOC’s prospects in Australia are bright, according to Christian. He expects impending regulatory reforms to accelerate the growth of demand response in the next two to five years.
Not only that, but he tips the changes will drive competition and efficiency for the benefit of consumers.
“The beauty of our business model is that if we’re successful as a business all consumers should benefit from more efficient networks and lower prices,” Christian says.
The changes may be a daunting prospect for those steadfastly stuck in the mindset of building more poles and wires, but Christian, unsurprisingly, feels differently.
“It is very exciting,” he says.