With ongoing debate about the National Energy Guarantee, there has been a bit of discussion about the merits of ‘demand response’.

Demand response is not a complicated concept - it basically means that a customer reduces their electricity demand at a particular time of the day. Unfortunately, some people have mistakenly associated demand response with the electricity system becoming unreliable.

In reality, demand response is a way to help reduce individual customer bills, improve reliability and reduce the average cost to supply electricity to all households and business.

The concept of peak electricity demand

Generation infrastructure has traditionally been built in Australia’s electricity system to meet peak demand. These demand peaks generally occur on very hot summer days when those households and businesses with air conditioning all switch them on at the same time. Additional power stations and electricity wires need to be built to meet this higher level of demand. More capacity is added to the system. However, the extreme peak demand periods only occur in a very hot summer. Given how these peaks are driven by variable weather patterns, it is possible for several years to go by between individual peaks.

And with declining energy consumption (because of energy efficiency), the more infrastructure that gets built, the higher the unit cost of supplying electricity (i.e. higher costs spread over fewer units of energy output).

Data source: Electricity Gas Australia published by the Australian Energy Council

Why does demand response make economic sense?

“The way in which we think about infrastructure investment in the energy sector needs to change. It doesn’t make sense to build infrastructure assets that only get used for a few hours every few years.”

This is where demand response has a key role to play as it is an economic way of reducing peak electricity demand - if the payments to business owners and households that reduce their demand during these peak periods are less than the equivalent cost of building infrastructure to meet the marginal (additional) unit of demand.



In the circumstances outlined above, everyone wins.

  • Businesses and households supplying their demand response to the market are rewarded financially.
  • Reliability is improved as there is less stress on the network.
  • All users benefit from fewer costs being incurred to build infrastructure. This improves what economist’s term as ‘capacity utilisation’.

“Importantly, demand response does not automatically mean switching off air conditioners in summer and heaters in winter. The best demand response options are often opportunities identified by businesses and households themselves.”

You can learn more about demand response in this paper I had published in the Australian Economic Review (although it’s behind a paywall).