Electricity markets have historically been one-sided

Most customers participate passively in electricity markets. They usually have an agreed rate for electricity and the real-time price fluctuations aren’t something they respond to, or even know about. While some customers might have a responsive load like controlled load hot water, most just switch on the lights and voilà!

Behind the scenes, the Australian Energy Market Operator forecasts and monitors how much electricity is needed, which is known as system demand. Electricity generators make offers to supply generation to meet the demand. Customers continue to cook dinner, watch TV, and connect to the internet, largely unaffected and unaware.

As the gap between available supply and customer demand tightens, the price of electricity quickly increases. Put simply, high prices encourage more suppliers (or generators) to come online. These are called peak events.

Though generators have been encouraged to ramp up their generation at times of high demand, there hasn’t been as much encouragement of consumers to moderate their demand during these peak events – until now. With the growth of solar, batteries, electric vehicles and digitisation, customers have a chance to proactively participate in electricity markets and be rewarded for it. This is what it means to move towards a two-sided market.

Two-sided markets

In a two-sided market, both buyers and sellers respond actively to changes in price. Customers move from passively consuming electricity to actively participating in demand response or demand management. Customers can use less electricity when prices are high by turning off or delaying the use of appliances. On the other hand, the excess electricity generated through rooftop solar and stored in a residential battery can be discharged when it’s needed.

Greater customer participation in the electricity market will be important going forward to keep electricity prices as low as possible. Instead of building expensive peaking generation, which is only needed for a few hours of a few peak demand days a year, customers can become more active and respond to tight market conditions. Some larger customers can participate directly, for example, through the Demand Response Mechanism, and others can participate in demand response programs through their retailer.

Two-sided markets benefit customers by providing them with the opportunity to reduce or manage their energy demand, and receive direct benefits from those actions.

How can customers get involved in two-sided markets?

At AGL, we believe customers should have the choice to engage more in their energy usage and share the benefits of that participation.

We already have a household demand response program running each summer, called Peak Energy Rewards. Customers participating in this program are notified during ‘peak’ events, typically on very hot days, and asked to reduce their energy use. By simply turning their air conditioners up a few degrees, or pre-cooling then turning it off for two hours, our customers respond to market demands, help avoid system outages, and get rewarded.

We run a similar – albeit much larger – program with our Commercial and Industrial customers. We create tailored solutions for each business based on their operations and requirements, enabling them to respond to peak events. For some businesses this means reducing their energy usage by rescheduling work, while others can temporarily switch to backup generation.

Our Virtual Power Plant (VPP) allows customers with assets like a residential solar and battery system to send electricity back into the grid when it’s most needed, through orchestration. We are building a VPP of household batteries across NSW, QLD, SA and Victoria and already manage Australia’s largest retailer-led VPP.

Two-sided challenges

A key challenge in transitioning to a more two-sided electricity market is building trust and understanding between the key players; customers, retailers, and the Market Operator.

Customers and their retailer (or aggregator) will have a new relationship – one where customers are actually service providers – a bit like generators - and retailers pay them for services. In this new world, retailers take the complexity out of trading in the wholesale market and balancing the grid by managing customer assets for them or supporting them to self-manage. But it’s difficult to imagine how to decide hours or days in advance whether you’re able to turn on or off an appliance.

Retailers and the Market Operator have a new relationship as well, as in two-sided markets, retailers are relying on customer assets to meet demand. While it doesn’t make sense to ‘schedule’ customers the same way we schedule generators today, the Market Operator needs to have confidence they understand what is being orchestrated and when, so they can maintain the balance.

As we transition towards two-sided markets, there will need to be access to real time metering data and a level of transparency across the customer, retailer, aggregator and asset being orchestrated, so that the Market Operator can have the confidence to act.

A good relationship built on trust is important for everyone – so customers are comfortable with how their assets are managed and rewarded, and retailers can predict the load management that will be available for the grid, to confidently provide services when there are needed to support the Market Operator. Building out these complex requirements and relationships will take time, which is why we’ve already started.

Shaping the future

We’re working closely with the Energy Security Board on its Post-2025 National Electricity Market Design work, which considers how to move towards a more two-sided electricity market, and more broadly how customer assets like solar, batteries and electric vehicles can better participate.

In 2020, we made submissions on the two-sided market consultation and the post-2025 market design consultation, based on our knowledge and experience to promote customer-centric solutions.

To learn more about two-sided markets, check out the work of the Energy Security Board and Australian Energy Market Commission here.