1. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 1 Survey of Demand-Side Participation in the national market Presented by John Fazio PHB Hagler Bailly

2. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 2 Background A fundamental objective of the Code is to ensure supply and demand- side resources are treated equally Some effort in the original market design to remove any impediments to demand-side response (eg NGMC review of demand response potential): w Pricing signals transparent w Market derives benefits of economically efficient demand-response potential NECA committed to facilitating pro-active demand-side management Survey commissioned to establish current level of, and market participant attitudes to demand-side response.

3. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 3 Key Survey Objectives Explore customer attitudes to the market: w Understanding of market design w Level of interest in demand-side initiatives w Expectations of retailers and third-parties in delivering programs w Support for existing demand-side product offerings w Suggestions for enhancing market design Database recording quantitative statistics on: w demand-side programs being offered by market participants w level of customer involvement Survey didn’t seek to quantify the technical and market potential for DS across NEM – much larger study.

4. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 4 Approach Stakeholder consultation w discussion paper w indicators w three draft questionnaires for retailers, NSPs and end-use customers Access database set up by NECA Questionnaire mailed out to: w 54 major end-use customers w All market participants registered as a retailer Follow-up telephone surveys with 12 end-use customers due to average response to mail-out.

5. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 5 End-Use Customer Responses SECTORNSWVictoriaQueenslandSA Manufacturing3332 Water Supply1 Mining1 Education11 Retail1 Cultural&Recreation1 Property Services1 Communications1 Health1 TOTAL7652

6. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 6 Participation in DS Programs Survey respondents represented: w 2,154 MW of maximum demand across 2,260 sites w Site maximum demands ranging up to 1000 MW Eight firms reported involvement in DS programs but: w Only four able to provide details of the programs w Three able to quantify the load reductions being achieved. Load reduction impacts: w Three respondents - 817 MW of DS resource out of 2,154 MW (38%) w Two respondents - 17 MW of DS resource out of 1,254 MW (<2%) DS strategies: w Rescheduling loads w Switching off discretionary loads w Energy efficiency

7. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 7 Participation in DS Programs Managing loads in response to pool price: w Most customers purchase electricity on fixed price contracts w Limited or no exposure to pool prices w However half the firms had considered part or full exposure to spot prices in their retail contracts or purchasing directly from pool but decided: No loads to shed Unable to manage the risk Unable to justify resources and/or specialist skills required Playing the spot market not part of core business Key driver for participation : w MAKE MONEY!

8. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 8 Need for Incentives Most firms (16 of the 20) believed greater incentive should be offered to encourage greater DS participation w “Increases in VOLL are important” w “Only way to encourage DM is to either penalise or entice people to do it” w “…difficult for us to shed load but everyone should be encouraged to do so” Others either disagreed or felt incentives would not make a difference within own operations Managing energy costs is a low priority for most businesses, incentives can help raise the profile of DS activities. Very few firms able to quantify what demand reductions are worth: w Needs further research

9. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 9 Barriers to DS Participation

10. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 10 Operational Issues End-use customers are likely to be most responsive to DS initiatives which offer: w Flexible “best endeavours” arrangements w No penalties w Sufficient notification period w Good communication links between customer and DS program facilitator w “Hand-holding” - Technical assistance to identify and scope out DS opportunities General view that retailers are best placed to deliver DS programs w Understand their business w May have already been approached by a retailer w Expected to provide “hand-holding” But any market intermediary or DS co-op could provide firm DS capacity.

11. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 11 Market Participant Results INDUSTRY SECTOR NSWVictoriaQueenslandSA Retail3221 TSP11 NSP12 Generators1121 TOTAL6462

12. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 12 DS Projects Evaluated and Underway INDUSTRY SECTOR ProgramsEvaluatedProgramsUnderwayMW of DS Capacity 1998199919981999 Retail40423742422 TSP03000 NSP582410 Generator1202750 TOTAL465539481182

13. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 13 Drivers and Barriers Retailers Clearly the most active market participant in DS initiatives Drivers: w Managing exposure to pool prices w Regulatory requirement (eg NSW licensing conditions) w End-use customer retention strategy – customer satisfaction and relationship building w Differentiation – new products and services Barriers: w DS projects not cost-effective w Lack of customer demand for DS products w Insufficient DS resource to make DS product viable w Structural and operational barriers with the NEM

14. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 14 Drivers and Barriers TSP and NSPs Drivers: w Deferral of T&D capacity augmentation w Regulatory requirement (eg NSW licensing conditions) w Increase asset utilisation w Reduce energy losses Barriers: w DS projects not cost-effective w Insufficient lead time to meet network requirements w Lack of customer demand/interest for DS products w Structural and operational barriers with the NEM itself

15. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 15 Drivers and Barriers Generators Drivers: w Manage commercial risk associated with variable pool prices and hedging contracts Lowering exposure to pool prices Increasing unhedged sales at time of high spot prices Barriers: w Lack of customer demand for DS products w Insufficient DS resource to make DS product viable

16. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 16 Range of DS Programs Offered PROGRAM TYPERetailersTSP/NSPGenerators Interruptible loads (firm)  Interruptible loads (non-firm)  Standby Generation  Hot Water DLC  Power Factor Correction  Fuel Substitution  Energy Efficiency 

17. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 17 Suggestions for Market Refinement Customers Improved relationships between retailers and customers Facilitate third-party aggregators and co-operatives Increase customer knowledge of the market and role of DS response Provide worthwhile incentives Market Participants Access to “live” consumption data Improve accuracy of load and price forecasting Symmetry of information – DS bids paid in same way as generator bids Training (for customers and staff) Improved IT systems

18. PHB Hagler Bailly - Asia Pacific Management and Economic Counsel 18 Next Steps? Recognise that DS is inherently different to the supply side: w The market is not core business for customers, but w It is core business for the supply side. Some potential next steps: w Strengthen Code cover DS more explicitly with clear rules for DS bidding w Recognise importance of DS aggregators/co-operatives as a way of overcoming barriers to DS w Follow-up with survey respondents to obtain further details of perceived NEM impediments w Education and awareness raising campaign to improve customer knowledge of the role of DS in the market (expand horizons) w Work with jurisdictional regulators to ensure there are no impediments to DS at the network level.