All Stick, No Carrot: Incentivising Demand Management

This is a synopsis of the speech I gave at All Energy 2024 as part of the 'Demand management opportunities for industrial users' session.

Imagine a world where electricity supply closely mirrors demand. Or even better, where demand seamlessly adapts to supply. As we move towards a future powered by renewable energy, achieving this balance between supply and demand will be essential for a reliable and resilient energy grid. Today, energy users – and not just generators – must play a larger role in demand management, enabling renewable sources to flourish without overloading the grid.

The Problem: The “Solar Cliff”

The energy market faces what’s been called the “solar cliff.” Essentially, we have a growing surplus of renewable energy, but demand isn’t adapting fast enough to absorb this influx. Unlike traditional power sources, renewables are inconsistent, which leads to misaligned production and load requirements. This discrepancy creates volatility, with sudden spikes in supply and demand, leading to higher costs and increased strain on the grid.

Right now, the energy costs associated with demand are only partially visible to most users as a capacity or demand charge on their energy bills. While many overlook it, this charge is tied to the infrastructure costs of delivering peak power. The demand charge benchmarks the highest single point of consumption over a period, making spiky energy use particularly costly.

Why Demand Charges Are So High

Demand charges reflect the “size of the pipe” required to deliver peak energy. Consider that most network costs stem from just a couple of peak weeks each year, like when everyone cranks up their air conditioning on a hot day. At these times, network stress is high, and systems run inefficiently. To ensure they can meet demand at such critical moments, networks must have a robust infrastructure in place, whether customers use it regularly or only sporadically.

For some commercial users, demand charges can make up as much as 65% of their energy bills. This setup has incentivised networks to build “just-in-case” capacity to accommodate infrequent demand peaks, which has come at great financial and environmental costs.

Moving Beyond the “Stick” of Demand Charges

Historically, energy demand management relied heavily on penalties rather than incentives. High demand charges and spikes in spot market prices serve as blunt tools, pushing costs onto consumers. But the challenges of renewable integration require a new mindset: instead of penalising high demand, we should reward load-shifting behaviours that help balance the grid.

Our current setup incentivises neither load matching nor active demand management, especially at the consumer level. Though some companies, like Amber Electric and EnelX, reward demand response from larger users, these models need to be applied across all sectors to make a meaningful impact.

The Case for Carrots: Rewarding Demand Management

The good news? We now have the visibility and technology to reshape our approach. With smart meters and advanced control systems, consumers can adjust demand in real time, responding to changes in energy availability. Imagine being paid to turn off discretionary loads during periods of low production, rather than just being penalised during peak demand.

Some networks are already exploring innovative solutions. In Western Australia, for instance, the lights in public stadiums are turned on during the day to absorb excess solar energy rather than curtail production. But broader, standardised incentives would encourage more consumers to engage in active demand management, creating a more resilient grid.

The Future: A Positive Demand Response Ecosystem

By introducing a “carrot” approach, we could foster a positive feedback loop. Demand response programmes could help businesses and households lower their own bills while reducing pressure on the grid. More stable consumption patterns lessen the need for costly grid upgrades and make renewable integration smoother, benefiting everyone from individual consumers to large energy providers.

Peak demand moments, when spot prices can skyrocket, could see users rewarded for reducing demand rather than penalised for consuming more. Businesses could even benefit from feed-in-tariff-style incentives for participating in load management, making energy not only more affordable but also more sustainable.

Making It Happen: A Call to Action

The technology to enable this shift is already in place—what’s lacking is an incentive structure. Governments, industry leaders, and energy providers must push for a widespread demand response programme. When businesses recognise demand management as core to their energy strategy, we unlock the potential for lower costs, greater reliability, and substantial progress towards a renewable energy future.

As Australia embraces this transition, it has the opportunity to lead the world by example, setting the standard for a balanced, green energy economy. Imagine an Australia renowned for its abundant, clean, and reliable energy, serving as a powerhouse for the world.

In closing, the shift from “stick” to “carrot” in energy management represents a fundamental reshaping of how we use and think about energy. Let’s build an energy system that rewards smart demand practices, strengthens our grid, and paves the way for a resilient, renewable future.

Thank you for your energy and attention.