Two sides to every story

As flagged in last Tuesday’s article on day ahead markets, today we look at the ESB’s other discussion paper, on two sided markets. Most markets for goods and services are naturally two-sided, with demand and supply both dynamically adjusting to changes in prices. The characteristics of electricity, or rather how we use it, has meant that it has in practice been much more one-sided. While the NEM’s wholesale market design results in a highly dynamic supply side (i.e. generators), the demand side (i.e. customers)  to all intents and purposes is a fixed number at any given time that doesn’t react to whatever the price turns out to be (there are a few exceptions where large customers have signed up for demand response programs). This is one of the reasons that electricity markets typically have a price cap, because the demand side does not act as a check on very high prices when supply is tight. It’s also why when supply gets even tighter and there is not enough electricity to go round, we use administrative ratioing (rolling “brownouts”) rather than see who is prepared to pay the most to keep the lights on.

The energy transition and the technologies both driving and supporting it are opening up the opportunity for the demand side to participate more actively in the electricity market. Rooftop PV has made millions of Australian homes and businesses suppliers as well as users of electricity. On its own this is not enough, given the passive nature of solar PV. The advent of batteries brings the opportunities to add control to this mix, when combined with ICT smarts. This can further be augmented by control of devices such as airconditioners or pool pumps. EVs are just batteries on wheels from the perspective of the electricity grid, so they can be added to this mix. Firms will generally prioritise business continuity over a smaller electricity bill, but there are ways for them to shift load around too, such as warehouses choosing when to recharge forklifts or supermarket chiller cabinets drawing a bit less at high priced times and a bit more at low priced times while keeping food temperatures within safe limits.

Enterprising companies are already starting to participate in the wholesale market using an aggregated set of these distributed resources (primarily home batteries at this point) in what is called a virtual power plant (VPP). As the name suggests this participates on the supply side of the market. Under a true two-sided market, customers – in practice their retailers – would actually bid demand side into dispatch, indicating what quantity of electricity they would buy at what price.

To be clear, this will not result in a wave of electricity “day traders” where small customers avidly monitor the 5 minute wholesale price and run around their homes switching appliances off or on accordingly. Digital technologies will need to make this a seamless experience for customers happening behind the scenes. Crucially customers will need to opt in to allow their retailer or a third party to implement the technology on their behalf. Given the trust issues retailers have and their patchy record on innovation, they will have to work hard not to cede ground to new entrants who either aggregate small customers more successfully or package up control technologies for individual customers who can then choose spot price exposure confident in the knowledge they have the tools to self-manage this risk in an automated way.

Equally important will be regulatory safeguards against poorer customers bearing the brunt of any residual requirement for load curtailment when demand exceeds supply. Given the better-off will self-select extra reliability through purchasing a battery and control technology that allows them to ride out a local grid shutdown, this will actually be easier to address in a two-sided market framework, which in any case should reduce the need for anyone to be turned off by the system operator.

The ESB’s discussion paper sets all this out and notes that the transition to a two-sided market will be one of evolution rather than revolution, with the necessary regulatory changes unfolding over time. However, they aim to have a market design blueprint mapped out by the end of the year.