Unlocking the potential of distributed energy resources and demand side participation

By Melissa Keane, Mohamed Khairat, Andrew Panaccio
Energy Renewables

Opportunities that lie ahead for the energy industry 10 min read

The Energy Security Board's (ESB) Post 2025 Market Design Options Paper provides a glimpse into upcoming reforms that aim to release the potential of distributed energy resources to meet current challenges with falling minimum demand and to leverage demand side participation.

Key takeaways

  • The existing regulatory framework is not designed to accommodate bi-directional power flow, notwithstanding that by 2030 it is expected that 50% of energy consumers will use some form of distributed energy resources and to be demand side participants.
  • A range of immediate steps are already being taken to address a more decentralised energy system, ranging from tariff and pricing reform introducing new categories of market participants.
  • There is significant value in unlocking the potential of distributed energy resources and demand side participation, with opportunities for all relevant stakeholders to have greater flexibility in the existing market and the ability to explore new markets.


In March 2019, the former Council of Australian Governments Energy Council tasked the ESB with advising on the required changes to the National Electricity Market (NEM), to ensure it could accommodate an increasingly diverse and distributed generation mix, while ensuring ongoing reliability of supply. The latest step in this process was the publication of an Options Paper on 30 April 2021, which broadly provides for four key reform directions.

In this Insight we provide an overview of one of these reform directions – the integration of distributed energy resources (DER) and demand side participation. See here for our overview of another of those options – the introduction of new frameworks for the procurement of essential system services.

Impact of changing trends on the existing regulatory framework

Distributed energy resources (DER) are renewable energy systems located ‘behind the meter’ and controlled by energy consumers. Common examples of DER include rooftop solar photovoltaic  units, battery storage, thermal energy storage, and electric vehicles.

According to the ESB, the largest 'generator' in the NEM is now owned collectively by customers, with more than 2.6 million household solar photovoltaic units across the NEM. By 2030, the Australian Energy Market Operator (AEMO) expects approximately 50 percent of consumers in the NEM to use some form of DER and to participate in the demand side of the NEM.

However, existing regulatory frameworks were designed for the traditional electricity supply model where centralised coal-fired power stations provided consumers energy through a one-way power flow. The shift to consumers increasingly providing and demanding power has created both technical issues, as parts of the grid were not designed to accommodate generation, and operational issues as AEMO has reduced visibility and control over DER. 

Although the rise of DER is causing significant challenges to the energy system, unlocking the potential of DER could be the solution to many of these issues. DER can provide both a competitive and low-cost alternative to large scale generation and also represents an untapped reservoir of flexible demand side participation. Where customers can access the wholesale markets through aggregators and retailers, the flexibility of consumer demand and DER can be harnessed to provide services that support the market, as well as derive cost and non-cost benefits to customers, retailers, network service providers and other parties. 

Steps are already being taken towards unlocking the full potential of a decentralised energy market

There are a range of immediate and initial reforms and steps being taken by the ESB and other parties to address challenges and issues arising as a result of an increasingly decentralised energy system and to ensure the full potential of the market can be leveraged by all market participants. These include the following.

number-blue-80x80px_1.pngRisk assessment tool

One of the first immediate steps being taken is the development of a risk assessment tool to determine the adequacy of the existing regulatory framework from the perspective of consumer protections. According to the ESB, this risk assessment tool will help assess where risks or opportunities to consumers may be emerging and help inform the development of the two-sided market design.

The risk assessment tool will be used to:

  • test whether consumer protections in place remain fit for purpose and ensure customers continue to have options to switch between retailers and aggregators without too much difficulty or cost;
  • determine whether additional protections are needed to increase and ensure ease of customer participation with new forms of energy services and opportunities; and
  • consider appropriate technical standards and arrangements to address minimum demand to maintain security and power quality.

In submissions to the ESB, there was general support from large 'gentailers' and network businesses for the risk assessment tool. However, several consumer advocates raised concerns about the interaction of existing energy regulation regimes, such as the National Energy Customer Framework (NECF) with the proposed risk assessment tool and whether such regimes are still fit for purpose. In its submission to the ESB, the Australian Competition & Consumer Commission (ACCC) endorsed a risk-based approach to assess whether the consumer protection framework remains appropriate. The ACCC added that there may be value in updating relevant retail energy laws and regulations and that targeted consumer protections may be warranted as a result of the 'complexity of new energy technologies and the nature of electricity as an essential service'.

number-blue-80x80px_2.pngCombating falling system minimum demand

With the rise of DER challenging the ability of system operators to balance the system under falling minimum demand experienced during the middle of the day where solar generation is at its peak, the ESB is proposing reforms to maintain the secure operation of the energy system. South Australia is at the forefront of this issue, with operational demand estimated to be negative during peak generation periods by 2023.

Initial reforms recommended by the ESB include emergency backstop measures which remotely disconnect domestic solar photovoltaic systems during system instability, such as those introduced in South Australia in response to the 2016 blackout. Other initial reforms include the development of turn-up services, or dynamic load services, as part of a mature two-sided market where DER can respond to market signals.

number-blue-80x80px_3.pngTariff reform

For the efficient and sustainable integration of DER, and to maintain security and power quality of the energy system, immediate tariff and pricing reform is critical. The ESB notes that reforms are needed to ensure network tariffs are more cost reflective and to support quality and efficient use of networks and demand management.

One example of current work in the area is the Australian Energy Market Commission's (AEMC) proposed rule change on access, pricing and incentive arrangements for distributed energy resources. The draft rule proposes to remove prohibitions on charges for energy exported to the grid and enable two-way pricing for export services. The AEMC expects to publish the final determination on the rule change in August 2021. Another movement in the area is the AER's work in developing a DER Integration Guideline, which will provide direction for distributed network service providers on how to value DER-driven network investment.

Though there appears to be general support for tariff reform to ensure the integration of DER, some retailers have stressed the importance of ensuring tariffs remain simple so that customers could continue to make informed decisions when selecting providers.

These views are broadly consistent with recent regulatory steps to ensure customers have easily accessible, clear and streamlined information regarding their energy rates.

number-blue-80x80px_3.pngNew market participants: Demand response service provider and integrated resource provider

AEMO has already taken steps to address an increase in two-way power flow and to help facilitate a more decentralised energy market, including through proposing the introduction of new categories of market participants.

In January 2021, AEMO made a final rule change which will establish a new category of market participant, a demand response service provider (DRSP). A DSRP will be able to submit demand response offers to the wholesale market that will be scheduled in a manner similar to bids from generators. The DRSP will receive the spot price for the reduction in demand which it would then share with its customers. This mechanism is designed to provide greater opportunities for large customers to participate in the wholesale market by bidding in demand reductions as a substitute for generation, thereby unlocking under-utilised demand response in the NEM. The mechanism will promote greater demand side transparency, as well as price and reliability-related benefits. The first of the reforms under the rule change will come into force in October.

Meanwhile, on 15 July 2021, AEMO released a draft determination which introduces another new participant category, the integrated resource provider (IRP). Under the IRP category, storage and hybrid facilities that provide bi-directional energy flows would be allowed to register and participate under a single registration category, rather than be required to register in two different categories. The draft determination also proposes significant amendments to the framework for the recovery of non-energy costs. The draft rule represents a major step to better integrate storage into the NEM and enable aggregators to provide new services which support the network and derive income for consumers. AEMO considers that the proposed draft rule will solve immediate issues facing participants with bi-directional energy flows and takes steps towards the two-sided market future being developed by the ESB.  Stakeholders are invited to provide written feedback on the draft determination by 16 September 2021.

Future opportunities

Other reforms proposed by the ESB that still require further development before being ready for implementation are set out below. We have also included some of the stakeholder feedback the ESB received via submissions in response to its Options Paper where these opportunities were raised and discussed.

Short term opportunities

Trader services model for a two-sided market

Under the current framework, entities that wish to participate in multiple energy or ancillary service markets mustregister in each category.

The ESB is proposing a trader-services model that creates a single and universal registration category for all entities who want to engage in the wholesale energy and energy services markets. The ESB considers that the model will facilitate participation and competition in the market and enhance the range of services available to consumers.

Expanding flexible trading arrangements

The ESB is suggesting the separation of controllable from uncontrollable resources, to provide an interface for customers to access improved choice and revenue streams.

The ESB has proposed two flexible trader models for stakeholder feedback:

  • the second connection point model where the consumer's use and production of energy services would be separated into two connections, via two metering installations at each site; and
  • the sub-meter connection point model which creates a new category of connection arrangement, a private metering arrangement. At a high level, the model involves installing a sub-metering connection point arrangement.

Stakeholder feedback so far around the proposed flexible trading arrangements is mixed, with views split on the two models and the extent to which they should be progressed.

Voluntary scheduled lite reforms

Scheduled lite was originally identified in the ESB's January directions paper and proposes to enable small to medium sized resources to actively participate in market processes or dispatch. The initiative aims to create greater participation of responsive resources, improve dispatch outcomes and increase visibility for forecasting.

The ESB has proposed two models for the Scheduled lite:

  • Visibility model, which provides information on the behaviours of resources and enhances AEMO's visibility, without requiring any participation in dispatch or response markets; and
  • Dispatchability model, which encourages new participants in scheduling and potentially market price setting, through reduced barriers and greater incentives.

Some stakeholders have criticised scheduled lite in its current form and have stated the take upas a voluntary system will be negligible unless made mandatory.

Principles to guide inoperability and communication

This aims to ensure the interoperability of DER assets and consumers' ability to choose energy providers. Interoperability refers to the ability of software and systems to exchange information and communicate with other systems. Without open interoperability, consumers will not be able to move easily between service providers and bring their equipment and data with them.

This short-term idea is in its infancy with no detailed standard currently proposed by the ESB. Stakeholder feedback will inform the design and guide the creation of standards that effectively implement DER into the wider market.

Some stakeholders, including the AEC, noted that overdone protections on removing barriers to switching has hampered innovation and recommended switching reforms should be delayed until the market matures.

Long term opportunities

Maturity plan framework 

The ESB's proposed maturity plan intends to provide a coordinated process to gain stakeholder feedback and formulate solutions to foster the integration of DER. The Maturity Plan will involve engagement four times a year with publications released on a six-monthly basis.

Notably, the maturity plan would not displace existing governance processes and regulatory functions. Potential solutions that emerge will need to be raised as rule change proposals to be considered by the AEMC.

Despite general agreement that continuing reform around DER is required, there was no consensus that the maturity plan was the preferred model. Many stakeholders called for clarity on the framework's governance and leadership. 

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