Electricity consumers will be paid for reducing their power demands, under a radical change to the market that will be introduced next year.

The historic rule change announced on Thursday will allow what’s known as ‘wholesale demand response’, where the wholesale market can pay users for cutting electricity consumption, rather than paying electricity generators to increase supply, when the system is under strain.

The shift, which will begin in October 2021, has been adopted by the Australian Energy Market Commission despite opposition from big energy generators and retailers, who were using the COVID-19 crisis to pressure for delaying the rule changes.

The commission has described the change as “an important reform to the NEM (National Electricity Market)”.

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It argues it will reduce electricity prices for consumers and improve reliability on the network, by allowing demand response to compete with ‘peaking’ electricity generators that typically receive very high prices for supplying additional electricity during times of heavy demand.

Under the change, large electricity users (such as big farms, factories and commercial enterprises) will get paid for taking their demand out of the system.

Over time, demand response is expected to be extended to households and smaller businesses who sign up with companies that ‘sell’ power reductions from thousands of customers into the market at times when wholesale prices are high.

However, the AEMC has baulked at extending the initiative to households and small businesses at this stage.

Energy Minister Angus Taylor said the new rules would lower prices and improve reliability on the electricity grid.

“This reform will help avoid spikes in electricity demand that can increase prices, and can cause unexpected blackouts,” he said.

“This is a great opportunity to strengthen energy-intensive industries like smelters by rewarding them for the role they play in making the grid affordable and reliable.

The benefits of wholesale demand response will flow through to all households and businesses through lower electricity bills and improved network reliability.

“Lower electricity costs on small businesses and industry means Australians have more money to invest, expand and grow jobs – and this is particularly important as businesses recover from COVID-19.”

Win for community and environmental groups

The Australian Competition and Consumer Commission has welcomed the change.

In a submission to the AEMC, the competition watchdog’s chairman Rod Sims had argued the historic change had the potential to “constrain the pricing of [electricity] generation businesses, limit the need for additional generation and lead to lower prices”.

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The Australian Energy Council, which represents the big energy retailers and generators, had wanted the changes delayed and to have the capacity to implement demand response limited to existing energy retailers, but this was strongly opposed by the ACCC.

The rule changes are a major victory for a coalition of community and environment groups that fought for the shift to demand response – the Public Interest Advocacy Centre, the Australia Institute and the Total Environment Centre.

These groups have welcomed the reform and the AEMC’s decision to adopt the change in 2021, rather than delay the introduction to 2022 or beyond as requested by the big energy companies.

“Big energy users like factories and farms will be able to earn money by saving energy during heatwaves and at other times when electricity prices are high,” the Australia Institute’s energy lead Dan Cass said.

This will push down prices for all consumers, improve reliability and help Australia safely retire our 20 remaining coal-fired power stations.”

Head of energy policy at the Public Interest Advocacy Centre Craig Memery said it was “a critical reform that will bring much-needed benefits to consumers, and a key part of a secure, zero-carbon energy system”.

However, these groups were disappointed that the change has been restricted to big electricity consumers rather than extended to all households and small businesses.

“We will continue to push for … the other 90 per cent of customers to be able to reduce their energy costs by participating in the demand response market,” the Total Environment Centre’s energy market advocate Mark Byrne said.

The Australian Energy Council had said it is “broadly supportive” of the rule but took issue with the timetable set down for its implementation, “given the disruption currently being caused by COVID-19, and likely to continue for some time to come”.