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December 2, 2016

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HOT or NOT?

December 2, 2016

 

The beginning of December - time for winding down at work and attending endless corporate Christmas parties for some, but for others it is time to task a junior team member with favouriting the Bureau of Meteorology’s website and start picking the peak days.

 

That’s right it is the start of the capital H, capital S 'Hot Season'!

Who cares about the Hot Season?

 

On 1 December the Hot Season commenced and in any ordinary year includes the peak periods which provide a basis on which to determine:

  • the capacity expected to be available from each demand side management (DSM) provider in two years’ time; and

  • the allocation of the capacity credits that each retailer will pay in the following year,

because in the WEM we cater for enough energy to cover these peak periods and allocate the costs on a causer-pays basis.

 

All retailers are trying to pick the peak but until now they have had the opposite reaction. DSM providers are trying to make sure that their consumption is high in the peak periods to prove that if they were called to respond (i.e. reduce consumption) they could. All other retailers are reducing consumption through the peak to avoid paying capacity costs.

 

But what is the game and how is it changing?

 

Each retailer’s share of capacity costs is determined by calculating their Individual Reserve Capacity Requirement (IRCR). I will spare you the detail (you can attend one of AEMO (WA)’s training sessions to be enlightened by the knowledgeable market operators), but the general principle is that you need to pick the 3 consecutive, 30 minute trading intervals on each of the 4 days where electricity consumption in the south west interconnected system is the highest.

 

Easy right?! Well it is certainly getting harder!

 

We used to be able to look at the Bureau of Meteorology's website, pick a few days that looked like they would be pretty hot, know that the peak was in the afternoon, reduce our consumption and cross our fingers. But now we have other complications in the form of a shifting peak.

 

We are seeing a significant reduction in consumption in the afternoon from our almost 600MW of solar resources. This is shifting the peak increasingly out of business hours. We now need to start looking at the amount of solar generation that is expected and factor that into our forecasts.

 

We are seeing and increase in the number of retailers playing the IRCR game including those previously providing demand-side capacity. Earlier this year, as part of the State Government’s Electricity Market Review, payments to DSM providers were slashed, resulting in the 500MW+ of DSM across 10 providers to be reduced to 82MW from the State Government owned Synergy.  In the 2015 Electricity Statement of Opportunities, the Australian Energy Market Operator stated that "[u]nder conservative assumptions, an IRCR response of 105 MW to 170 MW is foreseeable, which would [alone] change the timing of the peak interval from 5:30PM to 7:30PM."

 

 

We are also seeing an increase in the number of retailers playing the game looking to reduce capacity costs. This is reducing overall consumption on most of the historically typical peak days and shifting the peak increasingly to more modest temperature days. We now need to start looking at how we think others will respond and factor that into our forecasts.

 

So what does this all mean?

 

For DSM providers it means playing a new game - the IRCR game.

 

For retailers and large customers it means getting more sophisticated at forecasting a moving target to optimise their responses to peak events and reduce costs.

 

For residential customers, Synergy and the State Government it means bearing an increasingly larger proportion of the $560 million in capacity costs, with conservative estimates showing a likely increase of around 5%. This is because, non-contestable customers still do not have a direct incentive (or some would argue ability) to reduce consumption, where others can.

 

For data scientists it means a new project to come up with a new model.

 

If you are interested in optimising your IRCR response please contact Point or Analytics + Data Science.

 

Figures from WEM Electricity Statement of Opportunities, AEMO, 2016

 

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