Australia: International Review Of Demand Response Mechanisms

This report was prepared for the Australian Energy Market Commission.

Executive Summary

The Australian Energy Market Commission (AEMC) has asked us to review how demand response (DR) participates in wholesale electricity markets in a range of jurisdictions, in order to inform its own market design developments regarding demand response participation in Australia's National Electricity Market (NEM).

We have studied wholesale DR participation in six wholesale markets that differ in terms of their geographies and regulatory arrangements, offering a broad cross-section of approaches to DR. Half of these markets have an "energy-only" generation investment model (Singapore, Alberta and ERCOT), while the other half have capacity obligations (PJM, ISO-NE and Ontario) complementing their energy markets. Markets with capacity obligations may not be directly comparable to the NEM, but they have attracted the largest amounts of DR resources, which also participate in wholesale energy and ancillary services markets and may thus provide insights applicable to NEM.

Below we describe our observations about DR participation in wholesale energy markets, followed by ancillary services markets, then capacity markets. Note that in the sections that follow, we describe DR performing three functions: energy, ancillary services, and capacity. In contrast, our report is organized so as to distinguish between two different types of jurisdictions, which we refer to as "Energy-Only Markets" and "Markets with Capacity Obligations". DR could potentially provide all three functions in any jurisdiction.

Demand Response and the Energy Function

Perhaps the simplest means of enabling DR in energy markets is to establish liquid wholesale markets with transparent wholesale energy prices, which NEM and the other markets (energy-only markets and markets with capacity obligations) we evaluated already do. This enables the largest customers, who may be direct wholesale market participants, to reduce their consumption and save money when they observe prices rising above the maximum value that they obtain from consuming electricity. Other customers may do the same to the extent they are exposed to wholesale spot prices through retail arrangements. We call this "price-responsive load". Though most customers choose to purchase electricity at a fixed price, we see some price-responsive load, especially in energy-only markets with volatile energy prices. Load reductions attributable to price-responsive load in the energy-only markets we surveyed ranged from about 1% of peak load in Texas to more than 2% in Alberta, although the exact amounts are difficult to determine.

Price-responsive load enhances economic efficiency and supports supply adequacy. It does not, however, do so with perfect precision if wholesale prices are volatile and customers' load reductions do not coincide with times of greatest need. To increase precision, loads would have to submit price-responsive bids and allow the system operator to dispatch1 them in real-time (similar to how generators are dispatched). However, we have observed minimal participation in dispatchable load programs in Alberta and Texas. The lack of customer interest may be explained by the costs to purchase real-time telemetering equipment and the loss of a customer's operational flexibility when the system operator controls its consumption (and charges penalties for deviating) compared to the incremental value available.

We do see substantial amounts of load participating directly in energy markets where DR aggregators (DRAs) are allowed to sell end-users' load reductions as supply, as in PJM and ISO-NE. This supply-side DR model developed first in markets with capacity obligations, where system operators viewed dispatchable loads as a resource they could deploy in emergencies; and where specialized DR providers gained expertise finding and setting up customers with flexible loads, and aggregating them into resources that could compete with generation in capacity markets. We discuss DR performing the "capacity function" in the next section.

As with participation in capacity markets, DR providers' participation in energy markets is also on the supply side: they submit offers to curtail load into day-ahead or real-time markets and earn a market price if they are dispatched. However, the determination of the settlement quantity and price are not as straightforward as for a generator. The quantity is given by the difference between actual consumption during the period in which they are dispatched, and a higher hypothetical baseline level that would have been consumed if the resource had not been dispatched. In US markets, system operators establish baselines according to various methodologies that attempt to estimate the hypothetical consumption, for example based on that customers' historical consumption; Singapore plans to solicit DR providers to nominate their customers' baselines and penalize them if the customer consumes less than the baseline when not dispatched.

As for the settlement price, the locational marginal price would be appropriate if the customer had already bought the power and was now re-selling it. But that is generally not the case: customers only pay for metered load. Therefore the savings in the generation component of the retail price the customer would have paid on the energy not consumed should be deducted from the payment, in order to avoid double counting. Estimating that relevant retail price can be a challenge especially for disparate customers of a DR aggregator, although PJM (and the Midcontinent ISO) have developed ways to do that.

Policymakers may consider enabling supply-side mechanisms to engage the specialized expertise of third party DRAs if they would otherwise face barriers to participating in the market indirectly through agreements with retailers (and sharing some of the value in lowering the retailer's cost to serving the customers' loads). We have not evaluated the extent to which there may be barriers to retailer-DRA cooperation or other barriers to DRA participation in the NEM.2

One final consideration in incorporating demand response into energy markets is how to achieve efficient price formation that supports efficient operations and investments. Ideally, when generation supplies become tight, demand reductions would clear the market and set energy prices at customers' willingness-to-pay. It is important that rules for determining the system price take proper account of DR, particularly under scarcity conditions. In ERCOT, for example, reforms were introduced to prevent dispatch of emergency DR from depressing the system price.

Demand Response and the Ancillary Services Function

In order to accommodate the sudden loss of a large generator or transmission line, electricity systems need to hold operating reserves. Operating reserves have traditionally been provided by generators that produce less than their maximum output so they can increase their output when deployed in a contingency. However, loads can also provide operating reserves by offering to curtail at short notice. This ability to curtail is clearly valuable for the efficient operation of a power system. PJM, Ontario, Singapore, Alberta and ERCOT allow loads to compete with generation to provide contingency reserves. Loads provide a substantial portion of reserves in several of these markets, including approximately half of the responsive reserve requirement in ERCOT.

Allowing loads to provide ancillary services (AS) is beneficial because it can reduce overall costs. Also, in some circumstances, loads may be able to provide services that most generators cannot. For example, while loads can be curtailed via a signal from the system operator, they can also be curtailed automatically using under-frequency relays. Loads curtailed in this manner respond extremely quickly to contingencies, faster even than a generator on governor response. This fast response has enabled some specialized AS products, such in Alberta and ERCOT.

Some markets also allow loads to provide other AS services, such as regulation (direct system operator remote control to balance supply and demand within a dispatch interval). However, while some markets seem to be moving in the direction of allowing loads to provide regulation, we have not seen substantial participation where this is allowed.

In our review we did not come across significant controversies with respect to DR provision of AS. In particular, we did not encounter controversies about DR baselines in AS markets as we did in energy markets. We note that while DR providers may be technically capable of providing both AS and energy, in any given hour they will only be able to provide one or the other.

Demand Response and the Capacity Function in Markets with a Capacity Obligation or Emergency Standby Programs

In jurisdictions with capacity obligations, DR revenues from capacity payments tend to be much larger than payments for energy or AS. Recent policy developments have focused on participation rules for DR providers that are not available year-round, and how to ensure that DR providers respond to dispatch instructions when called. These issues are more important in capacity markets than in energy markets because capacity markets typically provide payments for being available to respond. In an energy-only market, payment is for actual dispatch rather than availability. It may be easier to measure response to a dispatch signal than it is to determine whether a resource is available to be dispatched if called (though note the concerns over baseline methodologies described above).

Although ERCOT is an energy-only market, its Emergency Reserve Service (ERS) program has some similarities with capacity market DR programs. ERS's predecessor was created following an episode in which firm load was shed. Load shedding may be necessary during a supply shortfall, but it does not distinguish between loads with different willingness to be curtailed. ERCOT created the ERS program to increase the efficiency of future load shedding by first curtailing customers with a relatively low value of lost load. ERS shares several characteristics with capacity market DR programs: it procures DR to respond to system emergencies and pays DR providers an availability payment.

I. Introduction

In some wholesale markets the market design includes elements which aim to incorporate demand response (DR) programs that existed in some form prior to restructuring and the implementation of an organized wholesale market. In other cases, mechanisms for DR to participate in the wholesale market have evolved over time with the aim of making markets more efficient. For example, in markets with a formal capacity mechanism it may be significantly cheaper to procure a given quantity of capacity from a mix of DR and generator providers than it would be to procure the same quantity from generation only.

DR in wholesale electricity markets can refer to four different ways in which market participants on the demand side can interact with the wholesale market. The first and second ways for DR to participate are part of the energy market design; the third relates to ancillary service (AS) markets; and the fourth relates to capacity markets.

The first avenue for demand side participation is price-responsive load: customers who react to prices by adjusting their demand, but without bidding into the wholesale market. As in any other market, electricity consumers tend to reduce their consumption if prices rise, all else equal. These consumers may be said to have provided DR in the sense that they purchase less electricity when prices are high than they would have done if prices had been lower.

Second, in some markets there are explicit mechanisms for individual consumers, or demand response aggregators (DRAs) acting on behalf of many consumers, to bid or offer3 directly into the wholesale market and thus be dispatched by the system operator in the same way that generation is. This second route for DR to participate may be either: (a) a bid curve (price and quantity pairs) reflecting the customer's willingness to pay for energy, or (b) supply-side participation reflecting the minimum payment needed for the customer to curtail and supply back its energy, effectively participating in the market in a similar way to a generator.4

Third, system operators typically procure a number of different AS products from market participants. These AS products are required to ensure that the system is robust to outages and other unexpected changes in supply or demand. Depending on the nature of the AS product and the technical design, market participants on the demand side may be eligible to supply.

And fourth, some market designs include a mechanism for procuring capacity that is separate from the energy market. Generators and DR providers are paid to be available to generate or curtail load and avoid emergency events over and above revenues that they earn in the energy market.


Electricity customers, especially smaller customers, often pay retail prices that do not follow short-term movements in the wholesale price as it changes with supply, demand, and other fundamentals. Larger electricity consumers may pay prices that are linked to the wholesale price. The latter may therefore be able to respond to short-term price signals and adjust their consumption accordingly. This route for DR to participate in the energy market is sometimes referred to as price-responsive load because it does not depend on any specific wholesale mechanism or market design beyond the normal price mechanism. This impact of prices on the level of demand is not directly apparent to the system operator in the same way that it would be if consumers or retailers were bidding a "demand curve" into the wholesale market in the same way that generators offer a "supply curve." In these markets, the system operator dispatches generators to meet a forecast of demand but few (or sometimes no) loads are formally dispatched. The system operator's demand forecast may include an estimate of the extent to which load may respond to price.

In some jurisdictions, the market design allows customers to participate directly in the wholesale energy market by submitting a schedule of quantity and price bids for demand-side dispatch, similar to how generators submit quantity and price offers for supply-side dispatch. However, we observe very limited participation.

Some jurisdictions also provide specific mechanisms for DR to "sell back" energy as supply. Market participants on the demand side may be paid to reduce their consumption, with such payments being independent from and additional to any benefits derived by purchasing a reduced quantity of electricity. DR is paid to reduce consumption, and such payments are separate from the regular settlement process through which the consumer pays for energy consumed (either directly or through a retailer).


Some wholesale electricity market designs incorporate a mechanism to pay capacity resources to be available to provide energy. Other market designs, including Australia's National Electricity Market (NEM) are "energy only" and do not have explicit capacity mechanisms. Where there is a capacity mechanism, often both generators and demand-side resources are able to participate. In several of the markets we studied, this route for DR to participate in the wholesale market is very significant in terms of the total revenues available to DR. Although the NEM does not have a capacity mechanism, we have included capacity mechanisms in our study because this is often the dominant route for DR integration (often leading to energy market participation as a side-product) and because some design questions addressed in respect of capacity mechanisms may also be relevant for designing a mechanism for DR to participate in energy-only markets.

All wholesale electricity market designs incorporate mechanisms for the system operator to procure various kinds of AS. The system operator requires AS to manage generator outages, other unexpected changes in supply or demand, and to keep the system in balance in real time. In some markets the technical specification of (some) AS products permits DR to provide AS.


In Australia's NEM there are no explicit mechanisms to require market participants on the demand side to participate in the wholesale energy market, although some can participate voluntarily. Large price-sensitive loads (greater than 30 MW) can opt to become "scheduled loads". Scheduled loads are required to submit price-quantity bids and to comply with dispatch orders. Since there are costs of complying with technical, bidding and dispatch requirements, most loads remain unscheduled. A notable exception is Snowy Hydro which has some pumps that are scheduled. Snowy Hydro recently put forward a Rule Change Request to make it compulsory for price sensitive large loads to bid into the electricity market.5 We also understand that there is currently no route for DR to provide AS in Australia.

We understand that a Rule change proposal has been put forward that would permit loads, as well as demand response aggregators (DRAs), to participate in the NEM on the supply side. The Australian Energy Market Commission (AEMC) asked us to review how wholesale markets in a range of jurisdictions have been designed to facilitate DR participation.

We have studied the ways in which DR participates in electricity markets in six different jurisdictions. The aim of our study is to document how these jurisdictions have integrated DR into wholesale markets, including energy markets, markets for ancillary services, and markets for capacity. In some jurisdictions the market design has permitted demand-side participation for many years. We seek to identify any recent trends or lessons learned that may be relevant to ongoing work to improve the design of the NEM. Where there are ongoing debates over the optimal design of mechanisms to integrate DR, we have described the options under consideration. In section II we introduce the six markets we have studied, and provide an overview of the market design and the type and extent of DR participation. Section III describes the DR programs in the three energy-only markets and Section IV similarly elaborates on DR programs in the three markets with capacity mechanisms. Finally, in section V we draw out key observations across the six markets.

To read this report in full, please click here.


1 We use the term "dispatch" to mean the process by which the system operator directs a resource to operate in a certain way (eg, directs a generator to produce a certain quantity in a particular time interval). In some jurisdictions the term "schedule" is used.

2 Another consideration for enabling DR aggregators to participate as suppliers in the energy market is that they could be dispatched and settled nodally, whereas price-responsive load faces only zonal prices. Nodal dispatch could provide end-users with more localized price signals and give the system operator more control.

3 Conventionally, bids would refer to a bid to purchase electricity (i.e., load) and offers would refer to an offer to sell electricity (i.e., generators). As we explain below, in some markets DR "offers" a reduction in demand into the wholesale market and is therefore similar to generation.

4 DR participating on the supply side is sometimes termed "negawatts".

5 Whitby, Roger, Executive Officer, Trading (Snowy Hydro Ltd.) to John Pierce, Chairman (Australian Energy Market Commission), re Proposed rule change: Demand Side Obligations to Bid into Central Dispatch, June 10, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.