The Climate Spectator has a look at the potential for reducing infrastructure costs associated with meeting demand peaks by market based demand shaving mechanisms - It's time to reform the NEM.

Ross Fraser chairs a company called Energy Response, which makes money by encouraging large energy customers to cut their electricity consumption at times of peak load. It is the country’s only Australia-wide demand aggregator of electricity, but it shouldn’t be. And it can’t even operate on a daily basis in any other state than Western Australia, because the National Electricity Market (NEM) won’t allow it.

Energy Response has contracts with commercial and industrial business that account for 73MW of capacity in WA, and has the rights to another chunk about the same size. Basically the deal is this: when peak load soars and puts stress on the network and on wholesale prices, these consumers agree to reduce their demand by the agreed amount. Fraser won’t say how much they get paid, but it’s clearly lucrative, because it’s likely to be around 10 times more than what they are paying for the electricity if they were consuming it, and it is lowering costs for other energy consumers.

Fraser says about 2200MW of supply-side capacity exists in the NEM only to service the maximum peak loads that occur on just a few days of the year. It costs $2 billion to build that capacity and much more to put it into operation. “Why do we invest $1 million per MW to meet these occasional peaks when there is 3000MW of commercial and industry capacity that is already built and could be and reliably available if we have the right market mechanism?” he asks.

The NEM, a market that has been widely praised for delivering cheap and reliable energy, is now criticised because it is inflexible, is skewed towards suppliers simply producing more energy, and worst and most ironic of all – it adds unnecessarily to rising electricity costs. “There is no environmental objective and no demand management objective in the national electricity law, and that’s quite surprising,” says Mark Lister, head of the Alliance to Save Energy.

Fraser, who was the project leader in the implementation of the NEM, says even the efficiency of the NEM is now in doubt. “I don’t see how you can call it efficient,” he says. “It is simple for generators to build new generators and supply new energy. But it is not efficient for the end-use consumer – they are having to cope with the cost of this waste each year.” And the scale of this “waste” is enormous: around $6 billion in costs – a quarter of the annual retail cost of electricity, which is caused by servicing the extreme peaks in wholesale prices and network demand for just 40 hours a year.

This link is a little old (from back in December) but its worth noting what the Australian Energy Market Operator (combining Nemmco's old electricity market operator role with that of the gas market as well) views as the outlook for the eastern states natural gas supply - Rise and fall of the gas provinces.

THE gas market will see a fundamental shift over the next two decades as gas-fired electricity generation expands under the Federal Government's carbon reduction scheme. Victoria's gas reserves will plunge and Queensland will become the dominant gas supplier on the east coast.

The forecast is contained in the first so-called ''Statement of Opportunities'' for gas released today by the Australian Energy Market Operator, which took over the running of the electricity market from the National Electricity Market Management Company earlier this year, and also took responsibility for the gas market.

By the end of the two decades Victoria could be down to 10 years of gas reserves - or less - forcing it to consider sourcing gas from other states for the first time, which will boost its gas price significantly.

NSW is likely to be forced to turn increasingly to Queensland for gas, although the wild card is locally sourced gas, as the exploration push for coal-seam methane gas gets under way in earnest in this state.

According to the AEMO, NSW will experience a doubling in gas reserves from 2025, largely thanks to an anticipated rise in gas reserves around Camden, to Sydney's south-west, as less gas is available from Victoria. Reserves from other regions such as Narrabri and Casino, in the state's north, are not yet significant.

The forecast suggests Queensland's domestic annual gas demand will treble to 458 petajoules by 2029 from 166PJ, and export demand for liquefied natural gas will reach 1302PJ by 2029. Victoria's annual demand will almost double to 403PJ by 2024.

But the big change will come from an expected 55 per cent drop in Victoria's gas reserves to 4344PJ by 2029, equal to just 10 years of production. But strong economic growth between now and then could reduce it to just seven years of reserves by then.

This anticipated decline will result from a rise in demand in Victoria, and elsewhere, coupled with falling reserves as Bass Strait's large oil and gasfields near the end of their life.

At the same time, South Australia's reserves are expected to fall by a quarter to 1075PJ, equal to 14 years of production.

Under these forecasts, NSW will need extra pipeline capacity from 2012, as well as Victoria, marginally at first but more significantly from 2017.

''All of the pipelines in Queensland … will be exceeded from between 2010 and 2013,'' the AEMO said.

NSW will need additional gas pipelines linking to Queensland, which may result in the long-mooted Hunter to Queensland pipeline proceeding.

In total, domestic gas demand in the eastern states will double to 1205PJ a year by 2029 from 626PJ now.

Over this period the NSW annual gas demand will reach 199PJ, up from 130PJ now, but well below Queensland and Victoria, largely due to the lack of sizeable gas reserves in NSW, coupled with its higher price relative to other states.