Proposed National Electricity Market (NEM) changes to accelerate VPPs – what it means for retail electricity businesses and aggregators

The Australian Energy Market Commission (AEMC) has recently proposed a draft electricity rule that presents a significant opportunity for aggregators and innovative retailers that would work well to help manage hedging risks, reduce costs and earn revenue in existing markets and through the provision of ancillary services.

The National Electricity Amendment (Integrating price-responsive resources into the NEM) Rule 2024 proposes to integrate aggregated consumer energy resources (CER) into the National Electricity Market (NEM). This change is designed to utilise resources such as virtual power plants (VPPs), community batteries, flexible large loads and other demand-side technologies to complement and compete directly with large-scale generators in the Australian energy market.

It is anticipated that these reforms will result in regulatory certainty facilitating new market entry, significant energy efficiencies and cost savings for both consumers and industry, improve the power system’s resilience and reliability and help achieve the Government’s goal of reaching net zero by 2050.

What are the key aspects of the changes?

The AEMC’s new rule change seeks to integrate price-responsive resources into the NEM. This represents a change in Australia’s energy landscape as there is currently no mechanism within the market to predict how these unscheduled CERs may (i) participate in and respond to price fluctuations in the spot electricity market; or (ii) participate in the provision of ancillary services.

Under AEMC’s proposal to integrate resources and provide services more efficiently, the draft rule establishes:

• Dispatch mode: ‘Dispatch mode’ is a new mode that will allow price-responsive resources such as CERs, which are currently unscheduled, to be scheduled and dispatchable in the NEM. This will allow participants to bid in the spot market and receive dispatch instructions. Participation in the dispatch mode is voluntary, allowing participants to nominate and aggregate small resources to participate in dispatch in an efficient and flexible manner.
• Incentive scheme: The proposal will create a short-term incentive scheme during the first five years from AEMO commencing its first tender to encourage participants to enter dispatch mode. This has been proposed in acknowledgement of the inherent disincentives to being scheduled in the NEM (for example being required to follow dispatch instructions) and the fact that most of the benefits from participating in dispatch mode flow to consumers generally as a positive externality, and not the participant specifically.
• Monitoring and reporting obligations: The Australian Energy Market Operator (AEMO) and the Australian Energy Regulator (AER) will monitor the impact of these unscheduled resources on demand forecasts to assess their effect on the market and provide insights that could help in adjusting future market operations.

The draft rule is currently open for stakeholder submissions until 12 September 2024. Dispatch mode is scheduled to commence on 5 November 2026, with early participation tenders starting in February 2027.

What does this mean for retail electricity businesses? We summarise the key benefits of the draft rule change and considerations for retail energy companies below.

What are the key benefits anticipated to arise from the changes?

While the AEMC considers that the rule change will result in a range of direct and indirect benefits, some of the key anticipated benefits include:

• Increased market participation: The rule change will open new opportunities for price-responsive resources such as VPPs to participate in central dispatch by facilitating aggregators and retailers bidding in their customers’ demand response. This will help to match up demand and supply effectively and ultimately improve reliability of electricity supply.
• Cost benefits for consumers and industry: If CERs are well-integrated in the NEM, the power system will operate more efficiently and consumers and industry will enjoy the benefits of cheaper supply.
• Improved demand forecasting: Integration of resources will also lead to better accuracy of demand forecasts, which will allow efficient planning for suppliers and increased market security and reliability.

What does the rule change mean for aggregators and retail electricity businesses?

With these new changes, electricity retailers and aggregators must consider how best to leverage the new electricity market framework models, consider how to tackle possible challenges and how best to benefit. We have included some considerations and practical implications of the changes below:

• New customer service offerings: Aggregators and electricity retailers now have more regulatory certainty governing VPP offerings and may consider designing new customer service offerings to obtain a competitive advantage following the introduction of the proposed rule change.
• New technology: Aggregators and electricity retailers may consider upgrading their current technology and investing in advanced systems such as demand response systems and data analysis to manage price-responsible resources.
• Regulatory compliance: As the new changes are rolled out, aggregators and electricity retailers must ensure compliance with updated regulatory requirements, which could include how they manage pricing and keep up-to-date with new electricity rules.

Retail energy businesses and aggregators should take this opportunity to understand these changes and consider investing in technology and resources to leverage their position within the market.

For more detailed information on the rule change visit the AEMC’s website or contact us to see what these changes could mean for your business.

If you have any comments or questions about this article, or the decision and its implications, please contact our team.

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Authored by:
John Kettle, Partner
Micheal Kenny, Partner
Kaleb Cox, Senior Associate