Authority to progress Standardised Demand Flexibility Product recommendations

The Electricity Authority Te Mana Hiko (Authority) has welcomed the recent report by the Standardised Demand Flexibility Product Co-design Group and endorsed the products the Group has designed, alongside its recommendations for how they should be implemented, and how barriers to them could be addressed. The work focuses on how practically to enable more commercial trading of shorter-term (intra-day) demand-side flexibility provided by commercial and industrial (C&I) customers.

View the report

The Group’s three recommended products are:

1. A standardised wholesale ‘Callable Spot Price Cap’: a financial instrument where the buyer pays a fee to the seller and they agree on a price cap. If the spot price rises above the agreed cap and the buyer makes a call, the seller pays the buyer the difference. The buyer is paying for protection against very high spot prices.
2. Two retail product templates that help customers provide flexibility and encourage demand flexibility resources that could underwrite the Callable Spot Price Cap:
   1. Flexibility payment: the retailer pays a customer to be ‘on call’ to reduce their electricity use at agreed times. If the customer cannot reduce demand when asked, the consequences are not intended to be punitive.
   2. Shared savings product: The customer chooses when to reduce electricity use, usually when spot prices are higher than their contract price. The retailer and customer then share the savings.

We are keen to see the Callable Spot Price Cap product working in the market (supported by the two retail products) because this will encourage greater use of demand flexibility from C&I customers. This will help manage peak loads, improve system resilience, and reduce need for costly new infrastructure, all of which will help provide reliable and more affordable electricity for New Zealand consumers.

The Group has identified some market-related challenges that will need to be addressed if we are to ensure enough retail contracts emerge to underwrite the Callable Spot Price Cap.

These challenges include a need for market education about the monetary value of flexibility, work to be done on baselining and measurement to provide trading confidence, and encouraging aggregation capability growth that will help bring C&I flexibility to retail purchasers. Work will also need to be done to assess whether further regulatory settings are needed to increase available flexibility.

We will aim to address these challenges and are committed to implementing the Co-design Group’s recommendations over time. Our intent is to establish the callable Spot Price Cap product, supported by the retail products, conditional on sufficient progress in C&I participation, aggregation capability, and market enablers such as education and baselining.

We will take a phased implementation approach, which will allow for foundational market preparation work (eg, to build commercial and industrial customers’ awareness of the value of flexibility and the practical requirements they face in enabling it). We will seek collaboration with industry wherever possible and appropriate.

We would like to thank the Co-design Group members for their time, expertise, and dedication, particularly the Chair Murray Nash.

You can find out more about the Co-design Group, including meeting minutes and its Terms of Reference, on the Authority’s website.