We introduced a new demand management incentive scheme (DMIS) in December 2017 to encourage electricity distribution network service providers (DNSPs) to find lower-cost alternatives to investing in network capital expenditure. The DMIS will incentivise DNSPs to undertake efficient expenditure on non-network options focusing on demand management (DM).
We expect that the new DMIS will encourage best-practice network planning to deliver value to consumers via lower electricity prices because DNSPs will:
- select efficient projects that deliver the most value to consumers when solving network constraints, regardless of whether these projects constitute a demand-side or supply-side solution
- seek third parties to propose DM solutions and form contracts with parties who propose solutions that deliver the most value to consumers.
We require DNSPs to test the DM services market because this will increase transparency, promote competition and put downward pressure on electricity prices.
The DMIS has three key features:
- Cost uplift – This gives DNSPs a financial incentive of up to 50% of their expected costs of efficient DM projects.
- Net benefit constraint – The size of the incentive will not outweigh the value (or net benefit) the DM project delivers across the electricity market. The DNSPs will estimate the net benefit of projects — for large projects, DNSPs will do this with the regulatory investment test and for small projects, they can use a simpler cost–benefit analysis.
- Overall incentive constraint – The total incentive in any year cannot exceed 1% of the distributor’s allowed revenue for that year.
To receive the incentive, DNSPs must report to the AER on their projects, how they are using DM to deliver value to consumers, what DM projects are underway or have contracts, and the outcomes of these projects. We will use this information to understand what results the DMIS is achieving.
Our publication of DNSPs' annual compliance reports will:
- provide transparency to enhance understanding how different DNSPs are:
- estimating, accounting for and realising the benefits of DM
- providing DM as an input for distribution network services, and subsequently accruing financial incentives under the scheme
- proactively tendering for another legal entity to provide DM services
- undertaking DM in-house in a manner that is compliant with the ring-fencing guideline
- utilising DM in different ways to meet their unique network needs
- assist us in identifying any need to change the magnitude of the cost uplift in a future version of the scheme.