The $22.5 million pilot program to secure 100 megawatts of capacity will be unveiled by the Australian Energy Market Operator and the Australian Renewable Energy Agency on Friday. It is the first time Australia has tried to formalise a demand response scheme to try and manage extreme peaks on the network.
AEMO chief executive Audrey Zibelman said the pilot program would help the electricity system to manage peak demand in real-time, without the need for new fossil fuel generation.
"Demand response has proven to be a cost-effective way to manage demand at peak times and acts as contingency to avoid disruptive power outages," Ms Zibelman said.
Traditionally, network companies have spent billions of dollars building more capacity into the network to deal with the 10 very hot days over summer when the grid struggles to cope.
ARENA has committed $22.5 million over three years to fund the pilot, based on an assessment of the current market. AEMO and AEMO will hold a workshop with industry stakeholders on Friday to consult on the proposed scheme.
The program is expected to be open to demand response aggregators, large industrial and commercial users, battery storage and smart thermostat companies. It will also involve both commercial and residential consumers.
Once companies are approved for the scheme, they would be contacted by AEMO when they are needed to cut back their power usage. They would then be paid compensation by AEMO under the existing short notice procedures.
AEMO is yet to work out the details of how much a business or consumers would get paid to cut their power usage. Some energy retailers already operate the service.
ARENA chief executive Ivor Frischknecht said demand response would help to facilitate Australia's transition to renewable energy.
"We need to find new, smarter ways of coping with spikes in demand and volatility as we move towards an electricity system with more variable renewable energy supply," he said.
"Instead of building a power plant that is only switched on a few hours a day a year, demand response will allow us to reduce energy consumption during peak demand while also reducing energy costs and emissions for consumers. It's a win-win."