Large energy users would be paid to reduce their power demand at peak times under a proposed new rule for the sector aimed at boosting competition and reducing wholesale prices.

The Australian Energy Market Commission will release its draft rule for a demand-response mechanism on Thursday, which will allow large commercial and industrial users to sell forsaken demand directly into the wholesale market for the first time.

But the draft ruling, which is aimed at taking pressure off the power system in times of peak demand, is not scheduled to come into effect until July 2022 and will initially preclude households and small businesses from the scheme.

Under the new rule, the Australian Energy Market Operator will be able to bypass retailers and pay large energy users to cut their power use via a third-party service provider.

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The measure, which will put the so-called “demand response” on an equal footing to generation for the first time, will see energy users paid as if they are generators. It is expected to put downward pressure on wholesale prices, lower emissions and prevent blackouts.

Demand response has long been advocated by consumer and energy groups as a way to improve the operation of the energy market, and was a key element of chief scientist Alan Finkel’s proposed remedy for the Australian energy market, centred on the now abandoned national energy guarantee.

The ACCC’s Retail Electricity Pricing Inquiry report, released in June 2018, also strongly recommended demand response measures.

The AEMC’s draft ruling, which will now be subject to an eight-week consultation period, came about after the Public Interest Advocacy Centre, the Australia Institute and Total Environment Centre applied for a rule change, along with a separate request from the South Australian government.

The AEMC chairman, John Pierce, said the changes, which are slated to begin on 1 July 2022, when the Liddell coal-fired power station is due to retire, would push more expensive electricity generation – such as that produced by so-called peaking plants – to the back of the queue.

“This draft rule is all about large commercial and industrial consumers in the wholesale market who can now participate directly in the wholesale market by offering in demand reductions,” Pierce said. “These are times in which those consumers have agreed not to consume electricity or consume less or later.

“Taking demand pressure off the power system is a substitute for generation and helps tackle rising wholesale prices at peak times reducing electricity costs for everyone.

“Most simply, demand response is a consumer choice to turn down or turn off their electricity use in response to a signal to do so. So if wholesale prices are higher, there is more incentive for demand response. It makes sense to manage demand for electricity if we are going to deliver reliable energy at the least possible cost.”

The Australian Consumer and Competition Commission chairman, Rod Sims, said the mechanism would make it “easier and more attractive” for big energy users to reduce their demand on the power system.

“This is a vital development in the reform of the national electricity market, and will help to bring electricity prices down,” Sims said. “A demand response measure allows the electricity system to be more efficient, limiting the need for additional generation and, importantly, constraining the power of generation businesses, both leading to lower prices for consumers.

“We will be closely examining the detail of the draft determination and are looking forward to seeing it come to fruition.”

The three groups who lodged the request for a rule change in August 2018 said the allowance of a new category of energy market participant – a demand response service provider – would allow consumers to freely compete against generators in the National Energy Market.

The Australia Institute’s Dan Cass said the three biggest electricity markets in the world – China, America and the EU – were pursuing similar reforms and Australia needed to “keep up”.

“Australia has a peak demand problem that means households, businesses and farms are paying too much for electricity,” Cass said. “High peaks during heatwaves put reliability at risk and the AEMC has recognised that demand response is a smart, efficient solution.”

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Mark Byrne of the Total Environment Centre said the “only losers” from the reform were the energy companies “that want to dominate the generation and retail markets and keep prices high.”

The AEMC rule will not allow households and small business users to take par but the AEMC’s executive general manager, security and reliability, Suzanne Falvi, told Guardian Australia that given the scheme was not due to come into effect until 2022, there was time to refine protections that could see them included in the scheme by that time.

“Before we open it up to households and small businesses, we need to be sure that they have got the right protections in place,” she said.

She said that while there had long been advocacy for demand response, technology was only now at a point where doing so was feasible.

“Technology has evolved to the point where now is probably the right time to be doing this,” Falvi said. “In order to to be able to do demand response well you need to be able to have the technology to be able to control your consumption.”