Embedded Networks: Significant regulatory changes occurring

Introduction

The Australian Energy Market Commission (AEMC) released its Final Report into Updating the Regulatory Frameworks for Embedded Networks (Report)¹.  The Report kicks off a comprehensive reform package to bring more rigour to the regulation of electricity networks that do not form part of the “grid”.

What are embedded networks and how are they regulated now?

Private grids, such as shopping centres and apartment blocks, traditionally receive services from an exclusive on-supplier acting within the precinct as the:

• network service provider: i.e. the provider of network infrastructure to enable the conveyance of electricity (and sometimes gas) to its occupants; and
• retailer: i.e. the seller of electricity (and sometimes gas) to its customers by on-supplying electricity acquired from a traditional retailer at the gate meter to the precinct.

These activities are generally referred to as embedded network activities because the private network is connected to/embedded within the traditional “grid”.

In addition to customary on-supply setups, there has been a rise in embedded network service provision as a business model in itself.  This has been driven by a number of factors, including the uptake of solar-PV within private grids and increased sophistication of embedded network service providers.

Unlike traditional utilities, operators of embedded networks are not generally the subject of intense regulation in Australia. Their on-supply activities are generally exempted from the requirement to hold requisite network and retail licenses or authorisations. The rationale is that the incidental and small scale nature of many of these on-supply activities in embedded networks mean that the full complement of regulatory requirements are inappropriate. Light-handed regulation currently applies by virtue of minimum conditions that attach to the various categories of exemption available to embedded network suppliers. This framework is managed by the Australian Energy Regulator (AER) and also some State-based regulators in parallel.

Updating the regulatory framework – market review

The AEMC has instigated a broad reform platform to amend the National Electricity, Gas and Energy laws, regulations and rules² to give effect to 29 recommendations of the embedded networks review undertaken in 2017. The AEMC’s Report follows a draft report, released on 31 January 2019, deep consultation and the receipt of 49 stakeholder submissions.  

The rationale for the package is that there are practical impediments to customers being able to exercise choice. Currently, many customers under an embedded network are locked into arrangements. Whilst customers can benefit from these arrangements, concerns have arisen that they do not have adequate protections, particularly when compared to those who are connected directly to the national grid. The AEMC believes that these customers should be provided the same protections, access to retail market competition and regulatory oversight as standard supply customers.

Further, many of the obligations that fall onto authorised retailers are unclear, impracticable or impossible to follow in an embedded network context. The changes are intended to more readily facilitate competition for ‘off-market’ customers in embedded networks.

The proposed changes primarily apply to new embedded networks established after the introduction of the new regime. Legacy embedded networks currently subject to deemed and individual exemptions would not be required to transition to the new framework. However, legacy embedded networks with registrable exemptions will be required to either fully or partially transition to the new framework, depending upon the age of the network. 

The proposed changes

The proposed changes are intended to give embedded network customers:

• “improved consumer protections in areas including disconnections, billing information, payment options and notification of planned outages
• new protections for the first time including access to customer hardship programs and continuity of supply in the event of retailer failure
• stronger regulation which enhances the ability of the Australian Energy Regulator to enforce compliance with obligations to provide protections
• access to competitively priced market offers by making it possible for them to choose their retailer and requiring better industry financial and data transfer processes to help more retailers compete in embedded networks 
• market-compliant meters that are registered with AEMO so it’s easier for customers to switch retailer and get better information about their usage and bills
• the same rights as grid-connected customers when upgrading their connections e.g. when installing electric vehicle charging stations within apartment blocks
• improved access to state government services such as concession schemes and emergency financial assistance, provide access to independent dispute resolution, and introduce reliability protections (these changes are recommended to state and territory governments).”³

It is intend that this will be achieved by addressing certain key themes, as outlined in the Report.

We explain the key aspects and impacts on market participants below.

Registration to be required for most embedded network activities

The proposed changes would substantially reduce the activities eligible for exemption from complying with the energy laws to truly incidental or novel activities like electric vehicle charging stations. The result of this will be to impose a higher level of regulation and oversight on most embedded network activities.

“Deemed exemptions” will be phased out under the proposed framework, with the definition of “distribution system” being amended such that many of the existing network activities currently “deemed exempt” will no longer be considered a network activity for the purpose of the National Electricity Rules (NER). Certain registrable categories will be revised/retained, including where unmetered gas is being sold to individual premises where it is used for limited purposes.

Two new registered roles would be created to cover most persons involved in embedded network activities – the Embedded Network Service Provider (ENSP) and the Off-market Retailer.

Key aspects of these roles are outlined below.

Individual exemptions

The Draft Report indicated that individual exemptions would not be available in the new registration framework. However, following stakeholder feedback, the AEMC has proposed to retain individual network exemptions where:

• the AER is satisfied that special circumstances warrant the grant of the exemption; and
• customer-focussed criteria is imposed to ensure that individual exemptions are only granted where customers retain access to retail competition and consumer protections are met.

No individual exemptions would be available for distribution systems with registered generation or a large load connected.

Retailer of last resort

The AEMC also proposes the establishment of a modified set of Retailer of Last Resort (RoLR) arrangements for embedded networks, where the retailer at the parent connection point would become the RoLR in the event of the failure of an off-market retailer. However, the AEMC acknowledges that this places significant risk on certain retailers who do not typically supply small customers. In these circumstances customers may not receive information and protections that they are eligible for, because the retailer may not have appropriate systems in place. Therefore the AEMC proposes that retailers who do not supply small customers should be able to obtain a waiver from being the RoLR.

Monitoring and compliance

Under the proposed framework, there will be increased regulatory oversight of parties providing services in embedded networks. This will arise from the conferral of registrations for ENSPs and off-market retailers, or through enhancement to the enforcement and monitoring powers of the AER over exempted participants. For example, the AEMC has proposed that exempt sellers become subject to compliance audit provisions, whilst exempt network providers be subject to general information gathering powers. 

Implementation & transitional framework

Implementation

• The new framework cannot be implemented until:
• the Council of Australian Governments (COAG) Energy Council considers and approves the framework;
• the South Australian Parliamentary Counsel drafts changes to the National Energy Law and National Energy Retail Law, and the South Australian Parliament passes the changes; and
• the South Australian Minister for Energy makes the proposed rule changes. 

Due to the uncertainty surrounding how long these processes will take, the AEMC has structured the transitional framework by reference to the:

Commencement Day - being the day that the changes to the energy and retail laws and the rules required for the transition period commence. Following this date, the current network and retail exemption guidelines will continue to apply for all exemptions; and

Effective Date – the day that the new framework comes into effect, being one year after the commencement date. 

Transitional framework 

The transitional arrangements for legacy embedded networks depend upon the age and type of the network. 

Deemed and individual exempt sellers and exempt network service providers will retain their exemptions. Legacy embedded networks may also seek an individual exemption from having to register as an ENSP and seek authorisation by the AER as an off-market retailer. 

Legacy embedded networks that have registrable exemptions will be required to transition into the new framework as shown in the table below. 

Implications

The AEMC’s proposed approach to will result in significant changes in embedded network regulation. However, this should not come as a surprise. The AEMC’s 2017 inquiry foreshadowed the need for change and the AER has been moving exempted network operators and retailers towards more comprehensive standards of compliance for some years now. This has been through strengthening the conditions that attach to various categories of exemption and, where appropriate, directing participants to apply for authorisations, rather than allowing exemptions.

At the same time the regulatory burden is being increased for many and the transition could be burdensome for some. Fortunately, various legacy set-ups will not be exempted and the proposed transitional framework provides some leeway for businesses to implement and adopt the changes. 

If you would like further information about the proposed changes or to understand how your business fits within the proposed framework, please do not hesitate to contact us.

Many thanks to Huw Calford for his assistance in preparing this update.