A new era for embedded electricity networks: AEMC's report signals major regulatory change

By Faith Taylor, Dan Howard, Romany Sloan, Andrew Lassman, Michael Beukelman and Georgia Davis
04 Apr 2019
The Australian Energy Market Commission has recommended significant reform to the embedded electricity network framework, bringing it in line with the national electricity regulatory scheme.

The Australian Energy Market Commission (AEMC) released its draft "Updating the Regulatory Frameworks for Embedded Networks" report on 31 January 2019. The draft report recommended a number of reforms to the existing regulatory framework for embedded networks to more closely align it with the compliance frameworks applicable to network service providers and authorised electricity retailers.  The AEMC's report sends a clear message to those in embedded networks that embedded network customers are to be afforded the same treatment as their on-market neighbours. 

This article considers what the report's proposals mean for stakeholders in new and existing embedded networks and how the industry has responded to the proposed changes.

What prompted the proposed overhaul of existing embedded network regulation?

The AEMC's final report "Review of regulatory arrangements for embedded networks", published on 28 November 2017, found that the current regulatory framework was no longer fit for purpose given the growth in the number and scope of embedded networks.  A particular concern was that a growing number of residential apartment block embedded network customers could not access competitive prices or important consumer protections, as they faced practical barriers to access retail market competition.  Further, it was found that there is inadequate monitoring and reporting of exempt parties, leading to the AER having little visibility over exempt parties' compliance with the obligations imposed on their respective exemptions. 

Who will be caught by the proposed changes?

The new regime will apply to embedded network operators and sellers in embedded electricity networks established after the proposed reforms take effect.  Currently the reforms are not intended to apply to existing embedded electricity networks (known as "legacy networks"), and the AEMC is still undecided as to whether legacy networks will be transitioned to the new regime. 

However, network operators and exempt sellers in existing networks will still be impacted by certain changes including the proposal to assign NMIs to all off-market connection points and install market-compliant meters. This will enable each customer in an embedded network to access its retailer of choice.  Currently, the process for an off-market customer in an embedded network to access its retailer of choice must be initiated by the customer and is often complicated by the customer's existing metering arrangements.  

Embedded gas networks will not be covered under the proposed regime. 

Victoria has not adopted the National Energy Retail Law (NERL) and thus these changes will not affect retailing activities in Victoria. 

What do the proposals mean for embedded network operators and exempt sellers?

The AEMC proposes to significantly reduce the number of parties eligible for network and retail exemptions, by creating two new roles:

  • "Embedded Network Service Providers" (ENSP) which will be required to register with AEMO and will be subject to many of the existing regulatory requirements placed on Distribution Network Service Providers (DNSP); and
  • "Off-market retailers", which will be required to obtain an authorisation from the AER and will be subject to most requirements that existing authorised retailers are subject to.

The following activities which currently operate under network and retail exemptions, will require a registered ENSP and authorised retailer under the new regime:

  • small commercial and residential complexes, which were previously eligible for deemed exemptions; and
  • large commercial and residential complexes, retirement villages, long term holiday accommodation and shopping malls, which all previously operated under registrable exemptions.

Under the new framework, ENSPs will be responsible for registering all child connection points with AEMO to enable visibility to other retailers, and off-market retailers will be responsible for appointing a metering co-ordinator at their off-market child connection points, in the same way that authorised retailers are required to do for NEM-facing child connections.

Standardised billing of network charges means one bill rather than two

Standard billing arrangements will be introduced for the recovery of external network charges from embedded network customers who choose to go on-market.  Currently, bespoke billing arrangements require retailers to operate manual processes to manage these customers, which has served as a practical barrier to embedded network customers going on-market and choosing alternative retailers. It also removes the administrative burden for a retailer of having to unbundle its network and retail charges and the customer being issued two bills (to cover the network charge its pays the network provider and its retail charge to the retailer) .   The network charges can be no greater than the customer would pay had it been connected directly to the Local Network Service Provider's distribution network (ie. a shadow price). 

Other notable changes to customer connection requirements

ENSPs will be required to provide customer connection services under the NERL and the National Electricity Rules (NER) in a similar manner to DNSPs.  Although a situation where an ENSP would refuse a new customer is rare in the current market, the AEMC have anticipated that embedded generators and customers may find themselves in the position of being refused connection as embedded networks evolve to become larger and more complex.  The AEMC noted that imposing an obligation on the ENSP to provide new connections or connection alterations would prevent a situation where a small embedded generator's application to connect is rejected for anti-competitive reasons.  Customers in new embedded networks will now be considered retail customers, and will therefore be eligible for consumer protections under the NERL and National Energy Retail Rules (NERR).  A number of minor amendments are required to these protections to accommodate the embedded network relationship.  This will address the AEMC's finding in its 2017 Report that embedded network customers have less protections.

A modified retailer of last resort (ROLR) arrangement will be established where the retailer at the parent connection point will be the ROLR if the off-market retailer fails.  This provides both continuity of supply to customers, and allows parent retailers an avenue to recover costs. 

More transparency for customers in embedded electricity networks

From a regulatory perspective, the new framework will provide more oversight of embedded networks.  ENSPs will be treated as registered participants under the national scheme and the majority of entities that were previously eligible for an exemption will be required to register under the NERL and National Electricity Law (NEL) as off-market retailers.  This will allow regulators visibility of those providing embedded network services, as well as customers receiving supply through an embedded network. 

What does industry have to say?

Stakeholder submissions on the report closed on 14 March.  While the recommendations in the report were generally welcomed by other regulators and across the electricity industry operating within the NEM,  existing embedded network owners and operators are concerned about the increase in costs and the complexity of new regulation especially where the supply of electricity is not the operator's main business.

Exempt sellers in existing embedded networks also raised concerns with the proposal to move all customers to market compliant metering which is costly for small embedded networks and it was suggested may result in financial consequences for individual customers.

The AER acknowledged the potentially onerous transition costs for existing embedded networks, particularly for some legacy embedded network operators and sellers where the transition costs could exceed any potential benefits to customers.  The AEMC has not applied the regime to legacy embedded networks, and is still considering whether to transition legacy networks to the new regime.

While a variety of stakeholders have shared their differing views in relation to the proposed framework, the AEMC will still need to make a decision on how to proceed on a number of the issues raised.

What's next?

The AEMC is currently in the stakeholder engagement phase, with the final report expected to be released on 30 May 2019. 

With such changes now firmly on the horizon, anyone who is considering installing or operating an embedded electricity network or customers looking to become part of an embedded network should consider how the proposed scheme is likely to impact on those arrangements.  

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.