09 Aug 2011

Regulatory changes are on the way for embedded network operators and energy onsellers

by Robyn Farmer

Under the National Energy Retail Law and National Energy Retail Rules, which are currently scheduled to take effect on 1 July 2012, the rules about the licences and authorisations for re-selling energy and operating embedded networks will change, and some existing exemptions will cease. The proposed Electricity Network Service Provider Registration Exemption Guideline will introduce new exemptions, but not all current exemptions will be retained.

Revisions to the Electricity Network Service Provider Registration Exemption Guideline (Network Guideline), and a new Exempt Selling Guideline (Selling Guideline), are currently the subject of consultation by the Australian Energy Regulator (AER).

These changes will impact on a range of matters relating to embedded electricity networks and electricity and gas onselling, including the circumstances in which registrations or authorisations are required and what conditions apply to them.

Exempt Networks

The National Electricity Law and National Electricity Rules prohibit a person from owning, controlling or operating a distribution system unless that person is registered with the Australian Energy Market Operator (AEMO) as a network service provider, or falls within an exemption from the requirement to be registered. For ease of reference, in this note we refer to an owner, controller or operator of a network collectively as the "owner" of that network.

The AER considers that electrical infrastructure (of any scale) used to convey electricity to third parties, for example within office buildings, industrial parks, shopping centres and similar premises, constitutes a "distribution system" in this context (referred to in this paper as "embedded networks").

There are currently exemption guidelines in place outlining deemed standing (or "class") exemptions from the requirement for the owner of an embedded network to register with AEMO and the process for applying for individual (specific to the applicant) exemptions. The Network Guideline on which the AER is currently consulting will revoke and replace the current guidelines.

Instead of the existing two-tier exemption structure, the Network Guideline introduces a three-tier structure. Only one of the current tiers will remain the same – the category of individual exemptions for which an embedded network owner can apply. The consultation makes it clear that individual exemptions granted under the current guidelines will continue unchanged after the introduction of the Network Guideline.

The following are just some of the changes to the current guidelines proposed by the draft Network Guideline:

  • the current categories of standing exemptions (ie. exemptions for which an embedded network owner satisfying specified conditions automatically qualifies) are being altered (and new categories introduced, such as for off-market energy generation, electric vehicle charging stations and temporary construction site energy). Unlike for individual exemptions, the beneficiaries of pre-existing deemed standing exemptions will be required to check that they comply with the new Network Guideline deemed exemption categories;
  • a new tier of "registrable" exemptions is being introduced, for which an embedded network owner satisfying specified conditions automatically qualifies, but the owner must register with AEMO;
  • subject to very limited exceptions, owners of an exempt network will not be able to render charges for use of the embedded network (other than through lease payments, strata fees and like charges). This is discussed further below;
  • all customers must be individually metered as required by the Network Guideline, except where the AER has determined an unmetered supply is permitted; and
  • the embedded network owner must have in place approved dispute resolution procedures.

Key issue: Can you charge for the use of an embedded network?

The current exemption guidelines apply different conditions on the charges that can be levied by the owner of an embedded network, depending on the category of standing exemption into which a particular facility falls. The most common condition is that the embedded network is supplied at no cost or a nominal fee.

Generally, the draft Network Guideline permits "external network charges" (the amount that the embedded network owner pays for use of the NEM transmission or distribution system) to be split between each customer in an embedded network in proportion to the metered energy consumption of that customer. However, where there is sustained over-recovery by the embedded network owner in respect of the same costs relative to the external network charge, the AER expects that the embedded network owner will pay rebates to customers (at most on an annual basis).

The AER has no set policy yet on the pass-through of use of system charges where the network owner does not also sell electricity to the user. It is interested in submissions on whether a shadow price should be applied (ie. the amount the user at the child meter would otherwise have had to pay to a local network service provider had it not been part of the embedded network).

The draft Network Guideline does not permit internal network costs (the embedded network owner's cost of building, operating and maintaining the embedded network) to be the subject of a separate charge for use. Instead, it assumes that costs of the embedded network have been capitalised as part of the overall construction cost and included in lease-payments, fit-out charges, strata fees or similar. The draft Network Guideline contemplates that there will be no separate return on investment through a charge for use of the embedded network, except in extremely rare circumstances where the AER has determined that a valid network charge can be levied.

This issue of how network charges are levied has been the subject of much discussion during the consultation, and the AER has invited submissions on the point.

Exempt selling

Currently the licensing requirements and exemptions applying to the sale of electricity or gas to customers are regulated at the State and Territory level. Under the National Energy Retail Law and National Energy Retail Rules, which are currently scheduled to take effect on 1 July 2012, the AER will be responsible for issuing and revoking electricity and gas retailer authorisations and exemptions. The AER is consulting on the Exempt Selling Guideline which will assist it in its exemption functions.

The proposed Network Guideline and Selling Guideline are intended to closely correlate with each other and so the draft Selling Guideline contemplates the same three tiers of exemptions:

  • deemed classes of exemption, which apply automatically and will not be subject to spot audits, (although the AER has indicated it will respond to complaints);
  • registrable classes of exemption, which apply after a person has notified the AER that it belongs to a particular class; and
  • individual exemptions, which apply once the AER has granted that person an individual exemption.

Many of the deemed and registrable exemption categories directly align to the exemptions in the Network Guideline, with the additional categories relating to the onselling of gas.

In recognition that onselling activities are currently undertaken in many jurisdictions, many of the registrable classes of exemption are only open on a transitional basis to new onsellers until 1 January 2015. Onselling operations commencing on or after this date will require an individual exemption.

Key issue: How is on-site generation treated?

When making a decision on seller exemptions, the AER must take into account certain "exempt seller related factors" and "customer related factors". Other factors include profit-making intentions and the amount of energy likely to be sold.

The draft exemption classes do not expressly include on-site generation. Instead the Selling Guidelines describe on-site generation as an "exempt seller characteristic" to be considered on a case-by-case basis, as each situation will be unique.

Other pertinent factors, like the development and maintenance costs of the generator and any connected network, will also be taken into account. Persons who sell electricity generated from on-site generators are being encouraged to apply for an individual exemption, so that the AER can review whether an exemption is in the long-term interests of energy customers. The AER indicates that a public consultation on each individual exemption application will inform its decision.

We query how workable this policy will be.

Given that there are now hundreds of thousands of distributed generation facilities installed throughout the country, as a result of various Governments' promotion of renewable energy generation, does it make sense to deal with each of them on an individual basis?

Should a caravan park that uses a rooftop solar PV unit to supplement the power supply to caravans on its site be treated any differently than one that only resells grid power? Why should it have to apply for an individual exemption?

Next steps

The consultations on the Network Guidelines and Selling Guidelines close on Friday 12th August.

The new guidelines are intended to be commence simultaneously with the National Energy Retail Law (South Australia) Act 2011, which is expected to be 1 July 2012.

It should be noted that the requirements to be registered or exempt from registration as an network service provider or a retailer are separate, and so both sets of guidelines will need to be considered if a party undertakes both activities.

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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.