New format for communicating Retail Pricing Information to energy customers

New format for communicating Retail Pricing Information to energy customers

AU Energy Compliance

There has been strong demand over the last few years for improved customer access to information that will help them meaningfully compare different energy plans and thereby access more affordable energy. In response to this concern, the Australian Energy Regulator (AER) has revised its draft Retail Pricing Information Guidelines (the draft Guidelines) for which it now seeks public feedback. In today’s article, we summarise those draft Guidelines.

Retail Pricing

Reason for change

A range of reviews and consultations over the last few years (including the Independent Review into the Future Security of the National Electricity Market (the ‘Finkel Review’)) have identified that one of the contributors to energy unaffordability for consumers is the difficulty for consumers in working out where they can get a better deal. Consultation on a Customer Price Information issues paper in September 2017 by the AER suggested that the current way in which energy information is communicated to customers is overly complex and confusing.

In response, four key amendments have been proposed in the latest draft Guidelines:

  • Instead of an Energy Price Fact Sheet (EPFS), each energy plan will require two documents known as a Basic Plan Information (BPI) document and a Contract Summary respectively;
  • Changes to the way in which plan information is required to be displayed on websites and in marketing material;
  • New requirements for using language that is clearer and simpler, and
  • Clarification of the definition of a plan that is ‘generally available’.

We consider each of these proposed changes in turn.

  1. Two new documents

The BPI document will be a single page with only the information most relevant for customers in order to compare one plan against others. It will be constructed from plan details provided by retailers to AER’s Energy Made Easy (EME) website.

The Contract Summary document will contain all the detailed information about fees, prices, contract details and eligibility criteria for an energy plan. The format of this document will be similar to the old EPFS.

  1. Marketing and display of energy plan information

It is common in energy marketing to use discounts to attract customers. However, there is no consistency in reference point for those discounts across different retailers. This can confuse customers into signing up for plans that are not the most beneficial for them. In light of this, the draft Guidelines proposes retailers will be required to link customers to the BPI from retailer websites. This will allow for a fair comparison between different deals.

  1. Clear and simple language

Definitions relating to General usage, controlled load and for plans with more than one time of use rates (e.g. on-peak and off-peak) will be introduced in order to ensure consistency across different retailers.

  1. Plans that are ‘generally available’

Currently, retailers are only required to provide information about plans that are ‘generally available’. Some retailers have interpreted this narrowly (e.g. to exclude plans with eligibility requirements) so as to restrict the number of plans that are made available. The draft Guidelines now clarify that this phrase covers a plan as long as that plan is intended to be available to many customers, then it should be included on EME.

To read more go to https://www.aer.gov.au/retail-markets/retail-guidelines-reviews/draft-retail-pricing-information-guidelines-2018. If you wish to comment on the draft Guidelines submissions are due by 16 March 2018.

Webinar Recording: Legal Update: Power Purchase Agreements (PPA’s): Key legal concerns

AU Energy Compliance

Under a PPA, the energy consumer pays for electricity consumed or generated from a solar PV system installed on their premises. The benefit to the consumer is that there is no upfront cost. There is a range of legal considerations for a business looking to offer a PPA. Are solar panels fixtures? What can go wrong? Today we answer some of these key questions.

View our webinar here.

by
Connor James and Anne Wardell

Welcome

The presentation will run for 25 minutes then we will have a Q & A for 10 minutes after.

What is a PPA?

PPA stands for Power Purchase Agreement. It is a contract to purchase electricity at a pre-determined price for a fixed period.

Who are the parties to a PPA?

• A purchaser or off-taker.
• A utility or authorised energy retailer.
• A vendor or power producer, developer, Independent Power Producer or investor.

Key Distinctions of a PPA?

There are many types of PPA but the key distinctions are: The location of the generator and whether a third party is required.

THE NATIONAL ENERGY MARKET

• In the National Energy Market (NEM) electricity prices are set by the Australian Energy Market Operator (AEMO).
• The transport of electricity from generators to consumers is facilitated through a ‘pool’, or spot market, where the output from all generators is aggregated and scheduled at five-minute intervals to meet demand.
• A dispatch price is determined every five minutes, and six dispatch prices are averaged every half-hour to determine the ‘spot price’ for each NEM region.
• The spot price is used as the basis for setting the financial transactions for all electricity traded on the NEM.

Fluctuating Prices

HOW THE NEM WORKS

The NEM is a wholesale electricity market in which generators sell electricity and retailers buy it to on-sell to consumers. There are over 100 generators and retailers participating in the market, so it’s highly competitive electricity prices in the wholesale market.

THE NEM, THE GRID AND THE FINANCIAL MARKET WORK TOGETHER

FLUCTUATING PRICES

All electricity sales are traded through the NEM. It is a wholesale market and prices fluctuate in response to supply and demand at any point in time.

NEM MARKET PRICE

• The price of electricity in the NEM is based on:
• Offers by generators to supply electricity to the market at particular volumes and prices at set times.
• Demand at any given time.

FINANCIAL MARKET PRICE

To manage price volatility, retailers and generators often enter into hedging contracts to fix the price for future electricity sales.

Source: AEMO NEM Factsheet.

Behind the Meter PPA

• The customer and vendor are collocated
• There is no need for the energy to be passed via a market participant
• These are usually used by businesses that have a heavy load such as a data centre.
• The energy is physically supplied and sold directly to the purchaser and the purchaser retains the rights to the renewable energy certificate.
• The energy is physically supplied and sold directly to the purchaser and the purchaser retains the rights to the renewable energy certificate.

Solar PPA

• This agreement is used to provide solar energy to consumers.
• The customer does not have to bear the cost of installing the solar system.
• The vendor sells the customer energy at a fixed rate which is often lower than the market rate.
• The vendor will receive renewable energy certificates which accrue from the solar system.
• During the term of the PPA, the vendor is responsible for the maintenance of the solar system.
• At the end of the term, the customer has the option to end the relationship and request the vendor to remove the solar system, seek to extend the PPA or purchase the solar system outright.

Behind the Meter PPA

Steps:
1. Consumer contracts directly with the generator (or no contract necessary if consumer owns the facility)
2. Generator sells any excess electricity into the grid, either at a merchant or through a PPA with a retailer.
3. The consumer continues to purchase electricity from the retailer under a standard ESA to cover load requirements where the generator is not producing (i.e. ‘firming’) (note: may not be necessary for combined generations and storage solutions such as solar or wind + battery or solar or wind + diesel generation).
4. Assuming consumer has some ownership interest in the generator, consumer receives return on investment from the generator

Behind the Meter PPA 2

Steps:
1. Generator sells power to the retailer under a PPA with a variable market price.
2. The retailer continues to sell power to the consumer under an electricity supply agreement (ESA).
3. Generator and consumer enter into a contract for difference (CFD) whereby they agree a fixed ‘strike’ price for the electricity produced by the generator.
4. The CFD is settled between the fixed strike price and the variable market price at which the generator sells the electricity it produces to the energy retailer.

Source: Optimising Energy Procurement via Corporate PPAs, PWC

Legal Considerations for Behind the Meter PPA’s

• Consumed v generated quantity
• Transfer of ownership of the system
• PPSA
• Access and license
• Licensing R8 exemption
• Financial product?

On-Market PPA

• This relates to a contract for the purchase of energy.
• These are usually used by businesses that have a heavy load such as a data centre.
• The energy is physically supplied and sold directly to the purchaser and the purchaser retains the rights to the renewable energy certificate.
• The purchaser is responsible for transferring the energy from the delivery point to its load.
• A market participant is required.

Sleeved PPA Structure with Renewable Certificates

Sleeved PPA

1. Buyer agrees a PPA (fixed* or discount-to-market) price with the developer to purchase the electricity it will generate. It will also agree the renewable certificates;
2. Buyer enters into a back-to-back PPA to sell the electricity to the utility;
3. The generator will transfer the electricity to the utility, which will sleeve it through the grid to buyer consumption sites.

*Fixed prices are typically index-linked to factor in inflation

Source: Corporate renewable power purchase agreements: Scaling up globally (WBCSD)

Virtual/Synthetic PPA

• This can also be referred to as a financial PPA as it is a form of hedging against increased energy prices.
• Unlike a physical PPA, the energy is not physically supplied and sold directly from the energy generator/vendor to the purchaser. Instead the generator must connect to the National Energy Market, where the purchaser is supplied energy through a contract with an authorised market retailer.
• A separate agreement such as a ‘contract-for-differences’ is agreed between the generator/vendor and the purchaser to guard against fluctuations in the spot price for electricity which will be reflected in the retail contract. This means that, in effect, the energy and relevant renewable energy certificates are provided to the purchaser at a ‘fixed price’.
• The most common example of this PPA is a Corporate PPA.
• Corporate PPAs can be structured in a variety of ways depending on the needs of the purchaser.

Synthetic PPA Structure with Renewable Certificates

Synthetic PPA

1. The corporate buyer agrees a PPA price with the developer and a price for renewable certificates;
2. Developer delivers renewable energy to the grid and is paid by a utility a variable spot price;
3. The developer and the corporate buyer settle the difference between the variable market price and the strike price and the developer delivers renewable certificates to the buyer and
4. The buyer continues to buy its power from the utility at the variable market price, which is now hedged by the synthetic PPA.

Source: Corporate renewable power purchase agreements: Scaling up (WBCSD)

Corporate PPA

• Due to the increase in power prices in Australia over recent years, there has been an upsurge of interest in Corporate PPAs.
• Corporate PPAs have long been used in the USA and Europe to reduce the cost of energy for companies.
• A Corporate PPA allows a company/corporation to set the price of electricity at a fixed rate rather than be subject to the spot price.

Legal Considerations for On-Market PPA’s

• Complexity of documents
• Risk allocation
• Fluctuation in wholesale price
• Delivery of the project or infrastructure
• Delivery of energy
• Financial and accounting considerations i.e.: lease v asset
• Regulatory risk

Protecting Solar Panels during a PPA

• During the operation of a solar PPA the solar system, including the solar panels, remain the property of the vendor.
• The system however will usually be physically installed at the customers residence.
• If the relationship fails then how does the vendor recover its system?
• One way to protect the assets is to register a security interest on the Personal Property Securities Register (PPSR).
• The Personal Property Securities Act 2009 (Cth) (PPSA) applies to personal property in Australia. It does not apply to land.
• Solar panels do not come within the definition of serial numbered goods.
• Are they fixtures?

Key Legal Considerations

• Counterparty risk- with regard to the length of the agreement, and capacity to deliver.
• Existing Regulatory framework. Vendor will need either a retail authorisation or an exemption from the Australian Energy Regulator (source: AER Statement of approach – Regulation of alternative energy sellers under the National Energy Retail Law)
• Future Regulatory Direction- noting the CER announcement on 23 January regarding the RET, noting the uncertainty surrounding the NEC
• Complexity- CDOs, synthetic PPAs, derivatives
• Simple PPAs?- transfer of ownership, generated quantity vs consumed quantity, a right to sunlight, PPSR.

See the SlideShow attached to the webinar below:

Webinar Recording Energy Updates: AEMC taking the axe to Embedded Network Exemptions

AU Energy Compliance

If implemented, the AEMC recommendations will effectively take an axe to the existing regulation of embedded networks – embedded network exemptions – redefining a sector of the energy market that is growing in importance. The changes discussed in this webinar are focused on NECF jurisdictions (NSW, QLD, SA, ACT and TAS). In a webinar to follow we will consider similarly significant changes to be implemented in Victoria following the gazettal of a new section 17 order.

embedded network exemptions

View our webinar here.

Hosted by Connor James and Anne Wardell

Welcome

The presentation will run for 25 minutes then we will have a Q & A for 10 minutes after.

What is an Embedded Network?

• Embedded networks are private electricity networks connected to the distribution and transmission system of the national electricity market through a parent connection point (gate meter).
• They are typically found in apartment blocks, retirement villages, caravan parks and shopping centres.
• They are on the increase with a range of business models being introduced on to the retail market.

AEMC Final Report on the regulation of embedded networks

Consistent with the AER’s submission to the AEMC review, the AEMC found the existing regulatory framework is not fit for purpose.

“However, the current regulatory arrangements for embedded networks are resulting in some customers not being able to access competitive prices or important consumer protections. There are also insufficient monitoring and enforcement powers for the Australian Energy Regulator (AER), leading to a lack of clarity that embedded network operators are meeting their obligations as suppliers of an essential service. While some embedded networks are providing benefits to energy consumers they may not receive in a standard supply arrangement, often they do not.,,

Recommendations

• If implemented, the AEMC recommendations will effectively take an axe to the existing regulation of embedded networks, redefining a sector of the energy market that is growing in importance and prevalence.
• The changes discussed are focused on NECF jurisdictions (NSW, QLD, SA, ACT and Tas).
• When considering the recommendations it is important to distinguish between those that apply to retail exemptions and those that apply to network exemptions.
• The recommendations are discussed under three main headings.

The electricity network service provider exemption guideline (Draft) (AER)

On 17 November 2017, the AER published Version 6 of the Electricity Network Service Provider Exemption Guideline (draft). The AER is seeking submissions on the draft. This new draft guideline should be read by all existing exempt operators.

The new draft guideline goes into further detail about microgrids and local energy sales:

“The AER is supportive of the concepts of microgrids and private trading but we caution there are significant regulatory hurdles which must be overcome before a microgrid or private selling of excess electricity can be implemented. We will work with proponents to develop models that respect and enhance the rights of customers to access new energy options but our ability to facilitate microgrids is limited by the constraints of the current regulatory framework”

embedded network exemptions

5 Key Questions

1. What is the headline for existing embedded network operators?
2. Why are changes being made?
3. Will we need to obtain a retail authorisation?
4. How do I obtain a retail authorisation?
5. Will existing embedded networks, and embedded network operators, be grandfathered?

What is the headline for existing embedded network operators?

Under the proposed regime new Embedded Network Operators (ENO) will need to obtain an authorisation rather than rely on an exemption.
The authorisation will not be the same as for an authorised retailer but it will include additional requirements that are not currently imposed on the holder of an exemption.

Why are changes being made?

The AEMC is dissatisfied with the existing regulatory framework:

“The Commission does not see retaining the current framework as an option…”.
The AEMC wants to increase the customer protections available to customers of an embedded network.

At the same time, the AER is introducing new dispute resolution obligations which apply to exempt sellers.

Will we need to obtain a retail authorisation?

Once the recommendations are implemented there will be a very narrow range of activities that can be conducted under an exemption.

Existing operators, such as managers of residential parks will not be included as an exemption category in either the network service provider exemption framework or exempt seller framework. Even community energy projects will be excluded from the exempt seller framework.

Activities which continue to be covered by an exemption

“However, the Commission considers that an energy selling exemption framework remains necessary to address circumstances where:
• the costs of retail authorisation and facilitating retail competition would outweigh the benefits to customers, and
• the need for regulatory oversight is low.

The Commission recommends amending the exemption framework by removing the detailed seller factors and customer factors from the NERL and providing the AER the power to exempt persons, or classes of persons, from holding a retailer authorisation in accordance with the NERR. The Commission also recommends narrowing the exemption framework by including a set of factors the AER must take into account in exempting persons, or classes of persons, from holding a retailer authorisation.

How do I obtain a retail authorisation?

It is proposed that the Australian Energy Regulator be given broader power to reduce the regulatory burden on authorised retailers who only supply electricity within embedded networks by the establishment of a new ‘category’ of retailer authorisation. However, it is unlikely that the AER would exempt (for need of a better word) new authorised retailers from any of the consumer protection provisions within the rules and retail law.

The AER requires that applicants for a retailer authorization meet a number of requirements as set out under the Retail Law. The AER must be satisfied that an applicant has the capacity to meet their obligations as an Energy Retailer under the Retail Law and Rules.

The AER must be satisfied that an applicant;

• has the necessary organisational and technical capacity to operate as a retailer;
• has the financial resources, or access to resources, to operate as a retailer; and
• Is a suitable person to hold a retailer authorisation.
• Your application will need to demonstrate the above.

The assessment by the AER is conducted at the point in time that an application is made. The application itself consists of a range of documents including a hardship policy, complaints management procedure, and compliance plan.

Point of difference

Authorised retailers who operate solely within embedded networks will not need to be a market participant and register with AEMO (providing they are sourcing electricity at the gate meter from a market participant retailer). This means that the prudential requirements will be less onerous. Nonetheless, the operational and compliance costs of running an authorised retailer are significant. Systems used for customer management, billing and operations will need to be fully compliant with the application provisions of the rules and retail law.

Will existing embedded networks, and embedded network operators, be grandfathered?

The separation of ‘new’ from ‘legacy’ embedded networks raises the obvious concern that the existing two-tier regulatory regime is evolving into a four-tier regime. This, in turn, raises the question about whether ‘legacy’ embedded networks can continue forever or will need to convert to the regime applicable to ‘new’ embedded networks.

Of course, when a property is sold, the exemption which applies cannot be transferred so the new ENO would need to apply under the new system.

As part of the review, the AEMC engaged Minter Ellison to “Review and advise in connection with the implementation of the recommendations in its Draft Report ‘Review of regulatory arrangements for embedded networks’ dated 12 September 2017.”

Minter Ellison identified that the draft report did not:

“show an intention that there should be any element of retrospectivity in relation to existing exemptions.”

Minter Ellison identified six options for either grandfathering existing embedded networks and embedded network operators or move them to the new regulatory regime.

In our view, the options open to the AEMC include recommendations to:

i. preserve all existing exemptions indefinitely, on their current terms and conditions;
ii. provide that existing exemptions only apply until such time as there are substantial changes to the network;
iii. Preserve each existing exemption until such time as the premises to which they relate are sold. We note that under the NERL. while authorisations are transferable, exemptions are not;
iv. Deem pre-existing individual and registrable exemptions to be authorisations for the premises to which they relate on the conditions on which they have been granted. Such mechanism could either:
A. require the previously exempt retailer to comply with the conditions attaching to the exemption as if they were contained in an authority; or
B. require the previously exempt retailer to comply with exemption conditions and the obligations of an Off-market retailer under the NERL and NERR;
v. give the holders of exemptions a certain time in which to elect to convert their exemptions to authorisations; and
vi. require the holders of deemed exemptions to notify the AER of the existence of their deemed exemptions within a certain time frame, in order to maintain them.

Preferred options

“In our view, given that one of the dominant themes of the Draft Report is the lack of information available to the AER about the extent and number of deemed exemptions, we are attracted to option (vi). We also consider there is some merit in further exploring options (iii) and (iv)”.

Conclusion

Whatever framework the AER decides to implement, the one certain thing is that Embedded Network Operators will be subject to more regulation. This means that if you are currently an ENO operating under an exemption you will need to be vigilant about keeping up to date with the proposed changes.

We are here to help with embedded network advice

• Compliance Quarter provides regular updates on what is happening in the energy regulation space. Check out our news stories on our website here.
• Alternatively, give Connor James a call to discuss your questions or issues or email us here.