Is Victoria really banning Embedded Networks, or just Re-naming them?

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In a recent article, we summarised the findings of the Expert Panel in the Victorian Embedded Networks Review Draft Recommendations Report (Report). The implementation of the Panel’s recommendations would see the end of ‘embedded networks’ by 2023. However, subject to certain conditions, ‘private networks’ will remain.

Below, we highlight the key components of the Report for embedded network operators in Victoria. It is clear from the Report that embedded networks will not be ‘banned’, rather they will be re-named ‘private networks’ and subject to stricter regulation.

Residential vs Commercial

The Panel’s recommendations would apply to residential embedded networks only. The likely reason for this is that the election promise on which this review was based, referred only to embedded networks in residential apartment buildings.

In respect of commercial or industrial embedded networks, the Panel has said they will continue to be regulated under the General Exemption Order (GEO), but the Victorian Government could extend the changes to commercial sites sometime in the future.

The Panel did not specifically address mixed-use developments and whether these would be considered ‘residential private networks’ for the purposes of the new regulation. In finalising its recommendations, we hope the Panel will:

  • be mindful of the treatment of mixed-use networks; and
  • have regard to whether any Local Energy Services (LES) Licensees supplying commercial customers (in mixed-use networks or otherwise), will be required to follow the GEO, or LES obligations.

New Regulatory Requirements

The most significant new regulatory requirement for embedded networks in Victoria is the introduction of the Local Energy Services (LES) Licence (detailed below). However, the three other key changes are that residential embedded networks will be required to:

  1. have renewable or other clean energy that delivers carbon emission reduction in line with the Victorian Government’s policy;
  2. show how benefits within the embedded network are regularly passed on to consumers within that site; and
  3. apply for exemption approval from the ESC.

In relation to point one, the Panel has acknowledged that installing solar and battery devices may be difficult in some settings and it appears that purchasing an energy product with a ‘green’ component at the gate meter, may be enough to satisfy this requirement. 

It is unclear what embedded network operators will need to demonstrate to comply with point two, but this would appear to place an additional administrative burden on the regulator. We question whether this is necessary, given the ESC’s recent work on formulating a maximum price cap for embedded networks.

It also remains to be seen whether embedded network operators with multiple sites, will be required to apply for approval for each of their sites independently. As there does not seem to be such a requirement proposed for the LES Licence, we do not consider it will be necessary for the interim exemption application process.

Local Energy Services Licence

The biggest proposed reform is the introduction of a new category of energy retail licence under the Electricity Industry Act 2000 (EIA). Conditions of the licence will include the new regulatory requirements outlined above, but also require that the LES Licence holder:

  • ensure choice of electricity retailer for customers;
  • ensure, to the fullest extent possible, equal consumer protections;
  • consider the best interests of consumers and show how benefits will be passed on to consumers when making agreements relating to the private network, including contracts for services with developers, owners’ corporations or other related parties;
  • meet appropriate financial, organisation and technical capacity and general suitability requirements as determined by the ESC; and 
  • meet any other conditions the ESC considers appropriate.

This proposal is similar to the Australian Energy Market Commission recommendations proposed for National Energy Customer Framework jurisdictions in 2017. Those recommendations are yet to be implemented and the Panel is likely to face serious opposition on this.

Furthermore, it is doubtful whether ensuring choice of electricity retailer for customers is achievable. The Panel acknowledged that it had not received any submissions with specific suggestions on how barriers to true retail market access could be overcome and asked for further submissions on this point. As we saw with the Power of Choice reforms in 2017, what appears to work in principle, is not necessarily effective in practice.

The difficulties in achieving true retail competition for embedded network customers are well-known. It is surprising to see the Panel focus on this vexed issue, when compliance with the other new requirements, including passing the benefits of the embedded network onto consumers, will ensure customers enjoy better prices than market customers regardless.  

2022 Effective Date

Apart from the LES Licence, the new requirements for embedded networks are anticipated to commence in June 2022. This does not leave much preparation time for existing operators, including smaller operators who may not have the capacity to comply with the new regulations.

Sensibly, the Panel flagged that there will be a 12-month period during which operators could apply for exemption approval from the ESC. In our view, this grace period should also apply to the other new regulatory requirements outlined above.  

While the new laws will apply from mid-2022, the LES Licensing Framework will not commence until 2023 and legacy embedded networks will not require a licence until 2026. In practice, larger operators who are more likely to have new embedded networks in the pipeline, can anticipate they will need to be licensed by 2023. Conversely, smaller operators for whom selling energy is not a core function, have at least five years to prepare for the new licensing framework.  

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