The Australian Energy Regulator has published an issues paper titled Retail Authorisation and Exemption Review. Broadly, the Issues Paper considers the changing nature of the energy market, the risks posed by new products and services, and asks whether changes are needed to the Retail Authorisation and Exemption Framework. This is a major consultation that will have long-lasting ramifications for the energy market and consumers. It builds on the work of the Energy Security Board, the Australian Energy Market Commission (particularly in relation to embedded network regulation) and prior work by the AER.
The AER is undertaking a review of the Retail Authorisation and Exemption frameworks set out in the Retail Law. The review arises as a result of the Energy Security Board’s (ESB) final advice to energy ministers in July 2021 as part of its post 2025 market design project. The review aims to assess the adequacy of the current energy consumer protection framework in the context of a transitioning energy market. It focuses on the authorisation and exemption frameworks as these are the gateway for energy products and services being captured by the NECF. The review will assess whether these frameworks remain fit for purpose for the post 2025 NEM, whether the NECF should and will capture new energy products and services that are likely to emerge, and what regulatory reforms may be required to ensure energy consumers continue to be adequately protected.
Since the introduction of the NECF there has been a substantial investment by consumers into distributed energy resources such as solar, batteries and smart appliances. It is expected that the benefits of the successful integration of such resources into the NEM will be approximately 6.3 billion dollars over the next 20 years (ESB Post-2025 Market Design Final Advice to Energy Ministers Part A, 2021, p 39.). The review being conducted by the AER will explore how new energy products and services will interact with NECF. There is a risk that new services will expose consumers to harms that impact on the essential nature of energy or that consumers will not be encouraged to take up new products and services if they do not come with adequate protection.
The outcome of the review will be a set of recommendations aimed at ensuring that the consumer protection framework is fit for purpose in the context of a significantly more complex landscape of energy products and services. The AER has identified three objectives for the review:
- to identify gaps in the NECF that inhibit consumers’ capacity to effectively engage in a transforming energy market;
- to recommend potential reforms to the National Energy Retail Law and/or rules, and/or other regulatory or other nonregulatory initiatives to mitigate the specific consumer harms identified through the review; and
- to identify the consumer harms that should be subject to ongoing monitoring by the AER because recommended revelatory reforms may not adequately mitigate the identified harms.
In meeting the objectives, the AER will review the need to consider the concept of essentiality regarding new energy products and services. In other words, this is likely to be one of the tests that the AER applies when considering what level of regulatory protection and oversight is required. The AER is also considering whether changes are required to introduce principles-based regulation utilising a set of broad but binding principles rather than prescriptive rules.
The AER will utilise the ESB’s Consumer Risk Assessment Tool. The Consumer Risk Assessment Tool provides key questions to examine as part of a risk assessment process. The principles underlying the ESB’s consumer risk assessment tool are:
- Accessed energy – energies and essential service, and consumer should have access to at least one source of electricity;
- Switching providers – consumer should be able to change providers when they choose;
- Access to information – consumer should have access to information that is sufficient, accurate, timely and minimises complexity and confusion to allow them to make informed decisions;
- Vulnerable consumers – the needs and circumstances of vulnerable consumers will need to be explicitly considered; and
- Dispute resolution – easy access to no-cost dispute resolution scheme should be available to consumers.
The Issues Paper examines the existing regulatory framework in NECF. Part four then goes on to examine the changes that are happening within the energy market. The AER notes that three million small-scale solar systems are now installed on Australian rooftops, equating to over one in four residential and many non-residential buildings. It is estimated that over the next two decades, 13 to 24 GW of rooftop solar PV capacity will be added. The uptake of distributed energy resources (DER) is giving consumers a greater opportunity to engage in the energy market whereby they can now buy, store, generate, and export their energy and store energy at different times. The National Energy Customer Framework was established “at a time when the uptake of DER was more limited and the DER based services and products were still in their infancy.”
In identifying potential harms and risks that may arise from new energy products and services, the AER considered several broad business models. These business models are set out in Table 1 of the Issues Paper.
Electric vehicle charging was broken down into two scenarios: 1. where an EV charging service provider sells electricity to the end customer at their premises (this will likely be captured under the NECF), 2. where an EV charging service provider sells electricity to the end consumer at a premises that the end consumer does not own or occupy, for example, a street-side EV charger, office building, or service station.
Aggregation services utilise behind the minute DER resources such as smart devices to manage energy usage at a premises or and the export of energy to the grid. Aggregation can operate with energy management services or separately.
Multiple providers at one premises
The AER notes that consumers may soon be able to have multiple energy providers at their premises. Multiple providers may supply different types of energy service. For example, in one household there could be a retailer who supplies electricity and an aggregator utilising solar panels and batteries on the premises to provide grid support services. As part of the Energy Security Board’s DER implementation plan, AEMO intends to submit its FTA rule change seeking to introduce a new metering arrangement to enable multiple energy providers as well as to address current models in the market.
Embedded networks may contain DER assets that are controlled and operated by the embedded network operator. For example, an apartment complex could have a community battery that is controlled by the embedded network operator.
As noted above, a key concept underpinning the AER’s review is that of energy being an essential service. NECF was born from the need to ensure protections for the most vulnerable consumers and essentiality forms the key policy rationale underpinning the NECF. Therefore, the AER notes that if a new energy service or product has the same essential characteristics as a traditional supply of electricity, this would point towards extending the scope of the NECF to include the new energy service (if not already captured). The appropriate level of consumer protection may depend on the type of consumer and their level of bargaining power. The AER notes that many new energy products and services are unlikely to be considered essential. For example, an EV charging facility is unlikely to be treated as essential because there are other modes of travel available to use and access.
Whole of system benefits
The AER acknowledges the importance of DER integration to realise whole- of- system benefits. The success of re-designing the energy market to enable a two-way system rests on many factors. One, the AER notes, is the ability for consumers to effectively engage with new technologies and services that support the realisation of the benefits of the new market design. If there are barriers to entry and/or the uptake of these technologies and services the benefits of the post 2025 market design work in facilitating two-way flows of energy may be inhibited.
The AER notes that a broader issue that may need to be considered is the impact of regulatory burden on competitive neutrality between traditional energy providers (i.e. retailers and distributors) and new energy providers. For example, a new energy service provider whose products fall outside of the NECF will not be required to comply with the consumer protection requirements set out in the Retail Law and Rules. This may place a disproportionate burden on traditional energy providers, particularly as new services and products reduce the need, volume, and quantity of the services supplied by traditional energy service providers.
In part five of the Issues Paper, the AER examines current and emerging challenges in the transforming energy sector. The AER recognises that the process of assessing an authorisation takes place at a single point in time. The AER assesses authorisation applications against the entry criteria set out under the Retail Law and must be satisfied that an applicant has the financial, technical, and organisational capacity and expertise to manage the activity it declares it wishes to undertake. There is no ability for the AER to reassess and an approved authorisation based on changes in circumstances, such as material changes in a retailer’s business model or changes in the scope or size of their operational customer type compared with what was assessed at the time of the grant of an authorisation. The AER must either grant or refuse an application. The AER must grant an application if it is satisfied that the applicant meets the criteria set out in the Retail Law, or that it will satisfy the entry criteria once they address conditions imposed. The AER is not able to impose ongoing conditions that limit the scope of an authorisation to a particular customer type, i.e. the sale of energy to large customers only.
The AER notes that the risk of consumer harm may be lessened by development of tools to limit the scope of authorisations, particularly to a parricular category, set out in the business plan submitted by the business seeking to retail energy. This will be important as new business models develop.
The AER highlighted the gap in the law where an authorised retailer is wholly acquired by another entity. The AER has no ability under the current framework to assess the acquirer under the Retail Law criteria for granting authorisations. This may give rise to consumer harm because the AER is not able to assess the suitability of the acquirer. This could be mitigated by requiring AER approval if there is a change in control of the authorised entity by another entity that is not already an authorised retailer. If the AER approval is not granted, authorised retailer would be required to surrender their authorisation.
The AER notes that the exemption framework was designed to permit the on selling of energy that is incidental and not the core activity of an entity’s business. The AER is seeing increasingly complex business models rely on exemptions because they do not fit the typical business model requiring an authorisation. For example, business models may include the sale of energy to a large number of customers in an embedded network, involving multiple service offerings such as solar PV, on-site – home community batteries and demand management options. The AER states that business models such as these do not obviously correspond to the intention of providing an exemption for the incidental on selling of energy. An authorisation may be more applicable to these types of models. However, the AER does not have the power to compel entities to obtain a retail authorisation in circumstances where it may be more suitable than an exemption. In such circumstances, the AER can potentially pursue such an entity for non-compliance with the obligation to obtain a retail authorisation.
Regular readers will be familiar with the AEMC’s proposed law and rule changes that would have significantly altered the regulatory framework for embedded networks. Those proposed changes were ultimately rejected by the state energy ministers. This current review is a another opportunity for reform in this area and reform is likely to occur.
The AER notes that: The regulation of embedded networks, and the risks and harms that consumers located in embedded networks may face, is consistently raised in the energy sector as an issue of concern.
Highlighted as an example of failure, embedded network regulation is likely to result from this review to address the issues identified by the AER, namely:
- Lack of retail competition – in practice, consumers in an embedded network often have difficulty buying energy from a seller other than the exempt seller, so have limited retailer choice;
- Potentially higher prices: without competition, there are fewer incentives for embedded network operators to lower prices;
- Supply Issues: including the lack of a complaints and dispute resolution process (albeit with various states addressing this issue over recent years);
- Lack of payment assistance – with embedded network operators not having the same resources available to implement payment assistance programs as on-market retailers may have;
- Life support- inadequate resources or processes and system in place resulting in life support customers not receiving the required protection from disconnection.
It will be interesting to see how much of the AEMC’s work feeds into the AER’s review and whether we will see a resurrection of the same proposals.
New Energy Technologies
The AER recognises the potential benefits of new energy products and services. At the same time, the AER notes that such products and services are likely to be more complex and may present additional risks to consumers. An example of such a consideration is provided in the Issues Paper, replicated below:
In taking a risk based approach, the AER will consider stakeholder feedback and other findings from industry and consumer consultations and work of the Energy Security Board.