What will happen to ‘legacy embedded networks’ under the AEMC’s proposed rule and law changes

What will happen to ‘legacy embedded networks’ under the AEMC’s proposed rule and law changes

AU Energy Compliance

Tomorrow the Australian Energy Market Commission (AEMC) will hold a stakeholder forum to examine the question of what will happen to ‘legacy embedded networks’ under the AEMC’s proposed rule and law changes. Below we discuss this question.

By Connor James, Compliance Quarter.

In January the AEMC released its draft report Updating the regulatory frameworks for embedded networks. The report set out proposed amendments to the national energy laws and rules to establish a new regulatory regime to improve consumer protections and access to retail market competition for embedded network customers. We have discussed the report in previous posts.

The headline items included the establishment of a new ‘type’ or retailer holding an off-market retail authorisation and the abolition of the majority of exemptions meaning that all ‘new’ embedded networks would need to be supplied by an off or on market authorisation holder. A new Embedded Network Service Provider (ENSP) role will be established and that party must register with AEMO and be subject to many of the existing regulatory requirements placed on DNSPs.

The remaining question was what is to happen with ‘legacy’ embedded networks.

Options for Transition

The language of the AEMC has gradually changed from being open to the possibility of allowing existing exemptions to a focus on transition. Transition means that a number of existing embedded networks will need to be supplied by an authorised retailer at some point. There are estimated to be between 700,000 -900,000 customers within these embedded networks, so the transition is important not only for suppliers but also for consumers.

The AEMC is now considering retaining ‘individual exemptions’ for those selling arrangements which meet a set of consumer interest and competition based principles and factors. This makes sense from the point of view of ensuring that the regulatory framework retains flexibility; particularly as we see more and more innovation in the space.

Deemed exemptions will not be transitioned to the new arrangement. These allow, for example, the sale of energy between related entities.

Transition Triggers

The AEMC recognises that ‘Existing EN are quite diverse and will have their own unique situation and characteristics. The transition framework needs to recognise this while keeping the arrangements simple and practical.

It is proposed to use two types of triggers for transition:

• Time based; and
• Size based (number of customers).

This means the size of an embedded network and the dates specified by the AEMC will determine when embedded networks need to transition to the new framework. From an operator point of view, this simply means that they will have time to come into compliance by either obtaining an off-market retail authorisation or by divesting of their embedded network operations- which creates its own issues.

We will provide updates to our clients tomorrow on the proposed transition timelines and new implementation timeline.

If you have any questions on the above, please contact me via email to [email protected]

Two Billion Dollar Opportunities for Innovation in the Energy Market

AU Energy Compliance

Innovation in the Energy Market – If you believe the news, we are in the midst of an energy crisis. Ignoring the politicking, today we examine two areas of the energy market that are ripe for innovation. In our previous post, we spoke about the number of businesses now looking to become energy retailers. Much of this is driven by business models looking to innovate the energy market.

Innovation in the Energy Market
Photo by Marcus Wallis on Unsplash
By Connor James, Compliance Quarter.

Demand Management that People Care About

Countless providers offer an ‘app’ or device to help you manage your energy. Most of them fail.

The promise is simple—give people more power over how and when they use, store, or export energy. In doing so, savings can be achieved, inefficient appliances can be identified, and money can be made ‘trading’ energy back to the grid. Energy can be exported in a way that takes advantage of the volatility of pricing of energy in the wholesale electricity market.

AEMO has identified demand management as key to reduced consumption and to increased grid stability. In the water industry, demand management has had a significant and lasting effect.

There is a problem with many of the demand management apps currently available. People just don’t care. Individual consumers are time poor and have more than enough applications on their smart-phones.

The challenge is to make this process interesting, to automate it (perhaps using AI) and to embed it. A similar problem exists in the number of consumers who could be on a better energy deal but are not. It needs to be fixed but it won’t be fixed without consideration of useability.

Innovation in the Energy Market

Microgrids and embedded generation

Microgrids are embedded networks on a larger scale. They overcome the issue of network fees, arbitrarily charged to each household, and present an opportunity for embedded generation. Our current grid is built on centralisation and heavy reliance on transmission. This is ineffective.

Establishing microgrid community ‘hubs’ allows for decentralisation and increased ‘grid security.’ Voltage can be managed at an individual ‘hub’ level and energy can be traded between households and between hubs or communities. In establishing a network of hubs and connections, the money that traditionally goes towards network and transmission can be re-invested at the community level in areas such as energy efficiency.

There are challenges to be overcome with microgrids. Regulatory hurdles are the greatest challenge. Re-wiring a sub-burb requires a distribution licence or exemption and requires rights to use public space.

The above two examples are obvious. Some opportunities are not so obvious. One area of significant concern in the energy market is the management of hardship. There are too many customers being disconnected and too many customers who cannot afford to pay their bills. Find a way to solve that problem and you will have a real impact.

Compliance Quarter is always working with a wide range of energy retailers. For a confidential discussion contact us by clicking here.

Changes to Energy Retail Reporting and Audit Obligations

Changes to Energy Retail Reporting and Audit Obligations

AU Energy Compliance

By Anne Wardell, Compliance Quarter

On 9 June 2017, the Australian Energy Regulator (AER) released the following documents:

The revised guidelines incorporate new rules introduced by the Australian Energy Market Commission (AEMC), refine the reporting framework and provide new guidance material on compliance audits.

Changes to reporting obligations

An important change is to the name given to reports and reporting periods. Reports will now be referred to as Immediate, Quarterly or Half Yearly Reports. Consequently, the sections in the procedures and guidelines which deal with reporting have been amended in line with this change. This includes substantive amendments to Appendix A.

The report and template contained in Appendix B has also been amended with the insertion of a statement regarding other breaches during the relevant period. The Practice Guide has been provided to assist regulated entities in understanding and conducting compliance audits. It provides further information in relation to the decision-making process around compliance audits, the terms of reference and how each type of compliance audit will be carried out.

Audits

Another important change is the introduction of a new AER compulsory powers section at 1.9 to 1.11 dealing with the power to obtain information and documents. Section 1.10 introduces a notice which can be issued by AER and to which civil penalty provisions attach for failure to comply.

Section 1.4 has been inserted which provides that the AER may require regulated entities to carry out compliance audits. Significant changes have also been made to Pt 4 dealing with compliance audits. The part now has separate provisions dealing with compliance audits carried out by AER and compliance audits carried out by regulated entities.

If a regulated entity is required to conduct a compliance audit it must submit an Audit Proposal to AER within ten days of receiving notice of the audit. The AER has the power to reject the proposal if it does not comply with the Terms of Reference set out by the AER. The AER also has the power to require a regulated entity to prepare a draft audit report. If the AER is not satisfied with the audit being conducted by a regulated entity it may revoke the requirement for the audit and instead carry out its own compliance audit under s 275 of the Retail Law.

It also includes a helpful diagram setting out a summary of the AER’s compliance audit decision making process.

History of the changes

The amendments were originally released for comment in December 2017 with submissions closing on 23 January 2017. A total of 13 submissions were received. A copy of each submission is available here.

After 9 June 2017, you should only respond to the AER with documents which comply with Version 4 of the Procedures and Guidelines. If you have need assistance in updating your forms please contact us.

State of the Energy Market

State of the Energy Market

AU Energy Compliance

Today saw the release of the 2017 State of the Energy Market, a report published by the Australian Energy Regulator.

There is a lot to digest in the AER’s comprehensive and useful report. In this first post, I will briefly look at some of the key themes.

It has been a challenging year for the industry, one that has seen significant structural and technological change.

‘Technology change is impacting on the wholesale electricity and gas markets more than at any other time in the history of the NEM…’ Paula Conboy—AER Chair.

Retail and Wholesale Pricing

Electricity retail pricing trended higher in 2016, in all states other than Victoria.

As I noted in a previous post, significant increases are expected this financial year on top of the average 13 percent in NSW and 11 percent in SA increases in 2016.

Australia’s electricity prices are above the OECD average, higher than the US, Canada, NZ, South Korea but lower than Japan, the UK and most of Europe.

In response to rising prices, the Australian Government has directed the ACCC to hold an inquiry into retail electricity pricing, with the preliminary report due in September 2017.

It has been another interesting year in the wholesale market. Wholesale market prices directly impact on consumers, although with a delayed effect.

The AER examines weekly wholesale prices in its report:

Challenging Market

The AER point to a number of factors resulting in challenging conditions generally, including investor uncertainty about the viability of new generation investment against the background of recent coal plant closures.

As the AER note:

‘The past 12–18 months have been some of the most challenging Australia’s energy sector has experienced since the National Electricity Market (NEM) was established in 1998.’

Legal Review

Successful court challenges by the network businesses are expected to place upward pressure on prices. On 24 May 2017, the Federal Court upheld elements of the Australian Competition Tribunal’s decision on revenues for NSW and ACT network businesses.

Legal review is a common theme in the relationship between network business and their regulators:

‘Since 2008, reviews have been sought on 32 out of 51 regulatory decisions (figure 8). Of the matters that were varied or remitted back to the AER, none resulted in a decrease in revenues the regulated businesses could collect from their customers compared with the original decision. Service providers face little practical downside from seeking merits review. The legal costs of seeking review are minor compared with the potential upside from successfully reviewing elements of the decision. To date, consumers have not argued successfully for any decrease in network revenues.’

Consumer Participation

In a previous post, I spoke about the increased participation of consumers in the energy market, the blurring of the traditionally distinct roles between retailer, consumer, generator, and distributor.

Pricing pressures are forcing consumers to take matters into their own hands. This is evidenced by the greater take-up of rooftop solar PV and interest in energy storage.

The AER reports on the percentage contribution of various sources of generation:

Source: AER, 2017 State of the Energy Market, 30 May 2017 (https://www.aer.gov.au/publications/state-of-the-energy-market-reports)