Taking the Axe to Embedded Network Exemptions

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Yesterday we spoke about the final Australian Energy Market Commission (AEMC) report on the regulation of embedded networks. Recommendations from the report will be considered by COAG and are likely to be implemented mid-to-late next year.

Today, we answer Five Key Questions for existing embedded network operators.

embedded network operators
Photo by Malte Wingen on Unsplash
By Anne Wardell and Connor James, Compliance Quarter. 

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 in this article are focused on NECF jurisdictions (NSW, QLD, SA, ACT and Tas). In an article to follow we will consider similarly significant changes to be implemented in Victoria following the gazettal of a new section 17 order.

The existing regulatory regime distinguishes between authorisation holders and exempt operators. To be able to provide network and/or retail services, embedded network operators must be operating under an exemption from the requirement for registration as a network service provider and/or hold a retailer authorisation.

Currently, exempt operators are regulated, but not to the same extent as authorisation holders. Exempt operators are not required to publish standing offer pricing, nor to report to the regulator, nor to comply with other requirements in the rules.

Question One: What is the headline for existing embedded network operators?

From the date of implementation, customers within the majority of ‘new’ embedded networks are going to need to be supplied by an authorised retailer rather than an exemption holder.  This means that a business that relies on exemptions to supply electricity within embedded networks will need to obtain a retail authorisation if it wishes to supply electricity within any ‘new’ embedded networks.

The implementation of the AEMC recommendations will redefine existing successful business models. Existing embedded network operators and exemption holders need to take note of the changes.

Question Two: Why are changes being made?

The AEMC is dissatisfied with the existing regulatory framework: [i]

“The Commission does not see retaining the current framework as an option…

We have also found significant practical barriers to customers in embedded networks accessing retail market competition, which means that embedded network customers have limited ability to change supplier if they are unhappy with the price they are paying or level of service that they are receiving. In addition, there are a number of provisions of the NERL and NERR that do not operate effectively for embedded networks.”

The AEMC is essentially concerned that the range of activities covered by exemptions is too broad. This flows back to wide-ranging concerns in the sector about pricing and consumer choice. Electricity pricing is newsworthy and pricing increases have real-life consequences, particularly for vulnerable consumers. The AEMC does recognise the benefits of embedded networks:

“Provided that they are appropriately regulated, the Commission considers that embedded networks can provide benefits to consumers by way of discounted prices and non-price benefits such as multi-service offerings, more environmentally sustainable housing and improved access to embedded generation. However, due to a lack of competitive pressure and appropriate consumer protections, the Commission considers that many embedded network consumers are not currently receiving benefits from these arrangements.”

Another major factor in seeking change is to increase the customer protections available to customers of embedded networks. The current view is that a number of customers of embedded networks have no recourse to dispute resolution or assistance in dealing with a complaint about the services received. We have discussed changes in this area in previous articles.

Question Three: Will we need to obtain a retail authorisation?

If you propose to supply electricity within ‘new’ (in reference to the implementation of the recommendations not to greenfield/ retrofit) embedded networks, then the answer is probably yes.

“The Commission considers the most effective way of implementing these measures is through elevating the regulation of embedded networks into the national framework. The Commission recommends requiring embedded network service providers that supply small customers to register with AEMO and on-sellers to hold a retailer authorisation except in a narrow set of circumstances.”

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:

“The Commission considers that it would be in the long-term interests of consumers if community energy projects are implemented within the proposed framework which requires the supply and sale of energy to small customers in embedded networks to be provided by a registered embedded network service provider and authorised on-selling retailer.”

There will continue to be activities that are appropriate for a retail 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.

The Commission agrees with the AER that a principles-based approach in the NERL would avoid precluding as yet unforeseen energy selling activities from being eligible for an exemption, where exemption may be more appropriate than authorisation. The Commission considers further prescription in the NERR would be appropriate for providing direction to the AER and certainty to industry on the eligibility criteria for exemptions. Placing these in the NERR balances this prescription with flexibility by providing any person the opportunity to request a rule change to amend these factors if they consider it meets the NERO.”

Question Four: 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 Commission acknowledges that elevating the regulation of embedded networks into the national framework will involve some costs for participants and market bodies. As we note above, providing consumer protections and providing access to the retail market is not costless. However, the Commission considers these costs will be minimised and proportionate to the benefits or the proposed changes.”

A point of difference for authorised retailers who operate solely within embedded networks will be that they need not 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.

We previously published an article on ‘how to become an authorised retailer’ which can be read here.

Question Five: 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.

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 the following six options for either grandfathering existing embedded networks and embedded network operators (or move them to the new regulatory regime), noting that option (iv) is the most attractive:[ii]

  • preserve all existing exemptions indefinitely, on their current terms and conditions;
  • provide that existing exemptions only apply until such time as there are substantial changes to the network;
  • 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;
  • 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:
    1. require the previously exempt retailer to comply with the conditions attaching to the exemption as if they were contained in an authority; or
    2. require the previously exempt retailer to comply with exemption conditions and the obligations of an Off-market retailer under the NERL and NERR;
  • give the holders of exemptions a certain time in which to elect to convert their exemptions to authorisations; and
  • 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.”

We are currently working with the Majority of retail authorisation applicants and have successfully assisted a number of retailers. If you would like to understand how the above impact your business, contact us by phone (02) 8001 6664 or email connor@compliancequarter.com.au



[i] See Review of regulatory arrangements for embedded networks, AEMC 2017, accessible at http://www.aemc.gov.au/Markets-Reviews-Advice/Review-of-regulatory-arrangements-for-embedded-net

[ii] See Review of regulatory arrangements for Embedded networks, Implementation of

recommendations in Draft Report

, Minter Ellison 2017, accessible at http://www.aemc.gov.au/getattachment/e7a91675-0277-4757-9221-a59bf832a5e2/MinterEllison-Review-of-regulatory-arrangements-fo.aspx

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