The AEMC draft rule and law package- the regulation of embedded networks.

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With up to 1 million energy consumers in the embedded networks, the AEMC has proposed sweeping changes to the existing regulatory framework.


By Dr Drew Donnelly and Connor James, Compliance Quarter.

The headlines:

  • There will be a very limited number of new embedded networks (post implementation of the rule changes) that qualify for exempt selling: the majority will require an authorised retailer (off-market retailer) to supply electricity within them.
  • All off-market customers will have a National Metering Identifier (NMI) and be ‘discoverable’ in MSATs (the market system).
  • The embedded network service provider (ENSPs) will need to register with the Australian Energy Market Operator (AEMO). It is likely that they will need to comply with higher safety and reliability obligations including those under jurisdictional obligations.
  • The transition question i.e. what will happen to existing embedded networks is likely to be determined with reference to the need to ensure that all customers enjoy the same protections regardless of their place of residence.

Below we discuss the proposed new regulatory regime for embedded networks. Work has been underway for some time on a new regulatory regime for embedded networks under the National Energy Customer Framework.

One of the key objectives is to give effect to the principles of Power of Choice by allowing embedded network customers access to retail competition.  The Australian Energy Market Commission (AEMC) is also looking to improve the consumer protections available for off-market customers, the AEMC is not concerned so much with the nature of the embedded network or the embedded network operator i.e. a customer should enjoy the same protections as an energy consumer regardless of where they live.

These are a complex set of proposal and there are a large number of stakeholders with different interests. Below we look at the discussion from the AEMC workshop held on 22 February 2019. As well as summarising the proposals made so far, the workshop gave an indication of AEMC’s views on future directions for its policy proposals and the areas where it needs feedback from stakeholders.

In summary, the proposal is to increase the regulation of embedded networks by requiring most on-sellers to be authorised retailers and most network operators to register with the Australian Energy Market Operator. The new regime will continue to exempt some network operators and on-sellers i.e. short-term accommodation. However, deemed exemptions will no longer be available with all exemptions requiring registration with the AER. The AEMC notes that developers and body corporates will still have the option to arrange direct connections i.e. to not establish an embedded network.

New Roles

Under the proposal, there will be two new roles established: the ENSP- the network service provider who will need to be registered with AEMO and the ‘off -market’ retailer.’

The ENSP will be an entity that engages in the activity of owning, controlling or operating an electricity embedded network. The ENSP will be required to register with AEMO. The ENSP may also be the ‘off market retailer’ i.e. one party may fill the two roles.

Interestingly, the AEMC proposes that very similar conditions for authorisation will apply to both off and on market retailers. This will be a barrier to entry that many existing ENOs cannot meet. A metering coordinator will be appointed for all embedded networks- with the aim of ensuring that metering within embedded networks is consistent with that in the NEM and that ‘off-market’ customers are discoverable in MSATs.

Standardised network billing arrangements will be introduced in an attempt to overcome the existing barrier to customer choice which is the difficulty for retailers in entering into agreements with ENSPs for network billing of on-market customers in embedded networks.

Off-Market Retailer authorisation

The off-market retailer will be a retailer authorised by the AER. Essentially the only difference between an off-market and on-market retailer will be that an on-market retailer is a registered market participant.  The off-market retailer will be obliged to make an offer to all off-market and new customers in the embedded network that it operates in.

Off market retailers will be subject to almost the same compliance obligations as an on-market retailer. They will also be subject to the same entry test. For the majority of the existing embedded network operators, this will simply not be possible assuming the AER applies the same tests it applies today to an applicant for a retail authorisation.

To obtain a retail authorisation, an applicant must demonstrate that it has the capacity to comply and financially support its operations. The AER has a guideline and we have published various guidance on this process.

Changes for existing authorised on-sellers

Existing authorised on-sellers will need to review the changes and consider the impact of the report on their operations.

The most significant changes for authorised on-sellers will be:

  • obligations to supply customers within an ‘embedded network area’;
  • meeting the same metering standards as market retailers;
  • the obligation to appoint a metering coordinator;
  • liaising with the new ENSP role.

Points of emphasis/questions from the workshop

In addition to summarising matters contained in the draft report released in January, AEMC emphasised certain points in the workshop and requested specific areas for stakeholder feedback. Stakeholders also asked some questions that are worth further reflection and submission from interested parties.

  • Transition arrangements. Which existing embedded networks, if any, should be transitioned to the new framework? This could substantially affect authorised on-sellers who operate in embedded networks that operate under network exemptions as registration as an ENSP would be required.
  • The definition of a ‘network activity’ is changing. This may mean that some activities that currently require a network exemption, will no longer require an exemption of any form.
  • Compliance costs. AEMC considers that the cost of complying with the new framework will be minor and seeks your feedback on potential costs. Our view is that full compliance with the new off-market retailer obligations and registration as an ENSP will be very costly for some organisations.

Embedded Network Managers (ENM): This role is being largely phased out for new embedded networks but with an increase scope of responsibility for legacy embedded networks. The new ENSP will take on most of the responsibilities of an ENM in new embedded networks. In existing embedded networks, the ENM will have new responsibilities for network billing and appointing National Metering Identifiers (NMIs) for all embedded network connection points. There will still be a role for ENMs in the remaining exempt embedded networks.

What is next

The AEMC draft is open for submission until 14 March 2018.  AEMC is aiming to give the package to COAG by the middle of this year.

Feel free to get in touch if you have any questions.

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