Time to understand “Ring-fencing”

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On 3 November 2021, The Australian Energy Regulator (AER)  concluded and published a revision of the Ring-fencing Guideline. Parties are expected to be fully compliant with the updated Guideline (version 3) by 3 February 2022. The Ring-fencing Guideline was revised to establish a framework and controls for a competitive market for deploying community-scale batteries and Stand-Alone Power Systems (SAPS). By separating monopoly network services and avoiding cross-subsidisation of large Distributed Network Service Provider (DNSP), the AER seeks to make energy services more competitive and beneficial for customers.

What is Ring-fencing?

Ring-fencing describes the division of regulated services (eg. installation/maintenance of poles and wires) and contestable services (eg. installation of smart meters) provided by DNSPs. Thus, the Ring-fencing Guideline regulates to what extent the DNSPs can provide regulated services and when services are to be contestable.

The AER seeks to create a competitive marketplace where third-party providers can enter and operate in the existing and new markets for contestable services. Effective Ring-fencing frameworks should result in increased choice for consumers and more competitive energy services markets.

In practice, the difficulty arises where DNSPs have ownership of community-scale batteries and SAPS, and the costs for these services are not adequately identified and separated. If costs are not identified and separated, there is an increased chance that consumers will carry costs where they should not.

Identified Risks for Retailers

In feedback to the AER, stakeholders noted that there is a significantly increased risk for smaller retailers to remain competitive because DNSPs and large energy retailers have the capital to secure ownership in community-scale batteries and SAPS. Further, it was of concern that DNSPs may act in a discriminatory manner towards smaller retailers out of self-interest.

The AER has now made an attempt to prevent cross-subsidisation between entities and discriminatory behaviour by DNSPs. The amended Ring-fencing Guideline requires DNSPs to identify and separate costs and business activities for Regulated DNSP Services and Contestable DNSP Services. DNSPs are further subject to increased reporting obligations.

Although the AER sees the value in using a single battery to provide regulated network services, the provision of such ‘regulated network services’ for single batteries must be waived by the AER on a case by case basis.

Key Takeaway for Retailers and Embedded Network Providers

Ring-fencing will become increasingly more critical for embedded network providers and small retailers for three reasons:

  1. Understanding the Ring-fencing regulatory mechanisms allows understanding and potential contesting of the DNSP service charges they incur.
  2. Identifying opportunities to offer additional services ‘contestable services’.
  3. Identifying opportunities in the deployment of small and community scale batteries.

If you are interested in finding out more about the Ring-fencing Guideline please register your interest for a webinar here.

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