Victorian Embedded Network ‘ban’: proposed changes to the embedded network regulatory framework in Victoria

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On 11 January 2022, the expert panel appointed by the Victorian Government to review the policy position of banning embedded networks in residential apartment buildings published its final report. The recommendations, if implemented, will have a significant impact on embedded network operators in Victoria.

The report sets out the panel’s recommendations for implementing a ban and further considers how the ban should apply to, or rather what changes should be made to the regulation of, legacy (existing) embedded networks.

Consultation process

This final report follows extensive consultation. In January 2021, the expert panel published an issues paper and, in response, received 133 submissions. The panel then held two online sessions.

The expert panel published a draft recommendations report in June 2021 outlining proposed recommendations to implement the ban. The expert panel received 50 submissions to the draft report from a cross-section of stakeholders.

Existing regulatory framework

In Victoria, most embedded network operators operate under the General Exemption Order (GEO), which is in an order made under section 16 of the Electricity Industry Act. Those businesses operating under the GEO are not required to hold a licence to sell, supply, or distribute electricity. Nonetheless, those businesses are regulated in their activities, including by inter alia various provisions of the Energy Retail Code.

Proposal of the expert panel

The expert panel recognised that well-managed embedded networks can generate various benefits for customers. These derive from the bulk purchasing of electricity, benefits of on-site renewable energy, and access to commercial network tariffs. The panel was, however, tasked with implementing a ban. To effect the ban, the expert panel made 16 recommendations, including that embedded network operators meet new conditions implemented by amendments to the GEO and the Electricity Industry Act.

One of the most critical conditions that will need to be met relates to on-site renewable energy generation (the On-Site Generation Condition). The second significant change proposed by the expert panel relates to the introduction of a new type of licence for the sale of energy within embedded networks (the Licence Condition).

Once a new GEO has been gazetted, the expert panel expect embedded network operators to apply for a new exemption and, as part of that process to declare to the ESC that they meet a range of requirements under the revised GEO, including a plan for deploying appropriate metering and other internal infrastructure to meet Victorian standards (which will enable residents to more readily transfer to other retail market offers if they wish).

The On-Site Generation Condition

The On-Site Generation Condition is that at least 50% of electricity at an embedded network must be met from on-site renewable sources. The expert panel has recommended that further consultation take place on the On-Site Generation Condition including the way in which it is calculated.

The key to the On-Site Generation Condition is that electricity is generated on-site, i.e. excluding the purchase of GreenPower. For the vast majority of embedded networks, having 50% of the energy generated on-site would simply not be possible.

The expert panel has recognised that existing embedded networks will have difficulty in meeting the On-Site Generation Condition and has noted that ‘purchase of energy from renewable sources from the market (for example, via Power Purchase Agreements or via GreenPower) may be necessary for legacy (existing) local energy networks once they are required to meet the renewable energy conditions (within 3 years after the LES licensing regime has taken effect), given the difficulties and potential expense in retrofitting these sites.’  However, the expectation remains that the maximum on-site renewable energy capacity will be installed, with only the remainder of the 50% obtained by purchasing from on-market renewable sources.

The additional obligation to ‘pass the benefit onto consumers’ could be achieved by ‘for example, information included on individual customer bills and ongoing auditing and monitoring processes undertaken by the ESC.’

The expert panel has recommended that the Victorian Government periodically review the On-Site Generation Condition.

The Licence Condition

The expert panel recommends establishing a new category of licence called the Local Energy Service providers (LES), administered by the ESC. They anticipate that this would be established via amendments to the Electricity Industry Act. LES providers ‘will only be able to operate if they satisfy conditions that require them to ensure customers have equal consumer protections, the benefits of renewable or clean energy and retail choice.’  In effect, embedded networks would become known as ‘local energy networks’ and be subject to the LES licensing framework regime. 

The proposed LES licensing framework shares many similarities / requirements as an electricity retail licence.  The panel notes that even if an entity holds an existing retail or distribution license, they would still need to obtain an LES license if they wish to supply / sell electricity in a residential embedded network.

When will the ban be implemented?

The timeline for implementation of the expert panel’s recommendations is set out in the following diagram taken from their report.

What does this mean for new/ existing embedded networks in Victoria?

Should the recommendations be accepted and implemented within the proposed timeframes, the effect is that:

  • Those sites that register or update their registration with the ESC on or after 1 January 2023 (or ‘local energy networks’ as they will become known) will be subject to the new rules / regime.
  • legacy (existing) embedded networks that are registered with the ESC by 31 December 2022:
    • will have some obligations that commence on 1 January 2023 pertaining to the revised GEO (e.g. enhanced consumer protection obligations)
    • will have additional time for compliance with the wider LES licensing framework – including the On-Site Generation condition – of up to 3 years after the new licensing regime being implemented (around 2027).

Clearly, we can expect further discussion on this issue. In future articles, we will examine the other recommendations of the expert panel and the impact of those recommendations on the industry.

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