If implemented, the AEMC recommendations will effectively take an axe to the existing regulation of embedded networks – embedded network exemptions – redefining a sector of the energy market that is growing in importance. The changes discussed in this webinar are focused on NECF jurisdictions (NSW, QLD, SA, ACT and TAS). In a webinar to follow we will consider similarly significant changes to be implemented in Victoria following the gazettal of a new section 17 order.
View our webinar here.
Hosted by Connor James and Anne Wardell
The presentation will run for 25 minutes then we will have a Q & A for 10 minutes after.
What is an Embedded Network?
• Embedded networks are private electricity networks connected to the distribution and transmission system of the national electricity market through a parent connection point (gate meter).
• They are typically found in apartment blocks, retirement villages, caravan parks and shopping centres.
• They are on the increase with a range of business models being introduced on to the retail market.
AEMC Final Report on the regulation of embedded networks
Consistent with the AER’s submission to the AEMC review, the AEMC found the existing regulatory framework is not fit for purpose.
“However, the current regulatory arrangements for embedded networks are resulting in some customers not being able to access competitive prices or important consumer protections. There are also insufficient monitoring and enforcement powers for the Australian Energy Regulator (AER), leading to a lack of clarity that embedded network operators are meeting their obligations as suppliers of an essential service. While some embedded networks are providing benefits to energy consumers they may not receive in a standard supply arrangement, often they do not.,,
• 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 are focused on NECF jurisdictions (NSW, QLD, SA, ACT and Tas).
• When considering the recommendations it is important to distinguish between those that apply to retail exemptions and those that apply to network exemptions.
• The recommendations are discussed under three main headings.
The electricity network service provider exemption guideline (Draft) (AER)
On 17 November 2017, the AER published Version 6 of the Electricity Network Service Provider Exemption Guideline (draft). The AER is seeking submissions on the draft. This new draft guideline should be read by all existing exempt operators.
The new draft guideline goes into further detail about microgrids and local energy sales:
“The AER is supportive of the concepts of microgrids and private trading but we caution there are significant regulatory hurdles which must be overcome before a microgrid or private selling of excess electricity can be implemented. We will work with proponents to develop models that respect and enhance the rights of customers to access new energy options but our ability to facilitate microgrids is limited by the constraints of the current regulatory framework”
5 Key Questions
1. What is the headline for existing embedded network operators?
2. Why are changes being made?
3. Will we need to obtain a retail authorisation?
4. How do I obtain a retail authorisation?
5. Will existing embedded networks, and embedded network operators, be grandfathered?
What is the headline for existing embedded network operators?
Under the proposed regime new Embedded Network Operators (ENO) will need to obtain an authorisation rather than rely on an exemption.
The authorisation will not be the same as for an authorised retailer but it will include additional requirements that are not currently imposed on the holder of an exemption.
Why are changes being made?
The AEMC is dissatisfied with the existing regulatory framework:
“The Commission does not see retaining the current framework as an option…”.
The AEMC wants to increase the customer protections available to customers of an embedded network.
At the same time, the AER is introducing new dispute resolution obligations which apply to exempt sellers.
Will we need to obtain a retail authorisation?
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.
Activities which continue to be covered by an 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.
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 AER requires that applicants for a retailer authorization meet a number of requirements as set out under the Retail Law. The AER must be satisfied that an applicant has the capacity to meet their obligations as an Energy Retailer under the Retail Law and Rules.
The AER must be satisfied that an applicant;
• has the necessary organisational and technical capacity to operate as a retailer;
• has the financial resources, or access to resources, to operate as a retailer; and
• Is a suitable person to hold a retailer authorisation.
• Your application will need to demonstrate the above.
The assessment by the AER is conducted at the point in time that an application is made. The application itself consists of a range of documents including a hardship policy, complaints management procedure, and compliance plan.
Point of difference
Authorised retailers who operate solely within embedded networks will not need to 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.
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.
Of course, when a property is sold, the exemption which applies cannot be transferred so the new ENO would need to apply under the new system.
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 six options for either grandfathering existing embedded networks and embedded network operators or move them to the new regulatory regime.
In our view, the options open to the AEMC include recommendations to:
i. preserve all existing exemptions indefinitely, on their current terms and conditions;
ii. provide that existing exemptions only apply until such time as there are substantial changes to the network;
iii. 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;
iv. 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:
A. require the previously exempt retailer to comply with the conditions attaching to the exemption as if they were contained in an authority; or
B. require the previously exempt retailer to comply with exemption conditions and the obligations of an Off-market retailer under the NERL and NERR;
v. give the holders of exemptions a certain time in which to elect to convert their exemptions to authorisations; and
vi. 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.
“In our view, given that one of the dominant themes of the Draft Report is the lack of information available to the AER about the extent and number of deemed exemptions, we are attracted to option (vi). We also consider there is some merit in further exploring options (iii) and (iv)”.
Whatever framework the AER decides to implement, the one certain thing is that Embedded Network Operators will be subject to more regulation. This means that if you are currently an ENO operating under an exemption you will need to be vigilant about keeping up to date with the proposed changes.
We are here to help with embedded network advice
• Compliance Quarter provides regular updates on what is happening in the energy regulation space. Check out our news stories on our website here.
• Alternatively, give Connor James a call to discuss your questions or issues or email us here.