Is your business at risk of significant fines? Embedded Networks and Authorisation Compliance

Locality Planning Energy Pty Ltd (LPE) owned and operated electricity lines embedded within multi-unit residential and business premises. These embedded networks distributed power to residents and business customers from embedded networks connected to the external grid. This is a common configuration in multi-storey residential and commercial buildings, shopping centres and industrial parks.

On 2 October 2024, the Australian Energy Regulator (AER) issued LPE with two infringement notices for penalties totalling $135,600 for owning and operating these embedded electricity networks without being registered with the Australian Energy Market Operator (AEMO) or exempted by the AER from the requirement to be registered.

Embedded Networks

An embedded network is formed when an electricity line brings power into a site from the external distribution or transmission network, and then distributes that power to end-users within the site. This not only involves the activity of owning and operating an electricity network, but often also involves the retail sale of electricity to end-users.

Both these activities require authorisations to be held, in the form of registrations, licences or exemptions, depending on the location and circumstances of the activity.

Network Authorisation Approval and Exemptions

Under the national electricity regulatory framework and several State-based jurisdictional energy frameworks, a person must not engage in the activity of owning, controlling or operating an electricity network, including an embedded network, unless they are:

• registered with AEMO as a Network Service Provider (NSP); or
• exempted by the AER from the requirement to be registered.

The electricity grid, comprised of high voltage transmission networks and lower voltage distribution networks, is owned and operated by a range of formally registered NSPs. There are complex and onerous technical and financial obligations applicable to registered NSPs. This type of regulation is generally recognised as unnecessary and inappropriate for embedded networks.

Under the AER Exemptions Framework, there are three categories of exemptions that are available, depending on the nature and purpose of the network and number of customers:

• deemed exemption;
• registrable exemption; and
• individual exemption.

A deemed exemption is an exemption that applies automatically to certain persons. A person covered by a deemed exemption does not need to either apply or register with the AER, but may still be subject to certain conditions. Deemed exemption classes are typically appropriate for small-scale supply arrangements where the costs associated with exemption registration would outweigh the benefits of increased regulation.

A registrable exemption is available on registration with the AER. It applies to a particular individual or entity for a particular site and is also subject to ongoing compliance with certain conditions. Registrable exemption classes generally apply to larger-scaled energy supply activities.

A network individual exemption is required where the circumstances of the embedded network do not neatly fit within the general conditions applicable to deemed or registrable exemptions. To obtain such an exemption, an individual application must be made to the AER, demonstrating that the applicant is capable of complying with conditions imposed by the AER.

There are various sub-categories of exemptions within each of these types of exemption, depending on the nature of activities and the type of site involved. Each type of exemption has conditions attached, imposed by the AER, depending on the nature of the exemption applicable to the activity. These conditions are aimed at protecting end-use customers and to ensure that technical standards are maintained, among other things.

Some classes of exemption, particularly those involving more than ten customers, require the embedded network to appoint an Embedded Network Manager (ENM). This is a person who is accredited and registered with AEMO to provide embedded network management services. It is important to note that if an ENM is required, the accreditation or appointment of an ENM must take effect immediately on the commencement of operation of the relevant embedded network.

Retail Authorisation Approval and Exemptions

In addition to the regulatory framework applicable to electricity network activities, there is also a framework applicable to the retail sale of electricity. In many embedded networks, the owner/operator conducts network activities and also sells electricity to end-users.

Under the National Energy Retail Law (NERL), any person or business who sells energy to another person for use at premises must have either a retailer authorisation or a retail exemption.

The selling of electricity within an embedded network must be undertaken by:

• a retailer which holds a retailer authorisation issued under the NERL allowing the holder to sell electricity;
• a person authorised to sell electricity in accordance with regulations in force in a jurisdiction where the NERL does not apply;
• the holder of a retail exemption or authorisation registered with the AER; or
• a person entitled to a deemed retail selling exemption under the AER Exempt Selling Guideline.

LPE had applied to the AER for an authorisation to retail electricity within embedded networks, and this was granted in 2014. Accordingly, LPE was apparently properly authorised to sell electricity within the embedded networks in which it operated. However, according to the AER it had not obtained appropriate authorisations or exemptions for network activities associated with its management of embedded networks.

Applicable Penalties and Enforcement

Any failure to comply with network and retail authorisation and/or exemption requirements under the NEL and the NERL may attract civil penalties, as these obligations are categorised as tier 1 civil penalty provisions. A breach of a civil penalty provision could attract the following amounts:

• if the breach is by a natural person, up to $553,000; and
• if the breach is by a body corporate, up to $11,060,000.

Under section 74 of the NEL, the AER may serve an infringement notice on a person if the AER believes on reasonable grounds that the person has breached a civil penalty provision. This course of action has been taken against a number of embedded network owners, with LPE being one of many examples.

State regimes

In addition to the registration and exemptions regimes applicable in the national electricity market, operators of embedded networks in some jurisdictions will also need to comply with State-based regulations, which have their own authorisation and exemption regime. A good example is Victoria, where an electricity network owner/operator must either hold a licence issued by the Essential Services Commission of Victoria (ESC), or be exempted under the ESC exemption regime.

The AER and the ESC both publish extensive guidelines on how these frameworks apply.