AEMC's final report confirms existing embedded electricity networks will be caught by the new regulatory regime

The Australian Energy Market Commission (AEMC) published its final report, Updating the regulatory frameworks for embedded networks, on 20 June 2019, following the release of its draft report in January 2019. While the final report retains the significant package of regulatory reform to the embedded electricity network framework proposed by the AEMC in the draft report, the AEMC has now extended its proposed new regime to cover certain existing (or "legacy") embedded electricity networks. At the time of the draft report's release, the AEMC had not decided whether to apply the new regime to legacy embedded networks.

The commencement date for the AEMC's proposed reforms is not yet known - but existing and prospective embedded network operators, exempt sellers and customers in embedded networks should start preparing for these changes, including considering how the new regime is likely to impact on arrangements in both new and existing networks.

A new regulatory framework for embedded electricity networks

To recap, the AEMC in its 2017 Review of regulatory arrangements for embedded networks identified significant barriers to embedded network customers accessing retail market competition, as well as a number of consumer protection gaps. It proposed an overhaul of existing embedded network regulation to more closely align it with the compliance frameworks applicable to network providers and authorised electricity retailers under the National Electricity Law (NEL) and National Electricity Retail Law (NERL).

As foreshadowed in its draft report, the AEMC proposes to reduce the number of parties eligible for network and retail exemptions by establishing two new roles and responsibilities within the regulatory framework:

• off-market retailers: the majority of entities currently eligible for retail exemptions will be required to obtain an authorisation from the AER as off-market retailers. Under the proposed framework, an off-market retailer will have a limited authorisation from the Australian Energy Regulator (AER) to on-sell electricity, purchased at a parent connection point, to customers at child connection points in an embedded network. Off-market retailers will be subject to most of the existing regulatory requirements that cover existing authorised retailers; and
• embedded network service providers (ENSPs): ie. those that own, control or operate an embedded network. ENSPs will be required to register with the Australian Energy Market Operator (AEMO) and must satisfy the conditions in the rules. ENSPs will be subject to many of the existing requirements imposed on distribution network service providers, as well as the AER's extensive regulatory powers (including monitoring, investigation and information gathering) and reporting requirements.

Entities may register as both an off-market retailer and an ENSP.

Central to the AEMC's proposals under the new framework is the integration of embedded electricity networks into the NEM, which the AEMC believes will remove key barriers to competition in embedded network markets by allowing off-market child connection points to be discoverable, and by improving access to metering data in AEMO's systems. Specifically, the new framework requires:

• ENSPs to register all child connection points with AEMO, and to maintain relevant data in AEMO's systems; and
• off-market retailers to appoint a metering coordinator at off-market child connection points, in line with requirement for authorised retailers in the NEM.

The AEMC has also advanced a number of consumer protection initiatives as part of the new framework, consistent with its stated objective to ensure that retail customers in embedded networks have the same consumer protections as standard supply customers. Significantly, customers in new embedded networks registered with AEMO will be deemed "retail customers", supplied by either an authorised on-market NEM retailer or an authorised off-market retailer under the new framework.

Further recommendations consistent with the AEMC's draft report include:

• the introduction of standardised billing arrangements for the recovery of external network charges from embedded network customers who choose to go on-market requiring ENSPs to:
  • set network charges at a level no greater than the amount that the customer would have paid had it been directly connected to the local distribution network to which the embedded network is connected (the 'shadow price'); and
  • use standardised processes and data formats to bill an 'on-market' customer's new retailer for these charges. The new retailer is then required to issue to the customer a single bill that charges both network and energy charges and specifies the amount of each; and
• retailer of last resort arrangements tailored to embedded networks.

Key differences between the draft and final recommendations

Although the AEMC's draft framework remains broadly unchanged in the final report, the AEMC has made four material changes in its final recommendations following stakeholder consultation:

• the new framework will apply to certain existing embedded networks, according to the transitional arrangements set out in the report;
• the framework now includes a mechanism for the connection of registered participants (for example, large generators) to an embedded network (including how performance standards will be applied and enforced);
• the AER's ability to grant individual network exemptions has been reintroduced; and
• the registration of off-market retailers by AEMO is no longer a feature of the framework - the AEMC instead recommends requiring ENSPs to provide off-market retailers with access to any necessary systems.

Transitional arrangements for legacy networks – what you need to know

Importantly, the AEMC has decided to extend its proposed reforms to certain existing embedded networks. However, the new framework will not apply to existing embedded networks currently subject to deemed or individual exemptions under the existing framework (such as caravan or holiday parks that sell metered energy to short-term holidaymakers, persons selling energy to less than ten small businesses or residents, or eligible government and community organisations). Those networks will retain the existing exemptions applicable to them under the current regime.

As a result, the proposed reforms will only apply to existing embedded networks with registrable exemptions. The transitional arrangements for these networks are determined according to when the legacy network was established, and the date that the reforms take effect (Effective Date):

• embedded networks established from 1 December 2017 up to 31 December 2019 must fully transition to the new framework within 2 years from the Effective Date;
• embedded networks established between 1 January 2020 and the Effective Date will have 9 months from the Effective Date to fully transition to the new framework; and
• embedded networks established before 1 December 2017 must undergo a partial transition to the new framework. For these networks, any existing retail exemptions must be transitioned to an off-market retailer authorisation under the new framework within 2 years from the Effective Date. However, existing network exemptions will be retained, and no transition to the new framework for this particular area will be required. The off-market retailer will need to comply with the AER's pricing schedule which will allow the AER to set prices to be charged to small customers with a maximum price at the standing offer price of the local area retailer. These networks will be exempt from the metering provisions in Chapter 7 of the NER (and would therefore not be required to appoint a metering coordinator).

As an alternative to the transitional arrangements described above, legacy embedded networks may also seek an individual exemption from registration as an ENSP, and seek authorisation by the AER as an off-market retailer. If the individual exemption is granted, the legacy network will not be required to transition to the new framework. The AER has indicated that this option caters to legacy networks with significant and unique impediments to transition and it will release guidance as to how it will evaluate these sorts of exemption applications.

Legacy network operators, who see merit in doing so, may also voluntarily opt in to the new regime.

The AEMC has also recommended a one-year grace period for the new framework to take effect (being one year from the commencement of the required amendments to the energy and retail laws and the rules).

Are embedded gas networks covered?

While the AEMC has recommended that embedded gas networks continue to be dealt with at a jurisdictional level, it notes that the off-market retailer authorisation and exemption features of the new framework would extend to gas on-sellers. This means that unless jurisdictions change the requirements for that jurisdiction, the relevant gas on-sellers will be required to obtain authorisation from the AER to become an off-market retailer, and will also be subject to most requirements currently imposed on existing authorised retailers.

Notably, deemed exemptions specific to, or capturing, gas sales will need to be registered under the new framework - including, the AEMC notes, the current deemed exemption for those selling unmetered gas to individual premises where gas is used for limited purposes.

What's next?

There are a number of pre-conditions to the implementation of the new framework, including approval from the COAG Energy Council, the passage of amendments to the NEL and NERL in the South Australian Parliament, and the proposed rule changes being made by the South Australian Minister for Energy. However, it should be noted that the AEMC has used an estimated commencement date of 1 July 2020 in its final report, after recommending that the implementation of the new framework be coordinated with other pending legislative and rule changes (such as the "five minute settlement" rule commencing in July 2021).

In Victoria, where the NERL applies in a limited manner, provisions governing network and retail exemptions for embedded networks are governed by jurisdictional specific regulation including the Victorian General Exemption Order 2017 and the Victorian Energy Retail Code. In order for the amendments proposed to the NERL to apply in Victoria, jurisdictional equivalent changes will need to be made by the Victorian Government in any implementing legislation.

Anyone who is considering installing or operating an embedded electricity network - or customers looking to become part of an embedded network - should consider and seek advice on how the AEMC's final recommendations are likely to impact on those arrangements, including:

• the need to establish internal reporting frameworks and operational changes to align with new standardised billing arrangements for on-market customers;
• planning for the transition of older equipment, and associated costs;
• the extent to which the transitional arrangements apply (according to when the legacy network was, or is proposed to be, established); and
• whether to seek any individual or registered exemptions under the existing regime and/or under the proposed new framework.

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