by Andrea Steele, Executive General Manager: Retail & Regulatory Affairs, WINenergy

Once the outcast of the energy industry, embedded networks have ‘come of age’, and on the back of a focused reform agenda will hold their own amongst other industry heavyweights.

Henry Paulson, the former US Secretary of the Treasury under President George W Bush, once said, “There is a very real danger that (financial) regulation will become a wolf in sheep’s clothing.”

And so the question arises: is the current focus on increased embedded network (EN) regulation across the National Electricity Market (NEM) necessarily bad? Is it friend or foe? The answer is: it depends. It depends on who you ask and whose interests may potentially be adversely affected by the introduction of the current round of regulatory reform initiatives and changes.

Embedded networks – best practice and here to stay

Much to the chagrin of some industry participants, it is generally accepted that ENs are here to stay and that they are in fact ‘best practice’ when it comes to greenfield, residential, commercial and industrial developments.

As greenfield development continues, it is inevitable that ENs are likely to become more commonplace, capture a larger number of end use consumers and become a significant part of the NEM. As such, it will become an expectation that best practice is also translated to the management of market systems and the facilitation of consumer choice. To meet this end, embedded network owners (ENOs) will be required to get up to speed with the market systems and frameworks which other industry stakeholders are already well versed in.

It is against this backdrop and the ongoing issue of energy affordability and consumer protections, that ENs have fallen into favour with the regulators, making the industry essentially ripe for regulatory reform.

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Embedded networks are commonly seen in shopping centres and apartment complexes, where the building owners can purchase all of the electricity required for the building at a bulk discounted rate and then on sell it to tenants.

The regulatory reform agenda

The NEM regulators always have very full reform agendas because not surprisingly, there’s always something to address in the energy industry. And so it followed that in 2014, given the growth in the number of ENs, and some confusion around roles and responsibilities of the players in the market, the Australian Energy Market Operator (AEMO) was tasked by the COAG Energy Council to develop a rule change to introduce new arrangements for ENs. In consultation with AEMO, industry stakeholders spent much of 2014 developing a detailed design framework to inform that rule change.

Fundamentally, this reform work has been focused on lowering barriers for retail competition within ENs and addressing existing problems in the operational interfaces between ENs and other NEM stakeholders and participants.

Currently, and without the proposed rule changes, ENs are not recognised in the National Electricity Rules (NER). Under the current regulatory environment the Australian Energy Regulatory (AER) has no real legislative-based powers in which to regulate either exempt network service providers and/or electricity on-sellers.

The aim of the rule change is to formally recognise the AER exempt on-selling guidelines in the NER. In doing so, the AER will have further powers to apply civil penalties where there is evidence of non-compliance by ENOs.

Further, in the most recent round of regulatory reform affecting the operations of ENs, there are a number of areas of the market regulation and policy framework which have been retained by the state-based jurisdictional bodies. In these instances, notwithstanding the AER’s published exemption guidelines, some jurisdictions have simply carved out retail contestably within ENs, as is the case in Queensland. In states like South Australia, whilst the application of the AER retail-exempt selling guidelines are in effect and retail competition within ENs is generally thought to be available, industry participants are confused by the process to effect their retailer of choice, making it impracticable in practice to ‘churn’ and become a market customer.

Design and objectives 

One of AEMO’s objectives is to codify the transfer process so as to allow it to be more streamlined and automated to closer reflect that which occurs in the broader retail market. The design is also expected to further lower barriers to competition in already competitive states like Victoria by further simplifying and streamlining the transfer process. It is right to think this is a big reform agenda for a market which, whilst mature, is peppered with EN managers and EN agents whose knowledge of the rules and processes are still evolving and in some instances are non-existent or worse still, possibly non-compliant.

New roles & responsibilities

The detailed market design work has reviewed a number of technical impediments to making choice of retailer in ENs easier, and has attempted to fix some, but not all, of them. Specifically, the work has enunciated and outlined a process where local service network providers (LSNPs) are no longer responsible for the maintenance of the market system, MSATS, within ENs.

Under the proposed changes, this function would be undertaken by a new market participant role, namely an EN manager (ENM). An ENM needs to be accredited by AEMO and their primary task is to receive and manage transfer requests for retailers choosing to supply customers within the applicable EN. ENOs will be required to appoint an accredited ENM as a condition of their network service provider exemption with the AER. Failure to appoint an ENM may result in non-compliance with the AER’s guidelines and leave ENOs open to civil penalties under the NER.

A brave new EN world 

The move to formally regulate the EN industry means that new roles and corresponding responsibilities are required. In the first instance, the role and responsibilities of the ENM will be to:

  • Manage MSATS and business-to-business transactions in order to allow for the set up and maintenance of NEM customers within an EN
  • Perform the roles that would normally be performed by LNSPs for NEM customers
  • Maintain the information required to facilitate subtractive metering to ensure accurate billing and settlements as they related to EN and NEM service points
  • Communicate to all other relevant market participants on behalf of the ENO.

There are also proposed amendments to metering contestability currently in place – specifically allowing all retailers to be the responsible person (RP) for a National Meter Identifier or NMI of any size or metering type in an EN. In addition, there are also thought to be changes to the B2B process to allow retailers, LNSPs and the ENM to better manage transactions, metering data and tariffing information. In light of the proposed changes, it is important to note that there is no proposal to change the tariffing arrangements within ENs.

Where to from here?

As is the case with most regulatory reform, change can be slow. The best part of the last 12 months has been spent on the consultation process, detailed design phase and rule change proposal. Pleasingly, the design and rule change proposal was submitted to the AEMC in September this year.

On the current timetable, it is anticipated that the AEMC review process may take up to 12 months. This will include public consultation and industry engagement once the final drafts of the rule changes are put together by the AEMC.

As for the implementation of any changes, the standard market procedure is to grandfather existing sites which would not comply with the new framework and rules governing ENs in the NER. The current view is that there is likely to be a two-year transitional phase for all existing ENs to become compliant but that all new ENs would be established in line with the new regulatory framework.

‘Is change, is good’

It is fair to say that for some players in the embedded network industry, these proposed changes will present some challenges to their operations, business model and fundamentally their overall profitability. However, like a lot of other energy industry reform which has passed before us, in order for the EN industry to move forward and support the forecast growth, the requirement to have a tighter and more regulated framework increases. It is against this backdrop that the regulators should be given the legislative power to ensure that:

  • Consumers within ENs can in all practical senses, effect ‘retailer of choice’ without the on-ground practical deterrents experienced by some EN customers in some NEM jurisdictions
  • Maintain, and in some instances, actually enhance consumer protections
  • There is integrity in the collection and maintenance of network data
  • The EN industry is held accountable for its performance and conduct just like other energy industry participants.

As such, given the current momentum behind this round of regulatory reform, it would appear that there is a good chance that regulators will be able to deliver positive change for many industry participants, not least of all the growing number consumers within ENs. And so, it may very well be that on this occasion that increased regulation may actually deliver industry participants the proverbial ‘sheep’, and not a menacing ‘wolf’.

About WINenergy

WINenergy is a market leader in the establishment, implementation and ongoing management of embedded electricity networks in Australia, is a licensed electricity retailer across the NEM and a registered market participant of AEMO.

For more information on embedded networks or how WINenergy can assist your business please contact our Executive GM – Market Development, Mr Douw De Kock on 02 9098 1242 or forward your enquiries to [email protected].

Michelle is a freelance journalist and editor who, as well as covering all the latest and breaking industry news, is a gun proofreader and editor who never misses a trick.

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