by Dan Howard, Partner, Clayton Utz
While much recent attention has been focused on distribution and transmission networks, and pressure on their returns, the role of the embedded network has also been facing significant change. In many ways, the embedded network is at the leading edge of network development and is a barometer for the success or otherwise of our ability to implement a suitable regulatory regime. But where do large-scale utilities fit in? Are we ready to face the challenges and embrace the opportunities?
Large-scale change is often difficult to achieve in an efficient manner. However, smaller, more confined networks are a wonderful test bed for future technology and integrated systems. The ability to install and run a range of renewable generation and electricity storage systems in an integrated manner is a particularly exciting prospect.
The embedded network provides an ideal environment to engage in larger-scale renewable energy capture and generation. Harnessing renewable systems and coupling them with advanced storage facilities will give the embedded network system the next tier of energy production and control.
What makes embedded networks even more interesting is the ability to integrate energy efficient and smart products. Managing the energy demand on an individual level and as a collective can maximise energy efficient usage and increase the proportion of renewable energy consumed across the embedded network.
The smart embedded network will provide advanced platforms that enable consumer benefits through individual system management, efficient usage and the ability to access the next generation of energy retail products.
With these benefits on offer, there is growing momentum to upgrade existing brownfield embedded networks and to plan advanced greenfield networks.
While embedded networks are principally the domain of shopping centres, airports, industrial parks, caravan parks and large buildings, larger integrated property developments including new mixed density developments are increasingly looking to utilise the embedded network for supply of electricity.
Developers and infrastructure owners are keen to market their developments as having leading edge green and efficiency credentials. As a result, the next wave of infrastructure is likely to involve an integrated development of embedded electricity networks, water supply networks, water treatment, gas networks and electricity generation and storage across greenfield developments. The existing ‘set and forget’ model of the electricity embedded network is likely to eventually disappear.
Regulating embedded networks
Regulation of the supply of electricity through an embedded network is currently focused on two key elements: the network component and the electricity retailing component.
In the National Electricity Market, network owners and operators are required to register as a network service provider or otherwise be subject to an exemption.
Typically, embedded networks can avail themselves of exemptions from the requirement to be registered as a network service provider which fall into three key categories: deemed, registrable, and individual.
Deemed exemptions apply automatically and cover small-scale selling arrangements on the embedded network. For example, an embedded network supplying electricity to less than ten small tenants requires no application to be made to the AER and will be covered by a deemed exemption.
Registrable exemptions require an application to be made to the Australian Energy Regulator (AER). These exemptions cover situations such as where electricity is supplied to large customers or supplied to 10 or more small tenants. Conditions apply to registrable exemptions and are enforced by the AER.
Individual exemptions are also available on application to the AER and are designed to cover situations where circumstances do not neatly fall within the permitted classes of registrable exemptions and are such that do not warrant the requirement to obtain a full network service provider registration.
Network exemptions typically align with the retail exemptions under the National Energy Retail Law.
While it is not proposed to detail all of the relevant exemption conditions, there are some requirements of embedded network approvals that will need to be revisited to enable the next generation of embedded networks to function efficiently.
Recent changes to the regulatory regime have focused on metering and management of the embedded networks. The National Electricity Rule changes, the subject of draft rule determination by the Australian Energy Markets Commission 10 September 2015, are designed to facilitate easier access to retail competition by all embedded consumers and to have managers appointed to ensure embedded systems operate and function within the applicable rules and procedures. While these steps are useful in progressing the operation of embedded networks, careful regulatory design is required to ensure that the impending advancement in network technology is fully utilised.
There are a number of key issues that arise from a regulatory perspective and need to be viewed in context of the advancement of battery storage; integrated renewable embedded generation; direct current systems; smart control plant; and control systems. If the aim is to have an overall impact that is much greater than the sum of the individual parts, then it is important the regulatory design embraces the integrated system concept.
The key pressure points that the installation and operation of this type of embedded network face are the ability to lock in customers over a reasonable pay-back period and managing the provision of the services only to those embedded customers who agree to receive them.
Retailer of choice provisions can have a significant impact on next generation embedded network models because they can permit embedded users to ‘bypass’ the embedded retail supplier and contract directly with an outside retailer.
While retail competition is a sensible goal on its own, the embedded network supplier is faced with seeking to recover installation, operations and power support costs from a changing customer retail base. This uncertainty could be reduced with regulation that recognises advanced systems and allows for cost recovery for those embedded networks and systems. It is worth recognising that in the embedded network environment, the retailing of electricity and the network ownership and operation are to some extent intrinsically linked, particularly where the embedded network owner has installed advanced systems designed to provide and monitor various power sources through the network which impact on the retail supply arrangements to the embedded consumer.
The regulatory regime needs to cater for and foster technically-integrated embedded developments, and one part of the solution may be to allow for multiple layers of retailers for an embedded customer, perhaps in addition to system cost recovery for the network and system owner.
Challenges for utilities
For the larger-scale network utilities themselves, the connection and interface with embedded network owners raises the challenge of what can be charged for the provision of broader network support, considering that the main network demand may be less over time than it would have been if an advanced embedded network was not installed. The role of large-scale utilities and the degree of interconnection and interface with advanced embedded networks are key issues in shaping the future operations of networks.
There may be advantages to the broader distribution utility if it could have some degree of influence and control over the ‘combined’ effect of the embedded network. For example, there may be periods where the larger network may benefit from the output of embedded network generation. The embedded network owner may be in a position to provide a combined power output from its storage position (which may include combined electric vehicles plus other power storage) to the benefit of the network utility.
This style of arrangement needs to be available to distribution utilities and the regulatory regime must be flexible enough to enable embedded network systems to receive appropriate payments for this style of service.
The role that utility networks will play as we move to the next generation of network systems and use will be fundamental to maintaining a secure and stable electricity supply to the end user. Not only will the main distribution networks provide connectivity, they will also deliver an energised system to embedded networks allowing power to be available at times when the embedded system does not have sufficient generation. Framing regulation in a manner that facilitates positive interaction between utility networks and embedded networks will be an important holistic step to a properly functioning network.
Importantly, network utilities need to now assist in embracing the future of the sophisticated embedded networks, which consumers and developers are keen to implement. Utilities are in prime position to support alternative regulatory models and work with the microgrid developers to achieve an efficient and flexible grid platform.
Dan Howard is an engineer and lawyer specialising in energy and resources law with an emphasis on electricity, gas, mining, utilities and infrastructure. He is consistently recognised by clients and independent directories for his expertise in these areas, including multiple listings in the Australian Financial Review’s Best Lawyers, Doyle’s Guide and the International Who’s Who of Energy Lawyers.
As a result of acting in the development of some of Australia’s largest electricity, gas and utility projects, Dan has significant experience advising energy generators, retailers, network distributors and end users.
He has a detailed understanding of the energy industry and energy regulatory environment in Australia.