by David Regenspurger, Principal Consultant, Energy Intelligence
With the increase in retail and commercial vacancy rates around Australia, owners of multi-tenanted buildings have looked to energy on-selling as a means of filling the revenue gaps in their rent budgets and providing lower cost energy for their tenants. As a result, there has been unprecedented growth in the embedded network sector along the east coast of Australia in the past few years.
Embedded networks: how they work
The supply of electricity can be broken into three main components:
- Raw energy costs, or contract rates, as negotiated with a licensed retailer. This cost usually accounts for 45 per cent of the total bill.
- Network costs make up about 45 per cent of the total charges. These costs are levied by local network service providers (distributors) but charged by the retailer as a pass-through cost.
- Market and renewable charges account for about 10 per cent of the bill, and cover both state and federal government levies that pertain to the regulated supply of electricity.
The above three components apply regardless of what type energy user you are. Small energy users (typically those using under 100,000kWh per annum) receive bundled rate accounts that consist of a combination of peak/shoulder/off peak energy rates and an annual service charge. Large energy users, however, receive unbundled accounts which show each charge component itemised on the bill.
Large energy users tend to pay a lower average cost for electricity than small users do. This is predominately due to the lower cost regulated network charges which apply, and the fact that large users can more readily negotiate raw energy rates for supply. This difference in cost can be up to 50 per cent depending on what state and network zone the site is located in. This differential is effectively the gross margin which drives profitability of an embedded network.
Infrastructure changes to establish an embedded network
An embedded network can be created where a building containing a number of tenants is fed through a single supply point such as a main switch board (MSB). A parent meter is installed between the incoming supply and the MSB to record the total electricity supply to the building. The site owner then purchases electricity at the parent meter, as a large market user, and on-sells this energy to tenants at small market rates.
The local network service provider legally only manages electricity supply to the lot boundary of a site. The MSB and all electrical infrastructure downstream of it remain the responsibility of the site owner. Hence supply interruptions and other electrical risks at site do not change whether the site is operating as an embedded network or not. As such, there are no additional liabilities in managing an embedded network that do not already exist at site.
In addition to the changes made to the MSB, changes to tenant and common area metering are also required. Those tenants that choose to purchase supply from the landlord will have a private meter installed to record their usage. Common area metering can also be replaced with private metering. This provides greater control over the ability to shut down power without the need for permission of the local supply authority. Tenants who purchase from their own retailer will continue to be supplied by a meter owned and managed by the network service provider or their retailer.
One of the key advantages of operating an embedded network is that building owners have greater control of tenant electricity supply. For those tenants who are purchasing supply from the landlord, tenant supply can be changed (upgraded say) without the need to involve the local supply authority. This saves both time and cost. The same principle applies to the common areas. Further advantages include the ability to easily monitor tenant electricity usage, which proves handy when it comes to site energy audits.
The Ministerial Council on Energy implemented a National Energy Customer Framework (NECF) on 1 July 2012. The NECF is intended to harmonise the rules that apply to sellers of electricity and gas across all eastern seaboard states. Under the NECF, the Australian Energy Regulator (AER) becomes responsible for administrating and managing both retail and network licence exemptions that are required by embedded network owners.
Tasmania and the ACT adopted the NECF (and consequently fall under the AER guidelines pertaining to embedded networks) in July 2012. South Australia introduced the NECF in February 2013 and New South Wales in July 2013. Queensland plans to implement the NECF by mid-2015, whilst Victoria has yet to announce when it intends to fully adopt the NECF. Western Australia and the Northern Territory are not part of the National Energy Market (NEM) and as such work under completely different regulatory frameworks with regards to electricity supply.
In July 2013 the AER issued revised guidelines relating to the on-selling and on-distributing of electricity. These guidelines provide a framework by which site owners may sell electricity to their tenants and recover network fees for those tenants choosing to purchase from their own retailer.
In addition to these federal guidelines, each state has certain nuances that are also relevant. For example, tenants in South Australia, New South Wales, ACT and Victoria have freedom of choice as to whether to purchase electricity supply from the landlord or from a licensed retailer. Tenants in Queensland and Tasmania however, do not have any choice, and if the majority of tenants choose to purchase supply from the landlord then every tenant must do so once an embedded network is set up.
Similarly, although tenants in South Australia and New South Wales have freedom of choice, they require remotely read market metering (typical of large market customers) if they wish to purchase outside the embedded network. The higher cost of this metering typically negates the ability to purchase from a retailer of their choice and often leads to high sign-up rates.
In early 2014, the Australian Energy Market Commission began work on proposed changes to the National Electricity Rules (NER) to better recognise embedded network arrangements within the NECF framework. Currently there is no specific reference in the NER to embedded networks, and no consistent national regime around the management of embedded networks and access to retail competition by customers within embedded networks. The lack of clarity in these arrangements poses a barrier to embedded network customers’ ability to contract with a retailer of their choice. The proposed rule change will create a new category of service provider-termed the embedded network manager (ENM) in the NER, to manage embedded network customers in the NEM.
About Energy Intelligence
David Regenspurger is the Founding Director and Principal Consultant of Energy Intelligence. David has significant experience within the embedded network sector, having implemented more than 70 embedded network sites across Victoria, New South Wales and South Australia over the past nine years. For more Information visit www.energyintel.com.au.