Final Recommendations for the Victorian Embedded Networks Review
Fast Facts
In October 2018, the Victorian Government made an election commitment to ban embedded networks in new residential apartment buildings. This follows ongoing concerns that customers living in existing embedded networks do not have access to the same competitive retail offers and consumer protections as other consumers.
The Government appointed an Expert Panel to undertake an Embedded Networks Review (the Review). The Terms of Reference (ToR) for the review was to provide advice and recommendations to the Minister on:
How to implement the ban on new residential apartment buildings with appropriate exemptions for renewable energy microgrids that deliver low-cost renewable energy; and
How to ensure that, to the fullest extent practicable, embedded network customers in legacy (existing) residential settings can access the same competitive retail offers and consumer protections as on-market customers.
Following an extensive consultation process, the Final Recommendations Report published in January 2022, outlines the Panel’s recommendations to implement the ban and ensure that, to the fullest extent practicable, all Victorian energy consumers will have access to the same competitive retail offers and consumer protections, regardless of where they live.
The recommendations address conditions for existing embedded networks; the licensing and exemptions framework; enhancing consumer protections; access to competitive retail offers; bundled services and fees; information disclosure; planning and building requirements; enforcement powers; disruption of supply; engaging with consumers; and transitional arrangements.
The proposed implementation timeline is:
Publication of revised General Exemption Order (GEO) by mid-2022;
Ban implementation commences on 1 January 2023;
Licensing framework established early 2024; and
Licensing framework consolidation around 2027.
One item to note is that the national framework is now lagging the Victorian reforms – in July 2019 the AEMC published detailed advice on how to implement its embedded network recommendations (following its 2017 review). The framework was intended to be implemented following amendments to electricity and energy retail laws, however, this process appears to have stalled amid the scale and complexity of broader post-2025 reforms.
Background
What are embedded networks?
Embedded networks are private electricity networks owned and operated by a party that supplies electricity to multiple customers within a building or a self-contained site, such as residential apartment blocks, retirement villages, social housing, caravan parks and shopping centres. Each embedded network is serviced by an embedded network operator that facilitates the purchasing, metering and billing of energy services at the site.
Embedded networks operate within unique regulatory arrangements. A party that supplies electricity to customers in embedded networks is often called an ‘exempt person’, because they are exempt from the normal requirement to hold a licence to sell, supply or distribute electricity under the Victorian Electricity Industry Act 2000. Activities that are exempt are set out in the General Exemption Order 2017 (GEO) – including retail exemptions, distribution exemptions and generation and multiple activity exemptions. Similarly, under the National Electricity Retail Law, a party must have an exemption by the AER from obtaining an authorisation to supply energy to an embedded network.
Generally, the party purchases electricity from a retailer at the ‘parent’ metered connection point and then on-sells it to customers within the embedded network at ‘child’ connection points – these latter sales being referred to as being 'off-market', as they are not conducted through the market like sales from retailers directly to customers.
What is the problem with the current regulation of embedded networks?
While embedded networks have the potential to generate benefits for its customers – such as cost savings from bulk purchase of energy, access to commercial network tariffs, and on-site renewable energy – these benefits are not always passed onto customers. Further, the way the exemptions framework currently operates means that while embedded networks are ‘regulated’, customers sometimes do not have access to the same consumer protections, information, competitive retail offers or concessions as on-market customers. In some jurisdictions, embedded network customers have not had access to State ombudsmen, and reliability and safety obligations are unclear.
In addition, with the growing number of multiple occupancy apartment buildings and retirement villages, there has been an increasing number of embedded networks and impacted customers.
Both the AEMC and Victorian embedded network reviews found that the current framework fails to strike an appropriate balance between innovation, consumer protection and facilitating consumer access to retail market competition.
Scope and objectives of the Victorian Embedded Networks Review
The ToR for the Expert Panel was to provide advice and recommendations to the Minister on:
How to implement the ban on new residential apartment buildings with appropriate exemptions for renewable energy microgrids that deliver low-cost renewable energy; and
How to ensure that, to the fullest extent practicable, embedded network customers in legacy (existing) residential settings can access the same competitive retail offers and consumer protections as on-market customers.
In addition, the Panel was asked to provide advice on:
An exemptions pathway for innovative new technologies including in the form of microgrids;
The expected impacts of the Panel’s recommendations, including how such a ban would intersect with legacy (existing) embedded networks;
Actions for regulators, particularly in relation to compliance and enforcement; and
Steps to implementation, including the timing and sequencing of recommended changes.
The Panel agreed on four principles to guide their review and recommendations – place benefits to consumers at the centre; prioritise equitable pricing outcomes and consumer protections; future-proof the design of the system; and ensure that Victoria’s regulatory framework will mirror or enhance the national standards.
Key Recommendations
Banning new residential embedded networks
The Panel recommended that the ban of embedded networks in new residential sites (apartment buildings, social housing, retirement villages and residential parks) should be implemented through amendments to the General Exemption Order (GEO). The GEO amendments mean that embedded networks as previously known will no longer be permitted in new sites unless they meet certain renewable energy conditions. New local energy networks, incorporating parent and child meter connections, would need to:
Satisfy the condition that at least 50% of electricity at the site is from on-site renewable energy sources;
Demonstrate how the benefits from renewable energy are regularly passed onto customers;
Comply with expanded consumer protections obligations, and facilitate retail market access; and
Comply with Essential Services Commission (ESC) monitoring and compliance obligations.
The Panel recommended that the GEO be revised, and an appropriate benchmark developed, by 30 June 2022 with the changes to take effect from 1 January 2023. Legacy (existing) LENs will not need to comply with the new requirements in the GEO until after the LES licensing framework has been implemented, although they will be required to update their registration with the ESC before 1 January 2023.
Phased transition to a new LES licensing regime
The Panel recommended expanding the licensing framework under the EIA to include a new category for local energy service (LES) providers. LES providers will only be able to operate if they satisfy conditions that require them to ensure customers have equal consumer protections, the benefits of renewable or clean energy and retail choice. Once the new licensing regime is in place, a person who supplies and sells electricity in new residential sites containing a local energy network must obtain an LES licence from the ESC.
New local energy networks will be required to have a license within six-months of the LES licensing regime being established, while legacy (existing) local energy networks will transition to the new framework and will have up to three years to apply for an LES license.
Consumer protections and market access
Once the GEO amendments come into effect, consumers living in all types of residential local energy networks should have access to customer protections which are equal or equivalent to those provided to on-market customers. In the interim, the Panel recommended that the Victorian Government should align all appropriate obligations placed on local energy networks with those placed on licensed retailers and electricity distributors (relating to family violence, disconnection, life support, payment difficulties, concessions, dispute resolution).
The Panel recommended that local energy network customers should have unencumbered access to the energy retail market and easy transfer to an on-market energy retailer without the need for a meter exchange. Metering and/or other internal infrastructure in legacy (existing) local energy networks should be upgraded or changed over time to enable on-market access without imposing a direct cost on customers to do so. The report includes related implementation recommendations to address challenges, such as the cost of meter upgrade, visibility of child meters within market systems, and market transfer arrangements. These include a requirement on LES providers to establish a plan for how they propose to provide market access to customers.
Other recommendations related to reviewing the broader licensing and exemption framework; bundled services and fees; information disclosure; planning and building requirements; enforcement powers; disruption of supply; engaging with consumers; and transitional arrangements. The report also recommends the Victorian Government consider extending the ban to small business customers.
Our Insights
Embedded networks have traditionally afforded landlords or body corporates the opportunity to become involved, in a light touch way, in the supply of electricity as the embedded network operator. In some cases, this has been an issue of convenience allowing tenants of apartment buildings, caravan parks etc., to avoid becoming customers of retailers and for ease of connection. In other cases, rules designed for these classes of on-suppliers have been adopted, resulting in tenants paying uniform tariffs without the ability to seek alternative offers from other retailers.
The Victorian reforms are therefore not unexpected, when considered through a broader lens of Governments aiming to achieve alignment of the rights of customers inside and outside of embedded networks and on-supply arrangements.
In this vein, the Victorian embedded networks reforms are intended to provide a more level playing field for customers of embedded networks. The Panel’s vision that customers should have equal protections, market access and treatment no matter where they live, and the recommendations that facilitate this outcome, are a big step in the right direction. Improved monitoring, oversight and enforcement by the ESC will help to increase transparency and safeguard the treatment of embedded network customers.
In relation to the requirement that 50% or more of electricity supplied to embedded networks must be met by on-site renewable sources, embedded networks which are focussed on creating micro-grids or supplying customers centrally from pooled renewable supplies will be well placed to meet the requirements. Some stakeholders have argued for these obligations to be able to be partly or fully met from the market (e.g., through power purchase agreements or green power contracts), which would assist those embedded networks with physical constraints on site. The Panel did however acknowledge that on-market sources of renewable energy may be required for some legacy embedded networks.
In practice, there may be challenges in setting a benchmark against which the 50% target can be set. For example, how will energy exported to the grid, electric vehicle charging, customer demand response or community batteries interact with the target? The Panel recommended that the Victorian Government undertake further consultation to determine how best to measure the target. As part of this, consideration should be given to the rapidly evolving distributed energy resources (DER) ecosystem and regulatory framework.
Interactions between the National and Victorian reforms
The regulation of embedded networks across national and State-based licensing frameworks has always been unique and somewhat clunky; and while there are recommended reforms nationally that aim to help harmonise these arrangements, there are still a range of matters dealt with through State-based regimes, including for example, access to concessions and rebates, access to ombudsman, retail price controls, reliability requirements, safety and technical performance standards, and guaranteed service levels.
One of the guiding principles for the Victorian review was to ensure that Victoria’s regulatory framework for embedded networks mirrors or enhances the national framework, including the AEMC’s recommendations. In July 2019 the AEMC published detailed advice on how to implement its proposed recommendations for updating the national regulatory framework for embedded networks (following its 2017 review). The framework was intended to be implemented following amendments to national electricity and energy retail laws, however, this process appears to have stalled amid the scale and complexity of broader post-2025 reforms, and is currently sitting with Energy Ministers for consideration. The national framework is now lagging behind the Victorian reforms.
Overall, the Victorian embedded network reforms are a step in the right direction, and the Panel’s recommendation for a phased implementation makes sense, particularly given the challenges and costs that may be incurred by legacy embedded networks in meeting the new obligations. As the regulatory frameworks and markets for DER evolve, however, the arrangements for embedded networks may need to be re-assessed, to ensure that customers have the ability to participate and/or benefit from new DER services, markets and flexible trading arrangements.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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