AER Releases New Ring-Fencing Guidelines
Fast Facts.
On 3 November 2021, the AER published the final Ring-fencing Guideline (the Guideline) and Explanatory Statement (Version 3) applying to DNSPs.
The Guideline takes effect immediately, although DNSPs must comply with Version 3 by 3 February 2022 i.e., 3 months after publication.
The AER was required to review the Guideline following recent changes to the National Electricity Law (NEL), which allow DNSPs to switch grid customers to regulated SAPS, where it is more efficient to do so.
The objectives of the review were to consider the ring-fencing requirements of distributor-led SAPS and energy storage devices, clarify some obligations, and reduce compliance administration.
The Guideline has changed in two main ways:
DNSPs may provide generation services for regulated SAPS where it represents a more efficient supply solution, with revenues allowed up to a fixed generation revenue cap; and
DNSPs may provide contestable battery services through a streamlined ring-fencing waiver process, and a requirement to address potential discriminatory behaviour in favour of a battery that a DNSP owns, operates or otherwise controls in some way. This was a change from the Draft Guideline.
Stakeholders can provide comments to the AER on the process and criteria for streamlined battery waivers until 1 December 2021.
For DNSPs, the Guideline provides increased flexibility for the provision on non-network solutions for their networks. For third party providers, the changes potentially limit network support revenue streams from SAPS and battery investments.
Background
What is the Ring-fencing Guideline?
Clause 6.17 of the National Electricity Rules (the Rules) sets out the requirements for ring-fencing DNSPs.
Ring-fencing refers to the separation of regulated services provided by a DNSP (e.g., maintenance of poles and wires) from contestable services by a DNSP or an affiliated entity (e.g., installation of smart meters or data services). The objective of ring-fencing is to promote a level playing field for third party providers in existing and new markets for contestable services.
The Guideline aims to prevent cross-subsidisation and discriminatory behaviour by requiring DNSPs to put in place controls relating to prevention of cross-subsidies (legal and accounting separation); functional separation (non-discrimination, location, branding, information access and service providers); waivers; and compliance and reporting.
Why Version 3?
The AER commenced a review of Version 2 of the Guideline in August 2019, primarily to address the changing nature of services offered by DNSPs, including generation services related to SAPS and contestable services from batteries. The review also sought to clarify some obligations and reduce compliance administration.
Draft Version 3 of the Guideline was published in May 2021, and consultation closed in September 2021. The Final Guideline was published on 3 November and takes effect immediately, although DNSPs must comply with Version 3 by 3 February 2022.
What are SAPS?
A SAPS is an electricity supply arrangement that is not physically connected to the national grid, such as microgrids, which supply electricity to multiple customers, and individual power systems, which supply electricity to a single customer. When parts of the distribution network need to be upgraded, it may be more efficient to supply customers via a SAPS rather than upgrading the network.
In November 2019, Energy Ministers considered the recommendations of the Australian Energy Market Commission’s SAPS Priority 1 Final Report and agreed to change national energy laws to enable distributor-led SAPS. Legislative changes were passed by in March 2021 and came into operation on 20 May 2021. Final Rule changes are expected by in late 2021.
Key Issues
Arrangements for SAPS
In relation to SAPS, the legislative framework originally envisaged that third parties would provide generation services for regulated SAPS. Through the ring-fencing consultation process however, stakeholders advised there may be circumstances where third parties cannot provide these services. In these situations, the AER identified a risk to the timely and efficient deployment of regulated SAPS by DNSPs. The Guideline was therefore amended to include:
An exemption allowing DNSPs to provide generation services to regulated SAPS up to a generation revenue cap per annum. The cap is intended to incentivise DNSPs to use third parties as SAPS resource providers when it is cost efficient to do so. The AER determined three categories of revenue caps:
Category 1: 0.2% for Ergon Energy and Essential Energy;
Category 2: 0.07% for Ausnet Services; and
Category 3: 0.02% for Ausgrid, Endeavour Energy, Powercor, SA Power Networks, TasNetworks, Citipower, United Energy, EvoEnergy, Jemena, Energex and Power and Water.
The exemption applies indefinitely for SAPS within the revenue cap.
A provision for DNSPs to apply for a waiver in circumstances where a DNSP reaches its generation revenue cap.
Reporting obligations on DNSPs to give information and transparency to prospective third-party providers that may assist market development for these services.
Arrangements for Batteries
The Guideline allows for DNSPs to provide contestable services with a battery. This was a change from the Draft Guideline. Under the Final Guideline the AER has allowed for a streamlined waiver process including a requirement to address potential discriminatory behaviour in favour of a battery that a DNSP owns, operates or otherwise controls in some way.
The Guideline considers three possible scenarios for batteries, and deals with them in the following ways:
Where a third-party provider (i.e., not a DNSP) installs a battery – that third party is not subject to the Guideline.
Where a DNSP deploys a battery and it meets certain criteria – the DNSP can pursue a streamlined waiver process. The criteria include:
Addressing the risk of cross-subsidisation e.g., to ensure only regulatory services provided by the battery are included in the DNSPs regulatory asset base; and
Testing the market for third party providers to provide the battery services.
Where a DNSP deploys a battery that is outside the set criteria – the DNSP would need to go through a full waiver assessment process requiring increased scrutiny by the AER.
Under all scenarios, the AER has discretion as to the length of any waivers that it grants.
Our Insights
The Guideline does not apply to parties other than DNSPs but does impact other market participants, as it allows DNSPs to provide new services in the market which compete with third party providers.
Implications for DNSPs
For DSNPs, the ability to obtain network support from SAPS will provide greater flexibility, cost efficiency and help to neutralise any preferences for network over non-network solutions. Indeed, there is extensive precedent for network support generation – for example, Ergon Energy has had waivers in place historically for generation activities in remote areas and for network support generation, and Horizon Power is successfully deploying these in remote Western Australian locations.
DNSPs will now need to:
Assess the impacts of the Guideline on their existing Ring-fencing strategies and implementation plans and update accordingly, ensuring compliance by 3 February 2022.
Establish a public register and report quarterly on the provision of generation services for regulated SAPS (no later than 15 January, 15 April, 15 July and 15 October each year).
Seek a waiver for the provision for SAPS generation services beyond their revenue cap, including evidence that an increase in the cap is in the long-term interests of consumers and balances the risk to the competitive market for SAPS generation services.
Seek a streamlined waiver to deploy a battery by completing the AER’s standard template form, including information about how the criteria have been met. Once the AER is satisfied, the waiver will be granted without consultation but with standard conditions relating to publishing information about the battery project, and verification of battery use by the DNSPs ring-fencing auditor.
Implications for third party providers
At issue is whether the AER’s decision to allow DNSPs to generate SAPS power rather than procure it obstructs the market for existing and new suppliers of these services. The AER consulted on this extensively, noting the market consisted of some 6,000 accredited service providers, and received several submissions indicating that DNSP involvement would hamper market development. Critical to the AER’s decision was their view of the maturity of the market to provide these services, and the rapid emerging need for SAPS.
On balance, Rennie Partners see the decision to allow DNSPs to have a more direct involvement in SAPS as positive for customers and the cost-effectiveness of new connections, but potentially negative for the emerging SAPS industry for the principal reason that it may hamper the ability for SAPS resource providers to target DNSPs as a revenue stream.
Similarly, battery investments are increasingly being financed based on multiple revenue streams, including wholesale arbitrage, frequency support, and network support. The AER’s decision to allow DNSPs to deploy batteries, such as large-scale community batteries, potentially limits diverse revenue streams for battery providers.
The controls in the Ring-fencing Guideline are intended to limit these impacts – only time will tell. As regulated deployment of these technologies progresses, the AER will review the framework to consider if it remains fit-for-purpose and in the long-term interest of consumers.
Contestable SAPS and battery providers should now engage with DNSPs in their target markets around their SAPS and battery deployment programs to identify and discuss opportunities to maximise the competitive provision of these services for customers.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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