Recent and future tightening of embedded network regulation

Introduction

Embedded networks are private grid networks, such as in shopping centres and residential developments, which traditionally receive services from an exclusive on-supplier acting within the precinct. The supplier acts as both:

• the network service provider, namely the provider of network infrastructure to enable the conveyance of electricity to the occupants; and
• the retailer, namely the seller of electricity to its customers, by on-supplying electricity acquired from a traditional retailer at the gate meter to the precinct.

In all NEM jurisdictions, embedded network operators have typically been exempted from the obligation to hold a licence, but have increasingly faced more stringent obligations as a condition of those exemptions. These have focussed on ensuring that customers within an embedded network are treated fairly and similarly to those not within an embedded network.

However, as embedded networks have evolved, regulatory gaps in the customer protection frameworks have emerged. The recent reforms to embedded networks in Victoria and proposed future reforms in NSW are intended to address those regulatory gaps, including by introducing maximum pricing for energy sold to embedded network customers.

This article provides an overview of these reforms.

Recent reforms to embedded networks in Victoria

In October 2018, the Victorian Government announced its intention to reform the regulatory framework for embedded networks in new residential apartment buildings, to enable competitive retail offers and enhanced consumer protections.

The first phase of the reforms commenced on 1 January 2023. New residential embedded networks with 10 or more residential customers are required to meet a renewable energy condition and a maximum pricing requirement to operate legally, as set out below.

Renewable energy condition

• 100% of electricity sold to residential customers at an embedded network site must come from renewable energy sources, with a mix of on-site and off-site renewable energy sources. Specifically, this condition requires that 5% or more of the electricity sold to residential customers is generated by on-site renewable energy sources.
• However, this condition does not apply to the following situations (i) sales to residents of retirement villages, caravan parks, holiday parks, marinas, residential land lease parks and manufactured home estates, and (ii) existing embedded networks with an agreement in place before 1 January 2023; and

Maximum pricing

The Victorian Default Offer (VDO) applies as the maximum price for residential customers living in new embedded networks, noting that the VDO has been the maximum price for customers living in an embedded network since September 2020.

The next phase of reforms proposes that existing and new embedded networks will transition to a licencing framework.

Other reforms have also been flagged in connection with this, for example a framework to ensure that the laws are adequately enforced and to protect customers. There is also a desire for legacy embedded networks to be exposed to greater retail competition and adhere to renewable energy requirements.

What reforms are currently being proposed in NSW?

In February 2023, the NSW Government announced the “Embedded Network Action Plan” that aims to bring outcomes for embedded network customers in line with those in traditional energy supply arrangements, and provide price protections for those customers. The NSW Government also announced that it would ask the Australian Energy Regulator to only approve new electricity and gas embedded networks that are in the interests of consumers.

In March 2023, the NSW Independent Pricing and Regulatory Tribunal (IPART) received a draft Terms of Reference from the NSW Government on the future of embedded networks in NSW. IPART has been asked to investigate and make recommendations on:

• electricity: whether the Commonwealth Government’s Default Market Offer is the appropriate maximum price for electricity embedded networks, or whether a different method should be used to determine the maximum price for electricity embedded networks;
• gas: an appropriate methodology or methodologies for IPART to use in setting maximum prices for gas supplied through embedded networks;
• hot and chilled water: (i) an appropriate methodology or methodologies for IPART to use in setting maximum prices for hot and chilled water supplied through embedded networks; and (ii) whether new embedded networks for hot and chilled water should be prohibited in NSW; and
• compliance and enforcement: the compliance and enforcement framework for any new price protections.

IPART sought submissions on the draft terms of reference in April. Once the terms of reference are finalised, IPART will undertake consultation and deliver a final report to the NSW Government within 9 months.

We work regularly with embedded network providers and would be very happy to discuss these developments with you if of interest.