In anticipation of the final report and the recommendations being released before the end of 2021, we set below the key recommendations in the draft report and the potential implications of these draft recommendations.

Background

An embedded network is a private electricity network, where electricity is supplied to an area or building through a privately owned and managed supplier (and not a licensed retailer).¹ Such an electricity network is generally established via a parent meter connection to the electricity grid, with child meters measuring consumption for individual residences internally within the embedded network.

In Victoria, the supplier and/or seller of electricity to customers in embedded networks is exempt under the General Exemption Order (GEO) from the normal requirement under the Electricity Industry Act 2000 (Vic) (EI Act) to hold a licence to sell, supply or distribute electricity. Concerns have been raised that customers living in embedded networks do not have access to competitive retail offers and adequate consumer protections.

In October 2018, the Victorian Government announced an election commitment to ban embedded networks in new residential developments in Victoria, with exemptions for buildings that use renewable energy micro grids to deliver low-cost renewable energy to apartment buildings.²

Following the re-election, the Government appointed an expert panel (Panel) to conduct the Embedded Networks Review (Review) and to provide recommendations on how to implement a ban on embedded networks in residential apartment blocks, with appropriate exemptions for renewable energy microgrids. The Panel was also tasked with providing recommendations on how to ensure that, to the fullest extent practicable, embedded network customers in existing residential settings can access the same competitive retail offers and consumer protections as on-market customers.

In June 2021, the Panel released a Draft Recommendations Report (Draft Report) that sets out the Panel’s 16 Draft Recommendations (Recommendations) to implement the proposed ban on embedded networks in residential apartment blocks.

With the final report expected to be released in December this year, it is timely to refresh our memory on the key recommendations in the Draft Report.

Key aspects of the Draft Report

Overview

The Recommendations in the Draft Report is divided into 2 key areas:

• Recommendations 1 to 5 relate to banning embedded networks
• Recommendations 6 to 16, which support the embedded networks ban, relate to consumer protections, access to competitive retail offers, planning and building requirements and other related matters.

The Panel recommends a staged approach to implement the proposed ban on embedded networks in residential apartment blocks.

Initial step: banning embedded networks through amending the GEO

To deliver the overarching election commitment of the Government, the Panel is proposing to amend the GEO as an initial step so that embedded networks as they currently exist will no longer be allowed (Recommendation 1).

Currently, most embedded networks can access the exemption framework automatically, and self-assess whether they meet the exemption criteria required by the GEO. Whist there is a requirement for many sites to register with the Essential Services Commission (ESC), there is limited capacity for the ESC to monitor or enforce compliance with the GEO requirements.³

The Panel therefore recommends that residential exemptions under the revised GEO should no longer be automatic. Instead, there should be an exemption approval process administered and regulated by the ESC (Recommendation 2).

The Panel also suggests, in the implementation strategies, that the amended GEO should require all sites with a residential private network (including apartment buildings, social housing, retirement villages and residential parks) to:

• have renewable or other clean energy that delivers carbon emission reduction in line with the Victorian Government’s policy
• show how benefits within the private network are regularly passed on to consumers within that site.

Long term: a licensing framework for new private networks

In the longer term, the Panel recommends that the licensing framework under the EI Act be amended to enabling licensing of ‘Local Energy Services’ (LES) providers for private networks. Once the new licensing framework is in place, anyone who suppliers and/or sells electricity in new residential sites containing a private network (including apartment buildings, social housing, retirement villages and residential parks) must obtain a specific LES licence from the ESC (Recommendation 3).

As part of the implementation strategy of the Recommendations, the Panel suggests that (among other things) the LES licensing regime:

• captures third party service providers or entities that provide services relating to the supply and sale of energy (such as metering, billing and customer service centre support); and
• covers and captures the appropriate entities – those for whom the supply and sale of electricity is their core business.⁴

Consumer protections and access to competitive retail offers

Ensuring that embedded network customers can access the same competitive retail offers and consumer protections as on-market customers is another key area of the Review.

The Panel recommends that:

• once the GEO amendments are given effect, consumers living in all types of residential private networks (including those living in social housing, retirement villages and residential parks) should have access to equal or equivalent consumer protections as on-market customers (Recommendation 6). These protections would include having access to family violence, disconnection and life support protections, having access to Energy and Water Ombudsman Victoria for independent dispute resolution, and having access to concessions at the time of paying their energy bill (rather than wait until end of the year to claim a rebate)

• all private network customers should have access to the energy retail market and it should be easy for them to transfer to an on-market energy retailer, without facing a greater financial or administrative burden (Recommendation 8)
• customers within legacy (existing) private networks should not remain stranded within a private network indefinitely (Recommendation 9). This would require metering and/or other internal infrastructure in legacy (existing) embedded networks be, over time, upgraded and/or changed to enable these customers to access the retail market without imposing a cost burden on customers to do so.

Other Recommendations

The Panel also made recommendations in relation to:

• information disclosure, which requires owners and occupants in residential private networks be provided adequate information about their rights and obligations as a customer within a network and the commercial agreements relating to the private network infrastructure and ownership and the management of those assets
• planning and building requirements so that a private electricity network within a residential building be designed, built and operated in the best interests of prospective owners and occupants
• bundled services and other fees and charges to ensure there is appropriate regulation, monitoring and enforcement
• mitigating disruption of supply due to failure of an embedded network
• giving voice to energy consumers in private networks
• transitional arrangements.

Proposed timeframe for implementing the ban and the new licensing regime

The Draft Report proposes that the initial ban through amending the GEO commences in mid-2022. The Panel contemplates that, once the GEO is revised, new private networks (which become operational after the revised GEO takes effect) will need to obtain approval from the ESC prior to supplying and selling electricity. Further, anyone relying on the GEO for a site which is operational prior to the revised GEO coming into effect will need to apply to the ESC for approval within 12 months of the new approvals process and application criteria being established.

Regarding the LES licensing regime, the Panel recommends that the LES licensing framework be established within 12 to 18 months after the changes to the GEO have been implemented. The Panel considers that it is feasible for private networks currently in development be required to operate under an LES licence within six months from the date the licensing regime is established. Further, legacy embedded networks should be operated by a licensed LES provider within three years from the date the licensing frame is established.

The Panel expects that the LES licensing regime be fully operational by late-2026 to mid-2027.

Implications of these Recommendations

Subject to the recommendations in the final report not materially deviating from the Recommendations in the Draft Report and a majority of these Recommendations being accepted and implemented by the Government, the regulatory framework for supplying electricity to and operating a residential private network will undergo an overhaul in the near future, affecting existing and future embedded networks as well as every participant of such networks.

The Panel acknowledges that these Recommendations, in particular, the requirement to become licensed, may be burdensome for some businesses and may result in them exiting the market. The likely consequences of these Recommendations are that there will be a small number of large LES providers supplying and selling electricity in private networks, rather than the large number of smaller exempt entities currently operating in the market.

The customers of these private networks will be the biggest beneficiaries of the reform with improved customer protections and ability to access competitive retail energy offers while developers of apartment blocks with private networks may be required to disclose information in relation to the ownership, operation and management of the private network infrastructure to prospective owners and occupants.

What’s next?

In the Draft Report, the Panel sought feedback in relation to each Recommendation and stakeholders were invited to make submissions in response to the Draft Report until early August 2021.

We will update you once the final report is released, which is expected to be in December 2021, and provide a detailed analysis on the implications of the final report.

_{^{1 https://www.esc.vic.gov.au/electricity-and-gas/information-consumers/information-embedded-electricity-network-customers
2 https://www.danandrews.com.au/policies/fixing-matthew-guys-mess-and-building-better-homes
3 https://s3.ap-southeast-2.amazonaws.com/hdp.au.prod.app.vic-engage.files/4916/2494/9381/Embedded_Networks_Review_-_Draft_Recommendations_Report.pdf
4 The Panel notes that it is not intended that asset owners, such as owners’ corporations, would become the licensed LES entity, although those entities could seek an LES licence if they wished. Instead, licensed LES providers could sign contracts with owners’ corporations allowing them to access assets (such as internal wiring between parent and child meters) enabling the sale and/or supply of energy. However, such contracts should not lock owners’ corporations into long-term arrangements in order to meet the cost of applying for an LES (see Recommendation 7).}}