Legal Insights

Update on the Victorian Embedded Network Review – the Final Report is out, are you ready for the changes?

By Robert Gregory, Peter Limbers, Xinyu Zhang

• 07 March 2022 • 16 min read
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The Victorian Government appointed an expert panel to review the operation of embedded networks in Victoria, with a view to ban them in residential developments. The panel released its final recommendations in January this year, recommending the banning of residential embedded networks through the revised General Exemption Order (which is the existing regime) initially and ultimately a licensing regime over a staged approach. The Government is considering the extent to which it will implement these recommendations and is expected to provide a formal response in mid-2022.

Some of these recommendations, if adopted, will from their commencement have a significant impact on developers, owners’ corporations and residential embedded network operators and service providers, each of whom will need to assess:

  • What specifically are the additional regulatory costs and risks associated with the recommended changes?
  • Do existing contracts already anticipate and allocate these types of cost and risk? If not, then where does that leave the contract? Is it still performable (legally and practically) by the parties?
  • What changes are needed to commercial, operating and contracting models for residential embedded networks in Victoria going forward? How are the additional risks and costs best allocated and managed?

Background

To give effect to its election commitment to ban embedded networks in new residential developments in Victoria, the Government appointed an expert panel (Panel) to conduct the Embedded Networks Review (Review) to provide recommendations on how to implement a ban on embedded networks in residential apartment blocks, with appropriate exemptions for renewable energy microgrids.

In June 2021, the Panel released a Draft Recommendations Report (Draft Report) that sets out the Panel’s 16 draft recommendations, which we provided a high-level commentary on in our December 2021 edition of The Lot.

The Panel’s final recommendations (Recommendations), together with its Final Recommendations Report (Final Report) were released on 14 January 2022.

Panel’s overall approach on implementing the ban

Consistent with the Draft Report, the Panel recommended the proposed ban on embedded networks in residential buildings be implemented in a stage approach as follows:

  • initially, via amendments to the General Exemption Order (GEO) so that local energy networks (LENs) will need to be registered and comply with conditions in order to be able to operate legally (Revised GEO Stage)
  • ultimately, via the establishment and operation of a Local Energy Services (LES) licensing framework, supplemented by the exemption framework under the revised GEO (LES Licensing Stage).

While the overall approach on implementing the ban on embedded networks has not changed in the Final Report, a number of Recommendations have been amended or updated, following submissions on the Draft Report from stakeholders.

This article will highlight the new elements of the Final Report, analysing the implication of these proposed changes. Also included is a table with the Panel’s proposed timeline for implementing the banning on embedded networks in residential buildings

Revised GEO Stage – key changes and updates

New registration process under revised GEO (Recommendation 2)

In the Draft Report, the Panel recommended that, instead of an automatic and self-assessed exempt framework, there should be an exemption approval process administered and regulated by the Essential Services Commission (ESC) as a transitional measure to enable improved monitoring and oversight of the sector.

A number of stakeholders submitted the proposed approval process would create a significant workload for the ESC, and could result in significant delays for approvals.[1]

To balance the need to ensure operators are adequately equipped to provide the services while not overburdening the ESC, this was amended to require that anyone wanting to rely on the revised GEO to distribute, supply and sell electricity be required to update their exemption registration (for existing LENs) or apply for an exemption registration (for new LENs), and to comply with the conditions recommended in the Final Report and other conditions proposed by ESC.

The Panel also notes under the current exemption regime, embedded networks are often operated and managed by embedded network operators while the owners’ corporation is the exempt person, which creates a mismatch between responsibility and function, and is problematic in the event of any breach of the GEO.

To ensure alignment of legal responsibility with the person carrying out the role or function, the Panel suggests that under the revised GEO:

  • an owners’ corporation be the exempt person for distribution activities and responsible for the wiring within the building (unless the owners’ corporation intends to undertake other activities)
  • an embedded network operator be the responsible person for the supply of electricity, the network and metering and the billing functions.

The Panel also recommends that, as part of the registration process under the revised GEO, the applicants be required to make declarations regarding complying with the conditions, and providing information to ESC to demonstrate their compliance or a plan to demonstrate how and when they will become compliant if they do not already meet the requirements.

New renewable energy condition (Recommendation 1)

Recommendation 1 proposes that, in line with the 2030 Victorian Renewable Energy Target, the revised GEO should include a new renewable energy condition requiring at least 50% of electricity at the site to be met from an on-site renewable source.

It was also recommended a benchmark be set as a volumetric measure to capture the total energy produced and consumer onsite when the building is fully occupied, noting that the Government should undertake further consultation to determine how to best measure the recommended target.

Given the Government’s willingness to exempt renewable energy microgrids notwithstanding the commitment to ban embedded networks, the Panel considers the new renewable energy obligation should not be satisfied by purchasing government-accredited renewable energy product such as GreenPower or entering into power purchase agreements.[2]

Passing benefits onto consumers (Recommendation 1)

In addition to the renewable energy condition, Recommendation 1 also proposes that the revised GEO requires LEN operators to demonstrate how benefits derived from within the LEN are regularly passed onto customers within that site. This condition may be met by LEN operators providing the relevant information in customer bills and by ongoing auditing and monitoring process undertaken by the ESC.

The Panel proposes that the revised GEO be drafted and released by June 2022 to enable existing LENs to update their registration and new LENs to apply for registration.

The conditions in Recommendation 1 (renewable energy condition and passing benefits condition) are proposed to come into effect on 1 January 2023, applying to:

  • LENs registered on and from 1 January 2023
  • any existing LENs that failed to update their registration by 31 December 2022.

The Panel further recommends that existing LENs be given time to retrofit the building so that the renewable energy condition apply to these sites within 3 years of a LES licensing regime being establish (i.e. during 2027).

LES Licensing Stage – key changes and updates

There is no material change to Recommendations 3 and 4, which relate to the establishment of and transition into (regarding existing LENs) the LES licensing regime.

When addressing submissions that providers with existing retail licences should not be required to obtain an LES licence, the Panel noted while an LES licence will share many of the same requirements as an electricity retail licence, an LES licence holder will perform functions which go well beyond those of a licensed retailer, including network functions and metering functions. In addition, an LES licence holder will be required to demonstrate that they meet the renewable energy condition, with benefits passed onto customers. As such, the Panel considers it is appropriate to establish a fit-for-purpose licensing regime rather than amending the existing licence categories.[3]

The Panel also recommends all entities supplying and selling metered electricity to existing LENs under the revised GEO be transited to the LES licensing regime. Further, asset owners performing the distribution function (such as owners’ corporations) should continue to be exempt under the revised GEO rather than being required to obtain a licence under the LES licensing regime.

The LES licensing regime is proposed to be established by late-2023 to mid-2024, within 12 to 18 months after changes to the GEO have been implemented.

Other recommendations

Recommendations 6 to 16 relate to improving outcomes for LEN customers.

While no substantial changes have been made to these recommendations compared with the Draft Report, the Panel clarified a number of points following stakeholder submissions.

Access to retail market

To remove barries impeding a LEN customer’s ability to move to an on-market retailer, the Panel proposes:

  • all child meters within embedded networks should be issued with a National Meter Identifier
  • metering and/or other internal infrastructure in existing LENs should be updated and/or changed without imposing a direct cost burden on customers.

Noting that who should bear the cost for updating the metering and wiring being one of the most contentious issues of the review, the Panel considers it may be appropriate for LENs to recover some of the update costs over time via tariffs charged to customer as part of the fees charged, provided that the charge must not exceed the Victorian Default Offer and must comply with the Australian Energy Regulator’s NSP Guideline price.

The Panel further recommends:

  • the relevant metering and infrastructure should be updated where needed within either 10 years of being commissioned in the network or 3 years from when the LES licensing regime comes into effect, whichever is earlier
  • owners’ corporations should have the option, to impose as a contractual condition, that their LES provider upgrade metering and associated infrastructure to enable choice of retailer.

Implications of these recommendations

While the Government is yet to formally outline the extent to which it will implement the recommendations (which is expected to be published by mid-2022), some of the recommendations set the direction and trend for the future policies and laws.

Developers

As noted by the Panel the proposed renewable energy condition in Recommendation 1 is consistent with the Government’s 2030 Victorian Renewable Energy Target. As such, even though the actual target and how to measure the target may change, developers should:

  • take note of the potential need to meet onsite-renewable source targets in its future projects
  • ensure the design of the building allows for the installation of solar panels, batteries and/or other renewable/clean energy technology.

Further, care is required when negotiating contracts with embedded network operators (in particular with respect to service agreements) to ensure the contract has appropriate contractual mechanisms to accommodate the potential regulatory changes.

Owners’ corporations

To the extent an owners’ corporation (OC) is the exempt person under the current GEO but does not operate or manage the relevant LEN, it may wish to discuss with its embedded network operator to correct the registration.

Assuming the Government will adopt the recommendations regarding the ban on the embedded network, OCs should ensure it registers or updates its registration with the ESC under the revised GEO within the required timeframe.

OCs may also wish to engage with their network operator to assess the scope of update or upgrade required in order for the embedded network to comply with the relevant recommendations (in particular, the renewable energy condition and the access to retail market recommendation).

Embedded network operators/third party service providers

If the revised GEO followed by a new LES licensing regime approach is adopted by the Government, embedded network operators/third party service providers (Operators) will be the most impacted participant, as they will be required to apply and maintain their LES licence in order to operate.

The requirement to become licensed (and comply with the relevant conditions) may be burdensome for some businesses, and the likely consequences of these recommendations are there will be a consolidation in the sector with a small number of large LES providers continuing to operate while many of the smaller operators exiting the market.

As noted in the Final Report, some Operators are currently not registered under the GEO. If and when the revised GEO is in operation (proposed to be June 2022), Operators will be required to register or update their registration with the ESC within the specified timeframe and comply with the relevant conditions.

Timeframe in implementing the proposed ban on embedded network

The Panel in the Final Report sets out the following timeframe for the implementation of the proposed reform:

Timeframe

Reform Action

Requirements on existing LENs (registered by 31 December 2022)

Requirements on new LENs (registered from 1 January 2023)

By 30 June 2022

Publication of revised GEO, including:

  • new registration process
  • new conditions on achieving renewable energy target and passing the benefits

N/A

N/A

30 June 2022

to

31 December 2022

New registration process comes into effect[4]

Existing LENs must update their exemption registration with ESC by 31 December 2022.

LENs that are in development and become operational during this period must apply to register their exemption with the ESC.

The new conditions are yet to come into effect.

N/A

Applicable participants:

  • OCs
  • Operators

1 January 2023 onwards

Registration process continues

New conditions under the revised GEO come into effect

For existing LENs that updated registration by 31 December 2022:

  • must comply with the requirement to pass benefits to customer[5]
  • any other conditions imposed by ESC.

Existing LENs that failed to update their registration by 31 December 2022 will be subject to the same conditions as a new LEN (including the renewable energy condition).

Must apply to be registered under the revised GEO.

Must comply with the following requirements:

  • renewable energy condition
  • passing benefits onto customer condition
  • any other conditions imposed by ESC.

Participant to which requirements apply:

  • OCs
  • Operators

Participant to which requirements apply:

  • OCs
  • Operators

Early 2024

to

late 2026

LES licensing regime established (incorporating requirements under the revised GEO)

LES licence is required to be able to sell and supply into existing LENs.

Prepare to meet the renewable energy condition by early 2027 (this is in addition to the other conditions).

Applicants will have up to 3 years to apply for a LES licence once the licensing framework is established.

LES licence is required to be able to sell and supply into LENs (and compliance with all the conditions).

For LENs registered between 1 January 2023 and when the licensing framework is established, applicants will have up to 6 months to apply for a LES licence once the licensing framework is established.

Participant to which requirements apply:

  • Operators

OCs will continue to be registered under the revised GEO as an exempt person.

Participant to which requirements apply:

  • Operators

OCs will need to register under the revised GEO as an exempt person.

2027 onwards

LES licensing regime in operation

Existing LENs must comply with the renewable energy condition.

The same requirements apply.

Participant to which requirements apply:

Participant to which requirements apply:

  • Operators


[1] Final Report, page 26.
[2] The Panel recognises that it may be necessary for some existing LENs to purchase energy through renewable sources from the market to comply with the renewable energy condition, given the difficulties and potential expenses associated with retrofitting the sites.
[3] Final Report, page 30.
[4] While the Final Report does not explicitly state that the registration process will commence as soon as the revised draft is published, we understand this is the intent, based on the timeframe suggested by the Panel in the Final Report.
[5] Existing LENs are required to meet the renewable energy condition within 3 years of the LES licensing regime being established, which is around 2027.
[6] The Panel recommends that OCs continue be exempt under the revised GEO after the establishment of the LES licensing regime. It is not clear whether the conditions on meeting renewable energy target and passing on benefits would apply to OCs under the revised GEO.

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