In the lead-up to the 2018 Victorian Election, planning minister Richard Wynne gathered a handful of reporters in Prahran to announce what amounted to an effective ban on embedded networks in residential apartment buildings.
The energy industry was left wondering what the planning minister was doing dabbling in and announcing energy policy. Our hope at the time was that sanity and sensible policy would ultimately prevail.
But the expert panel appointed last year to review the state’s embedded network industry has produce a final report, and the news is not good: They have recommended a series of measures that would, indeed, create an effective ban on residential embedded networks.
If implemented, the measures will cut off access to renewable energy and EV charging for most new apartment buildings, retirement villages, and other types of multi-dwelling sites. We estimate the ban will stop 15MW of solar and some 50,000 EV chargers from being installed over the next five years.
In this blog, we unpick the recommendations and discuss what it means for Victorian embedded network occupants and the industry.
A little background…
Embedded networks are private networks that serve multiple customers within a building or site. They are common in apartment buildings, retirement villages, social housing, caravan parks and shopping centres.
As of March 2021, there were 166,000 customers being supplied by 1500 embedded networks in Victoria with 80% of these customers being residential. Each embedded network is serviced by a single embedded network operator that coordinates the purchasing, metering, billing, and customer service of energy services at a given site.
Well-managed embedded networks can deliver a range of benefits for consumers, specifically the ability to purchase electricity at large customer rates generally leading to lower energy bills, integration of renewable energy and other new energy technology, and upfront energy infrastructure savings.
But the embedded network industry has unfortunately been marred by instances of price gouging customers who are unable to leave their embedded network. Furthermore, embedded networks operators have been operating in a regulatory-lite environment where customers do not enjoy the same consumer protections as other customers.
Regulatory changes to date (e.g. Power of Choice reforms circa December 2017) have failed to adequately address the issues that consumers face or empower embedded network operators to make customer transfers easy. The ban was proposed by the Victorian government as a means of protecting consumers.
What exactly is proposed to be banned and how?
The report proposes to introduce a ban on embedded networks in residential settings in Victoria initially through changes to the General Exemption Order (GEO) to the Electricity Industry Act 2000 in mid-2022 and later by introducing a new licensing framework enabling the licensing of “Local Energy Services” (LES) Providers in early 2024. The coverage of this ban would include:
- Residential apartment buildings
- Social housing
- Retirement village, and
- Residential parks (i.e. Caravan parks)
The report also recommends the Victorian government consider extending the ban to small business customers.
Embedded networks will continue to be allowed where 50% or more of the electricity consumed at the site is met by on-site renewable generation sources and the benefits of these renewables are passed on to customers.
Sites registered after January 01, 2023, must comply with the new requirements and sites registered under the GEO before the licensing framework is established will no longer be automatically approved. Prior to this, the site will be covered by grandfathering measures being afforded to legacy networks.
What about legacy networks?
Legacy residential embedded networks will also be impacted and be required to:
- Update their registration with the Essential Services Commission and demonstrate they comply with the new requires of the GEO;
- Meet the 50% onsite renewable energy target by installing the maximum amount of onsite renewable energy and purchase the balance via the market through Power Purchase Agreements or buying GreenPower; and
- Apply for a LES license within three years of it being introduced (by 2027).
Isn’t a renewable energy target a good thing?
We are big fans of renewable energy and carbon targets, but not ones where governments prescribe how the target should be met, as they can lead to economically inefficient outcomes and stifle innovation.
If implemented, the renewable target set out by the report would be the only sector-specific renewable energy target anywhere in Australia, and further still, the only onsite renewable energy target for any sector in Australia and probably in the world.
If delivering energy to customers at lowest cost is the Victoria Government objective then onsite renewable energy target will not necessarily achieve this and in many cases will lead to increased costs for consumers. Owners and corporations will no doubt need to dig into their pockets to install equipment to meet the targets.
Embedded networks are the most cost-effective way of delivering renewable energy to customers within apartments and others multi-dwelling settings. But setting this target means that many sites that could strongly benefit from renewable energy today, but can’t meet the target, will be locked out of renewable energy options now and in the future. It cuts off options for future multi-lot residential complexes to:
- Bulk purchase renewable energy – such as via a power purchase agreement
- Install onsite renewable energy that would deliver less than 50% renewable energy but still be benefical. (E.g. why should a site with 45% renewable energy generation not be allowed to proceed if it delivers good outcomes for consumers?)
- Meet 50% renewable energy target in a few years due to advances in technology but can not today. It is incredibly difficult to set up embedded networks retrospectively to enable renewable energy projects.
- Install demand response and managed EV charging to make best use of renewables by removing a logical aggregation point.
Our view is that the negative impacts of the proposed onsite renewable energy target have not been considered in detail.
Is there anything to like about the review?
The report recommends making amendments to the GEO to ensure that customers have access to consumer protections that are equal or equivalent to those provided to other customers.
In addition, there are recommendations for improved monitoring, compliance and enforcement of embedded networks.
Lastly, it has been recommended that there is increased disclosure requirements of embedded networks to prospective owners and occupants of sites planned to have embedded networks installed.
These are sensible recommendations to improve consumer protections and transparency within the industry.
What should be the Victorian government’s approach?
Firstly, let us ask what should be the objective of the Victorian government?
- Improving consumer protections
- Driving down energy costs for consumers by enabling retail competition
- Enabling more renewables, or
- Simply trying to save face on an election promise that was an ill-informed, blunt force policy – implementing a ban
Keep in mind that just 74 customers out of the 131,000 residential embedded network customers (0.06%) provided a submission to the review. It was hardly a landslide of complaints about the industry. Further, the Energy and Water Ombudsman of Victoria (EWOV) data shows that embedded network providers are subject to complaints at half the rate of traditional energy retailers.
Embedded networks operators are reporting that since the introduction of the VDO, complaints about pricing have dropped nearly to zero. So why is there even a need for a ban on embedded networks? It hardly seems like a proportional response.
Putting aside the implementation of a ban, the government could have focused on sensible policy that would lead to better protections and lower-cost outcomes for consumers.
The embedded network industry is intensely frustrated by the single mindedness of the government on a the need to ban something and has been crying out for the government to fix issues the regulatory issues that have led to the issues.
Specifically, issues relating to meter contestability, meter transparency, and AEMO B2B integration with networks and retailers and harmonising Victoria’s regulatory framework with the AEMC’s Embedded Network Rule Charges that will make it easier for customers of embedded networks to access retail competition.
If the Victorian government really wants to ban something, then implement a ban on embedded networks that do not have frictionless access to retail competition. Putting the regulatory frameworks and systems in place so that disgruntled customers can leave without a fuss is something that everyone can get behind.
Regarding the 50% renewables target, we would propose simply linking the target to the VRET and removing the onsite requirement would lead to far better outcomes for customers and the environment.
In summary
The overall approach to a ban proposed by the report is certainly not a great outcome for anyone. (In fairness to the Expert Panel the terms of reference made it extremely difficult to propose anything other than a ban.)
A ban on embedded networks in Victoria, regardless of the caveats, is a disastrous outcome for strata consumers and communities, the embedded network industry, and innovation within the energy industry as a whole. It locks out:
- Customer access to energy at consistently low prices (all customers in most embedded networks should be able to enjoy prices consistent with the best retail rates in the market)
- Customer access to distributed renewable energy generation and battery storage or sites that do not meet the lofty goals of ambitions of the government
- Easy integration of EV charging infrastructure into apartment buildings enabled by embedded networks
- Opportunities for innovative community energy projects
Implementation of a ban will inevitably lead to higher costs to owners corporations and customers of embedded networks as the costs of compliance are passed down. There will also be stagnation of an whole industry and poorer service outcomes for customers as the embedded network industry with a dim future rushes to cut costs (and probably the exits).
In implementing the findings of the report, we hope that the Victorian government comes to its senses and makes regulatory changes that don’t throw the proverbial baby out with the bath water.
James Allston is the Managing Director of New Energy Ventures, a management consultancy that specialises in new energy projects and businesses.
New Energy Ventures works extensively with embedded networks, helping property developers and energy companies to create profitable businesses by maximising the use of new energy and achieving good outcomes for end customers.
