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Embedded networks - it's time for change

In 2018, the National Energy Customer Framework (NECF) was amended to include the requirement for exempt sellers and networks, selling and supplying to residential customers, to join an Ombudsman scheme. 

Since then, EWON has worked with the Australian Energy Regulator (AER) to bring existing NSW energy exempt networks and sellers into our membership. Combined with our customer complaints data, this has provided us with a unique perspective on how the current framework has failed to respond to the growth of embedded networks, resulting in significant customer detriment.

This Spotlight On outlines EWON’s insights over the past three years, particularly how the existing framework can be improved to ensure clarity, transparency, accountability and ultimately, consumer protection aligned with that of mass market energy residential and small business customers.

Definitions of key terms

Rapid growth overtakes exemption framework

At the time the NECF was introduced, the exemption framework aimed to capture situations other than where AER authorised mass market energy retailers were selling energy for profit to residential and small business customers. Policy makers frequently noted that the exemption framework typically applied to situations including where residential park operators and lodging / rooming / boarding house landlords onsold electricity 1 to their residents as an incidental part of their business. 

Calling it an ‘exemption’ framework clearly implies this is outside the norm. The system was set up to ensure that most energy sellers were captured in the AER authorised and licensed area where customers would be afforded the high standard of consumer protections warranted for essential services.

But as the embedded network industry has grown, the regulatory system has become unwieldly. It can no longer be said that the exemption framework is for entities who are not selling energy as their ‘core business’. 

Since the introduction of the exemption framework, we have witnessed the rapid growth of the embedded network industry. Authorised energy retailers have now moved into this section of the energy market, proof that the embedded network industry is now driven by the core business of selling energy to customers for profit. This situation creates an imbalance between the National Energy Retail Law (NERL) policy principles and the application of the current exemption framework.

Regulation no longer fit for purpose

In the face of the growth of the embedded network industry, the Australian Energy Market Commission (AEMC) found that the regulatory framework for embedded networks is no longer ‘fit for purpose’ 2

We recognise the motivation for the development of some embedded networks has been to deliver improved customer and environmental outcomes, for example, prioritising sustainability of utility supply. However, the overall growth of the industry is not being driven by consumer demand. The benefits of embedded networks are geared towards offsetting building costs for developers and locking in long-term revenue streams for service providers that continue long after the developer has left the scene. This developer/operator supply driven business model is only successful due to the sustained growth in Australian property prices and the increasing demand for more affordable housing i.e. apartments rather than stand-alone houses – it is not consumer demand driven, the benefits to residents/owners are unlikely to emerge.

Further, the application of the exemption framework guidelines for retail and network exemptions and the historical lack of administration of the AER’s register of exemptions has played a role in the development of a for-profit industry selling energy, with minimal regulatory consumer protection or price protection to embedded network residential customers.

This report provides a detailed overview of what’s not working in the exempt energy sector and suggests how the exempt guidelines can be tightened. We encourage all relevant stakeholders to read this report and take action by responding to the AER’s call for submissions as part of its review of the exemption framework.

Exemption framework review – how to be part of it

In light of the current AER review into the exemption framework, actions need to be taken now to address these inconsistencies and start to bridge the gap that has seen customers of embedded networks receive lower levels of consumer protection.

EWON’s unique vantage point allows us to see firsthand the gaps in consumer protections outlined in this report, but it is not in our remit to address them. We have welcomed the open engagement of the AER over the past eighteen months which has culminated in the current review of the exemption guidelines.  

We look forward to contributing to the actions required to address the consumer protection gaps, which will help build the confidence of embedded network residents in the energy sector.

EWON’s experience with exempt entities

It has now been three years since the introduction of mandatory membership of EWON for exempt entities. In 2015, EWON drove to change the exemption framework, effective from 1 July 2018, which we considered a huge step forward in bridging consumer protection gaps. What we didn't expect was that this experience would shine a brighter spotlight on what is not working – from a regulatory perspective. 

It’s time to take action – be part of the exemption guideline review 

The AEMC proposed a regulatory reform package in June 2019 aimed at fixing the regulatory gaps created by the growth of embedded networks. These reforms are still being considered by the Energy National Cabinet Reform Committee (ENCRC). Even if the AEMC reforms are agreed to by the ENCRC, the time taken for effective change to be implemented will be lengthy and consumer detriment will continue. It is also uncertain whether the reforms will apply to both new and legacy embedded networks. 

The progress on regulatory reform of the embedded network industry is uncertain, but action can be taken now to improve the current exemption framework. 

In May 2021, the AER released a consultation paper to update the exemption guidelines (PDF). The consultation paper outlines the issues it considers can be addressed now, including some of the problems that EWON has encountered as we have expanded our membership to exempt entities. For example, the AER is consulting on multiple party network registrations and what it means to own, control or operate an embedded network. The AER is also proposing to take a more proactive role in exempt entity compliance within the current framework. The AER is asking stakeholders for further ideas on how to facilitate exemption holders taking up membership with Ombudsman schemes. We strongly support the AER’s steps to address these critical issues. 

In addition to the changes proposed by the AER in its consultation paper, EWON recommends the following improvements are considered.

 Act now: Improve consistency and transparency 

When introducing its 2019 reform package, the AEMC noted that the lack of comprehensive and reliable data on embedded network customer numbers highlights some of the challenges associated with the current exemptions’ regime 5. EWON considers there is still limited publicly available information on the number of customers living in embedded networks. 

 We recommend that the AER be more proactive in collecting the numbers of customers covered by network and retail exemptions and ensure that these numbers are reported publicly on a regular basis – or change the public register so that customer numbers are included in the details on a registered exemption.

The AEMC also recommended a more consistent approach to regulating the energy services provided to residential customers. This means doing away with a two-tiered system of consumer protections for different classes of residential customer. We are calling for the existing framework to be amended now to reflect this recommended change in policy. This means that no residential customer should be covered by a deemed exemption, even where there are fewer than 10 customers. 

 We recommend that the network and retail exemption guidelines are updated so that all residential customers are included in a registered class exemption.

We also consider this change should include any sale of energy to residential customers. For example, the supply of unmetered gas and chilled or hot water to residential customers should be raised up into a registerable exemption class. Our Spotlight On: Hot water embedded networks highlights how these new energy products are still essential services for the residential customers living in these networks. The growth in fragmented energy services within residential buildings is a fast-emerging issue that must be given an appropriate level of oversight. 

 We recommend that the AER create a registered exemption class for entities selling unmetered gas combined with hot water.

EWON recognises that currently sellers of hot water mostly charge customers for $/litres of hot water. This means that the hot water seller is not considered to be selling energy. However, it is critical to note that the Australian Energy Market Operator has long standing Gas Retail Market Procedures that incorporate hot water meters into the gas supply for residential customers. 

We urge the AER to create a registered exemption class for unmetered gas and combined with chilled or hot water. This would achieve three main outcomes:

  • introduce public transparency on the growing number of gas embedded networks in Australia. EWON notes that the number of NSW residential customers in unmetered gas and hot water networks has increased from 13,000 in 2019 to over 49,000 in 2021.
  • any hot water embedded network operator that wanted to charge customers for the gas used to heat the hot water would have the ability to register an exemption.
  • State government jurisdictions would then be free to create legislation or regulations that require hot water sellers to bill customers for the gas used to heat the water (see our Spotlight On: Hot water embedded networks).

 Act now: Proactively engage with exempt entities and maintain the exemption register

When the framework was first initiated, exemptions were intended to apply to small energy sellers who covered limited numbers of customers. The framework was developed at a time when rapid growth in an embedded network industry was not anticipated. It is understandable that the approach taken to the exemption framework was one largely of self-regulation and proportional obligations for consumer protections.

The exemption framework now covers several hundred thousand customers across the NEM. The embedded network industry is made up or large numbers of small and large specialist embedded network providers whose business model is based on selling energy to residential customers for profit.

The exemption framework has become a critical consumer protection mechanism, albeit not as expansive as NECF, for a large and growing number of residential customers. It is no longer appropriate to rely on self-regulation for the embedded network industry. 

 We recommend the AER take a more active role in engaging with exempt entities, and in reviewing existing registered and individual exemptions.

 We recommend the guideline contain stronger requirements for exempt entities to keep the information on registered exemptions up-to-date. 

Act now: Increase accountability for unregulated billing agents

The published information contained on the register of exemptions should be expanded to include the details of any billing agent providing retail services to the embedded network.

Many embedded network customers are unaware how energy services are structured in their residential building. Providing accessible information could help them navigate poor customer service and complaints. It would also provide Ombudsman schemes with more resources to identify and manage systemic issues arising from complaints and ensure more accountability from energy companies who have structured their business to avoid regulation.

We recommend that the published information contained on the register of exemptions be expanded to include the details of any billing agent providing retail services to the embedded network. 


For queries about policy issues raised in Spotlight On, contact Rory Campbell. For media queries contact Fran Strachan. Don't want to miss future editions? Subscribe to Spotlight On.

 

Footnotes

  1. The Hon. John Ajaka, Second Reading Speech, National Energy Retail Law (Adoption) Bill 2012, p12629; The Hon. J.D. HILL, House of Assembly, National Energy Retail Law (South Australia) Bill, Wednesday 27 October 2010, 1753
  2. Australian Energy Market Commission, Final Report, Review of regulatory arrangements for embedded networks, 28 November 2017, p58
  3. AER, Exempt selling guideline, Version 1, December 2011, p7
  4. AS/NZS 10002:2014, Guidelines for complaint management in organizations, Australian/New Zealand Standard
  5. Australian Energy Market Commission, Final report, Updating the regulatory frameworks for embedded networks, 20 June 2019, 18