AER Issues Paper on Embedded Networks within the NEM

February 9, 2024


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AER Review of Embedded Network framework underway

On the 30th November 2023, the Australian Energy Regulator (AER) released an Issues paper with the purpose of reviewing the regulatory framework for Embedded Networks. Following a Stakeholder information session and targeted meetings with selected parties within the industry, submissions in response to the paper closed on Monday 5th February to conclude the initial engagement information review of the Network and Retail Guidelines.

Recent years have seen a number of jurisdictional queries into Embedded Networks, including Victoria, NSW, ACT and South Australia. These queries highlighted some of the common harms facing customers in embedded networks which have assisted in prompting this review by the AER.

Specifically, the AER's issues paper sought to gain stakeholder feedback on:

  • The risks and harms to consumers due to embedded networks 
  • Potential benefits of embedded networks 
  • Policy options for improving the framework, if harms are found to outweigh the benefits.

Guiding Principles of Embedded Network Review

Unlike Jurisdictional reviews, such as those in Victoria and NSW the AER review of embedded networks is unique in that it is driven by regulatory factors and principles governed by law. Most importantly, the Issues Paper released by the AER has explicitly defined that it will assess the regulatory framework in line with the National Electricity Objective (NEO), which is established within the National Electricity Law (NEL).

For those not familiar with the NEO, this is defined as "to promote efficient investment in, and efficient operation and use of, energy services for the long-term interests of energy consumers".

The AER also clearly outline that they will include further principles and factors given to them under the National Energy Retail Law (NERL). This includes the following principles that are supported by additional factors available to the AER in their assessment:

- Regulatory arrangements should not unnecessarily diverge from those applying to retailers.

- Exempt customers should, as far as practicable,have the same right to choose a retailer.

- Exempt customers should not, as far as practicable,be denied customer protections afforded to other customers.

The importance of this cannot be underestimated as it ensures any outcome the AER draws from their review must abide by these requirements. This was summarised by the AER through the below points that will guide their assessment of the regulatory framework:

- Benefits to consumers,

- Harms to consumers (and risk of harms),

- Costs for exempt entities,

- Administrative cost for the AER, and

- Our ability to monitor and enforce compliance.

Extensive review of Residential Embedded Network arrangements

Throughout the issues paper, the AER has outlined in detail relevant considerations, information and positions that elicited 32 specific questions pertaining to the regulation, harms, protections and options that may sit within the AER's regulatory toolbox to amend, improve or adjust the framework in place.

Given the substantial increase in residential embedded networks within the NEM (209% increase since December 2017), the AER has placed a significant portion of its focus in this review on the NR2 and ND2 activity classes. This is reflected in their considered amendments and collation of data for the review.

Particular emphasis was subsequently placed on six key options that the AER is considering as adjustments to the framework.

Proposed AER Regulatory Options

Option 1 – Close the ND2 deemed network exemption class and revise the activity class criteria for NR2 registrable network class

This option has been proposed if the visibility of embedded networks and ability to enforce their conditions of exemptions is deemed to be greater than the benefit of continuing to allow the deemed category for NR2 to continue. Primarily aiming to ensure all residential embedded networks are captured on the AER website, and improve understanding of customer numbers and types.


Option 2 – Revise NR2 registrable network exemption class criteria

Beyond removal of the deemed exemption category for residential embedded networks, the AER has proposed increasing the burden of information required by applicants when applying for an NR2 Exemption. This may include evidence of prescribed benefits, records of policies and procedures and additional compliance obligations. Some grandfathering has been considered.

Option 3 – AER assessment of all NR2 registrable network class exemptions

Should the evidence of this review indicate to the AER that greater scrutiny is required, they have proposed assessing all NR2exemptions prior to approving them. This would mean that any planned networks would require their exemption application well in advance, as approval would not be automatic and reliant on complaint or breach driven review. This has been proposed to follow the existing individual exemption process already outlined by the AER.

Option 4 – Close the NR2 registrable network exemption class to future registrations

This option has been tabled by the AER to consider should the evidence of harm be greater than any benefits to customers drawn from allowing these Embedded Network configurations to operate. While this would be quite a significant step and have vast impacts on the industry, it evidences the serious nature of this review process and could include variation of this activity class, much the same that the Victorian review led to an adjustment in classes of embedded network to local energy networks. However, the AER is open to transitional closure of this exemption class.

Option 5 – Introduce mandatory compliance and performance reporting

Somewhat in acknowledgement of the AEMC's recommendations around accredited providers, the AER has indicated it would consider the introduction of mandatory reporting for both compliance and performance. This may include requirements to report breaches of exemption conditions, or performance reporting akin to that of on-market retailers aligned to customer outcomes.

Option 6 – Introduce family violence protections

The introduction of these protections will be implemented by the AER, and they are seeking feedback on which provisions from the retailer obligations may require consideration of adjustment to suit various form of Exempt Seller. These provisions were not available for them to assess in the previous guideline assessment and may be referenced within the document reviews later this year.

Industry Impact of the AER Review of Embedded Networks

Considering the recent reviews conducted by the AER into the Retail and Network guidelines for embedded networks, these options are a strong deviation from previous engagement by the AER which has historically taken more of an adjustment and refinement role in their regulatory updates in these areas.

The proposed options by the AER signal the level of concern they hold for this activity class, who is the largest and fastest growing. Quite interestingly, the paper also questioned how they could align their regulation with that of local jurisdictions to complement what may come from for example the proposed IPART changes, or those already in place.

ENM Solutions has consistently supported the AER's national framework and its application in line with existing laws and rules. Our submission reflects this support and outlines in response to the AER's specific questions - our experience within the framework and within our customer and client base - which is that the existing framework may be improved in line with the direction and feedback of industry.

Over time, the regulation in place has supported drastic improvements within Embedded Networks for customers, owners and operators alike. Our experience has been that this regulation and market forces have provided sufficient shift to improve the outcomes for all stakeholders, and with further review and feedback, the AER has an important role to continue that guidance and industry regulation.

Embedded Network Compliance and Regulation Moving Forward

Within our report included below, we have provided detailed responses to the AER paper and will continue to engage with the process as it progresses through review of the Network and Retail Guidelines.This timeline is included below.

Should you have any specific concerns regarding the content of the issues paper, further review of the network and retail guidelines, or would like us to represent your views and concerns in further submissions - please don't hesitate to reach out to one of our team for an informed discussion.


Phone: 1300 000 366

Helpful Links
- AER Issues Paper
- Notes for AER Stakeholder Session
- ENM Solutions Submission to the AER

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