The evolving nature of the market provides an opportunity to analyse the regulatory challenges, many which lie behind the consumer protection framework under the National Energy Customer Framework (NECF) and the Australian Consumer Law (ACL). The Commission will describe three examples to underline specific regulatory challenges that have been identified to start the second stage of the consumer protections review. The examples are the following:

  • Distributed energy resources (DER)
  • embedded networks
  • bulk hot water.

Customer protection for distributed energy resources

The NECF was originally developed with the view that all small consumers would be supplied through the interconnected electricity system and would need to enter a retail contract to access energy supply. However, as technology has developed, many products and services, such as solar and battery systems, are now provided by different entities (other than traditional retailers) and the roles of both retailers and these new entities is becoming less distinct. 

Currently, the NECF and ACL can apply in different ways depending on the way in which an energy related product or service is provided. Consumers who invest in DER may not have the same protections as customers of traditional grid-supplied electricity. Further, it may not always be clear to a customer what the correct avenue is to resolve a particular complaint relating to DER products. 

Solar PV and battery system bought from a third party

Under the NECF, the sale of electricity to consumers is prohibited unless the seller holds a current retailer authorisation or an exemption. Where energy is supplied by an exempt seller, the ACL applies in addition to any conditions placed on the exempt seller under the NECF through their exempt seller authorisation.

Currently, when a customer buys a solar PV and battery system from a third party, they will (most likely) be connected to the grid and therefore must purchase electricity from an authorised retailer. In this case, the applicable consumer protections are the:

  • NECF for the electricity purchased from the grid
  • ACL for the solar PV and battery system.

When things go wrong

Customers need to know which is the applicable consumer protection framework when things go wrong. For example, if a customer finds that something has gone wrong in relation to their energy contract with a traditional retailer, the customer is able to contact its retailer in accordance with the dispute resolutions provisions under the NECF. If the result is not satisfactory, the customer is able to escalate the issue to the jurisdictional ombudsman for resolution.

If there is an issue with the solar PV and battery system the customer must contact the original supplier to resolve the fault. If the solar PV and battery components are sourced from different suppliers, they must determine which component is at fault, then contact that supplier. If the manufacturer has gone out of business, the customer must seek resolution elsewhere, possibly the importer (whereas grid supplied customers are protected in the event of a retailers going out of business under the retailer of last resort (RoLR) provisions of the NECF). The customer may also raise any issues with its state-based fair trading agency or the Australian Competition and Consumer Commission. Both can assist customers with the mediation of commercial matters, such as warranties, payments and contract issues.

The COAG Energy Council requested industry, consumer groups and other stakeholders to develop an industry-wide Code of Conduct for sellers of distributed energy resource products, systems and services including solar and storage technologies. On 30 April 2019, the Clean Energy Council, the Australian Energy Council, the Smart Energy Council and the Energy Consumers Australia lodged an application for authorisation for a New Energy Tech Consumer Code. The proposed voluntary code will set "minimum standards of good practice and consumer protection that will be provided by signatories covering all aspects of the customer experience". The Commission support the industry taking steps to develop a code to address consumer protections for new energy service providers. The Commission will take the proposed voluntary codes into account when assessing whether changes to the NECF are also required to protect consumers for DER. 

Consumer protection for embedded network customers

What are embedded networks?

Embedded networks are private electricity networks — that is, they are owned and operated by parties that have been exempted from the requirement to register with Australian Energy Market Operator (AEMO) — which serve multiple customers and are connected to another distribution or transmission system through a parent connection point. Generally, the exempt network service provider also purchases electricity at the parent connection point and on-sells it to customers at child connection points within the embedded network. Such sales are referred to as being ‘off-market’, in that they are not conducted through the NEM. On-selling entities must hold a retailer authorisation from the  Australian Energy Regulator (AER) or be exempted by the AER from having to hold a retailer authorisation.

Common examples of embedded networks include shopping centres, retirement villages, apartment complexes and caravan parks. Embedded networks may occur as new developments or as retrofits of existing buildings. In recent years, there has been a significant increase in the number and scale of embedded networks, with the residential apartment market being the primary driver of this growth. The Commission estimates there are more than 500,000 customers within embedded networks and this number is growing.

How are embedded networks regulated?

The National Energy Retail Law (NERL) requires that a person must be authorised to sell energy to a person for premises unless exempted by the AER from obtaining an authorisation. Similarly, the NEL requires that an entity which owns, controls or operates a transmission or distribution system register with AEMO unless exempted by the AER from doing so. The development of embedded networks brought both opportunities for innovation and potentially new risks for consumers, which challenged the regulatory framework under the NECF

Problems with embedded networks

To address this regulatory challenge, the Commission started the Review of the regulatory frameworks for embedded networks which was completed in December 2017. From this, the Commission found that the exemption framework is no longer fit for purpose in the face of the growth in the number and scope of embedded networks. The current framework does not strike an appropriate balance between innovation, consumer protection and facilitating consumer access to retail market competition.

In particular, the Commission found significant practical barriers to customers in embedded networks accessing retail market competition, despite earlier regulatory reforms that sought to put in place arrangements to allow for this. Currently, customers of exempt on-sellers in embedded networks are not included in AEMO’s retail market systems, and so competing NEM retailers are unable to quote, transfer and bill customers using standard market processes. Bespoke embedded network tariffs and billing arrangements also require NEM retailers to adapt product offerings and operate manual processes to manage transactions with embedded network customers. These issues mean that, in practice, embedded network customers have limited ability to change supplier if they are unhappy with the price they are paying or the level of service they are receiving.

Embedded network customers do benefit from some consumer protections imposed by the AER as conditions of exempting embedded network operators from registering as a network service provider (NSP) and being authorised as a retailer. However, these consumer protections are more limited than those applicable for standard supply arrangement customers. Consumer protection gaps exist in areas such as:

  • de-energisation and re-energisation obligations
  • obligations to provide connection services
  • life support arrangements
  • information provision and RoLR arrangements
  • reliability standards and guaranteed service level payments for outages
  • safety obligations in some jurisdictions
  • access to concessions and ombudsmen schemes in some jurisdictions.

Finally, the current exemption frameworks suffers from an inadequate compliance and monitoring regime. The AER does not place reporting requirements on exempt parties and therefore has no visibility over their compliance with exemption conditions. There are also limited enforcement options available to the AER.

Next steps

Given the above problems with embedded networks, the Commission recommended changes to the regulatory framework for embedded networks to address the identified issues. The proposed package of changes included:

  • improving consumer access to retail market competition in legacy and new embedded networks, by capturing all embedded network customers in AEMO’s market systems and by standardising network billing arrangements between embedded networks and NEM retailers
  • elevating new embedded networks into the national regulatory frameworks, including through the registration of embedded network service providers (ENSPs), the authorisation of on-selling retailers and the extension of standard NEM metering arrangements to embedded networks
  • narrowing the network service provider and selling exemption frameworks for new embedded networks to apply only to circumstances where the costs of registration as an ENSP and retail authorisation would outweigh the benefits to consumers and where the need for regulatory oversight is low
  • enhancing consumer protections in legacy and new embedded networks through improving the AER’s ability to monitor and enforce exemption conditions, addressing gaps in the NERL and National Energy Retail Rules (NERR) for embedded network customers supplied by an authorised retailer and improving the information provided to consumers entering embedded networks or involved in the conversion of a property to an embedded network.

In its June 2019 final report, the Commission set out a comprehensive package of law and rule changes to implement these recommendations.

Consumer protection for bulk hot water customers

New apartment buildings, usually high rise buildings, have common hot water systems to heat water in a centralised water plant and distribute it to each unit instead of having individual heaters (known as, bulk hot water). This service is being provided to consumers by energy retailers and embedded network operators. The provision of this service has created consumer confusion as it is not clear if it is an energy service, how it is charged and if the NECF is applicable. 

How bulk hot water is provided 

Consumers that are tenants in buildings with a centralised hot water plant, are facing different supply models depending on:

  1. Hot water plant ownership: the hot water plant can be developed, maintained, operated and owned by three different persons; a body corporate, an embedded network operator or a retailer.
  2. Boundary meters: the hot water plant usually has two boundary meters, one to measure the amount of energy (electricity or gas) that is required to heat and maintain the water heated and another one to measure the amount of water that enters the water plant. In some cases the energy boundary meter does not comply with the energy metering regulations. 
  3. Hot water meter: hot water is distributed through water pipes and each apartment has a water meter that individually to measures the amount of hot water consumed in each unit. However, the ownership and the meter reading responsibilities vary, depending on each building. For some buildings, individual hot water meters are provided by DNSPs. In others, a retailer or embedded network operator is responsible for metering.
  4. Other meters: each apartment also has energy and water meters to measure electricity, gas (cook tops) and water individually. However, there are cases where the gas (cook tops) meters are not installed and consumers are charged a fixed rate.* 
  5. Billing: a consumer can be billed by an embedded network operator, by a retailer or by a body corporate depending on each case. It is possible that the consumer is billed by different retailers for hot water, gas and electricity.

In general, the retailer or embedded network operator is chosen by the body corporate and consumers (tenants) are not likely to be able to choose the provider for hot water and gas. If implemented, under the new embedded network framework being proposed by the Commission, consumers will be able to choose an electricity provider.

Note: *the network provider only charges the embedded network for the site's total gas consumption by its energy retails. Gas meter readings are supplied by the network provider.

Problems with bulk hot water

Is bulk hot water an energy service?

The NECF does not provide a definition for ‘sale of energy’ or if it is limited to the supply of electricity and gas. Under the NECF it is not clear if the sale of bulk hot water is a sale of energy. Hot water is being provided to customers, in some cases, by energy market participants (authorised or exempted sellers) however, this does not mean that this service is covered by the regulatory framework under the energy laws and rules. 

Different energy bodies have provided different regulatory approaches to bulk hot water. For example, the AER states in their retail guidelines that the sale of bulk hot water cannot be considered a ‘sale of energy’ under the NERL and the NERRAEMO, without mentioning if the sale of hot water is sale of energy or not, provides in their retail market procedures information on how to calculate energy for hot water (common factor) and a hot water meter definition.

Because it is not clear if bulk hot water is a sale of energy, some retailers are including their own definition of bulk hot water in their contracts and applying the contract terms and conditions of a standard retail contract. For example, in the contract terms and conditions of a bulk hot water contract, retailers are including as a requirement that this service must be consistent with the NERL, NERR and the standard retail contract. Under these contractual arrangements, most bulk hot water consumers are paying standing offer prices.

How is bulk hot water metered and billed? 

Retailers and embedded network operators are metering hot water with different types of water meters. The meter used to measure bulk hot water in each building unit is a water meter and not an energy meter. Therefore, it is unclear which metering requirements are applicable and if the energy metering regulation would apply. 

For billing, retailers and embedded network operators issue hot water bills or an energy bill that includes separately hot water charges. To calculate the hot water price in cents for each building unit (consumer), providers use a conversion factor (or common factor). The way this factor is calculated and how hot water consumption is disclosed in the bill (in MJs or litres) may vary depending on each provider. 

As a result of these arrangements, consumers are paying an estimated amount of the cost to heat the water they consume which will depend on other external factors as follows: 

  • Vacancy of the building: the conversion factor will vary depending on the number of people that are consuming hot water in the building. This factor is usually calculated as an average of energy consumed to heat the water plant and the hot water consumers in the building. The boiler will consume the same amount of energy to maintain the water heated at a predetermined temperature and that cost will be divided in the number of hot water consumers. Therefore, each unit will pay a higher price if there is a low rate of vacancy in the building for that billing period.
  • Water plant maintenance: if the water plant is not well maintained it will need greater amounts of energy to heat the water at a predetermined temperature.
  • Temperature settings: the temperature is set by a designated body (body corporate strata, owners corporation, etc.). The higher the temperature is set the more energy is needed to heat the water and it cannot be altered by tenants (for example for saving purposes).
  • Water plant efficiency: the water plant needs to be well-designed and insulated to avoid high distribution loses (in terms of energy) that usually happens if the water is stationary in the pipework.
  • Individual meters: when the hot water meter is inside the unit and there is no meter data logger (which transmits the meter reading from the internal hot water to a panel elsewhere in the building) customers receive estimated bills for the amount of hot water consumed.

It is therefore likely that consumers are paying high or inaccurate bills for hot water because of these external factors.

Are there other relevant regulations?

Other regulations, such as the Residential Tenancy Acts, include general requirements to charge tenants for the supply of electricity, gas or in general other services. For example, only if the premises are metered separately, providers may charge the tenant. The NSW Civil and Administrative Tribunal decided that the way bulk hot water service is metered does not appear to meet the requirements of the Residential Tenancies Act. The Tribunal found that the supply of gas is indirect and the charges are based on a calculation that includes extraneous factors. The Tribunal concluded that is not satisfied with the system disseminating the cost of gas supplied to the premises of every resident and that it is not separately metered.

Is bulk hot water covered by the Ombudsman schemes?

The government approved ombudsman schemes to solve complaints and dispute resolution between energy consumers and retailers and distributors in each state. However, it is not clear when consumers can access these schemes for hot water services. 

The main issues identified by these agencies are:

  • inability of customers to access market offers (lack of competition)
  • limitation in access to NECF consumer protections
  • limitation in access to dispute resolution schemes
  • bundles with other services, electricity/bulk hot water, chilled water for air conditioning, air conditioning, telephone and internet services, pay TV, amongst others.

For example, Energy and Water Ombudsman NSW (EWON) reports that it is able to investigate billing disputes but not those related to the following matters:

  • the efficiency, age or condition of the hot water system itself
  • the occupancy rate of the dwelling
  • action or inaction of a strata corporation, property manager or landlord.

In Victoria, where bulk hot water is being regulated, Energy and Water Ombudsman Victoria (EWOV) has declared that there are certain cases that it cannot investigate, such as:

  • most issues with the bulk water system (storage tank and heating equipment)
  • most issues related to switching bulk hot water companies
  • any compliant related to an owner’s corporation or building management as EWOV can only receive complaints about Scheme Participant.

Currently, some ombudsman agencies have no jurisdiction to provide dispute resolution to embedded network customers or bulk hot water services. Some retailers (if it is the case that hot water is provided by an authorised retailer) have included in their hot water contracts provision to give end users full access to energy ombudsman schemes, Office of Fair Trading and hardship programs. These commercial decisions provide more benefits to consumers and improve competition between retailers and embedded network operators when supplying this service. However, it is unclear how these provisions will fully cover consumers especially if it is not defined as an energy service.