POWERING CONSUMER PROTECTIONS: WHY DECENTRALISED AND DISTRIBUTED ENERGY RESOURCES WARRANT A NEW LENS ON CONSUMER PROTECTION REGULATIONS

Powering consumer protections: Why decentralised and distributed energy resources warrant a new lens on consumer protection regulations

Rhea Rachel

Environmental Engineer and Master of Environmental Law candidate at Sydney Law School.
The author, an employee of a NSW Government Agency, has produced this article in an individual capacity:
it does not represent the views of the author’s employer.

Recent years have seen distributed energy resources usher in a new era of self-generation and reduced reliance on traditional centralised energy networks. Australian customers are increasingly enabled to access unconventional “behind the meter” energy sources and contribute to a two-way flow of energy back to the grid. Simply put, these services are altering the very landscape of electricity generation and distribution upon which Australia’s energy consumer protection laws have been designed to date. Against this backdrop of a changing energy landscape, this paper examines why new energy technologies warrant a new lens on Australia’s consumer protection regulations, calling for a new definition of “energy supply”, and for the future-proofing of Australia’s customer frameworks so that further technological advances do not render existing frameworks redundant. It discusses the challenges in applying existing policy frameworks to new energy services, and the need for a suite of rules and regulations to fill potential gaps in policies and promote competition in the new energy environment.

1. INTRODUCTION

Recent years have seen a rapid increase in the development and implementation of new decentralised energy technologies and distributed energy resources (DERs) in Australia. These services (including load aggregation, virtual power plants and shared hot water systems) each offer novel energy services for customers during a period of drastic energy transition across Australia. Australian customers are increasingly enabled to access unconventional “behind the meter” energy sources and contribute to a two-way flow of energy back to the grid. These services, alongside the growing uptake of residential solar battery storages, are gradually ushering in a new era of self-generation and reduced reliance on centralised electricity networks. In other words, DERs are beginning to alter the very landscape of electricity generation and distribution upon which the majority of Australia’s energy consumer protection laws have, to date, been designed.

In light of the growing uptake in DERs, government agencies, regulators, and consumer advocacy groups alike have become increasingly vocal about the need for new consumer protections. In April 2019, the Clean Energy Council, the Australian Energy Council, the Smart Energy Council and Energy Consumers Australia submitted an application to the Australian Competition and Consumer Commission (ACCC) for a voluntary New Energy Tech Consumer Code (NETCC) – a set of minimum standards for consumer protection in new energy technology.[i] In April 2022, the Australian Energy Regulator (AER) commenced its review of consumer protections for future energy services, with the aim of assessing the applicability of the National Energy Customer Framework (NECF) in the current transitioning energy market.[ii] Similarly, in November 2022, the Victorian Department of Environment, Land, Water and Planning (DELWP)[iii] released a consultation paper on the protections for consumers of DERs [iv], and, within New South Wales, the Independent Pricing and Regulatory Tribunal (IPART) is expected to commence a review of the future of embedded networks in 2023.[v] Suffice it to say there is currently considerable regulatory attention towards the policy implications of new energy technologies across Australia.

Within this backdrop of a changing energy landscape, this paper aims to examine why DERs warrant a new lens on consumer protections in Australia. Overall, there appear to be two key themes within regulatory discourse on this issue this far: first, the fundamental and overarching uncertainties in relation to the application of existing regulatory frameworks to DERs, and, second, the need for a suite of technical rules and regulations to fill potential gaps in DER consumer protections.

2. Regulatory Uncertainties with the Application of Existing Consumer Protection Frameworks to DERs

Most consumer protections in Australia are governed by the Australian Consumer Law (ACL), which consists primarily of the Competition and Consumer Act 2010 (Cth)[vi], and the Competition and Consumer Regulations 2010 (Cth). This legislation sets the framework for a single national consumer law, creates a national legislative scheme for statutory consumer protections, and incorporates minimum fair trading and consumer protection provisions.[vii] While the ACL applies to virtually all Australian consumer products, energy services are acknowledged as requiring an additional set of consumer protections because of the essential nature of energy supply (i.e., its “essentiality”).[viii] Therefore, consumer protections for traditional energy services are governed by an additional set of regulations under the NECF[ix]. The NECF is administered by the AER, applies solely to entities “selling energy to customers at premises”, and hinges upon the principle that the essentiality of energy warrants additional protections to consumers.[x] 

Within this context, regulatory uncertainties arise as to how and where DERs fit into the existing ACL and NECF frameworks. For the purposes of this paper, these issues are considered overarching and are discussed separately from the technical issues outlined in Part 3.

2.1     Uncertainties in the Definition of the Essentiality of New Energy Services

One of the key issues with distributed energy resources is whether they meet the NECF’s definition of an essential energy service. For example, households and retail customers are being offered novel energy services, such as energy management software, that allow remote control of customer’s energy consumption and provide energy aggregation services that can temporarily reduce or stop a customer’s energy supply. These services, while not essential themselves, certainly impact the supply of otherwise essential electricity and gas services to customers.

Given these developments, it is currently unclear whether new energy services, such as virtual power plants and load aggregation, meet the definition of essentiality, and, consequently, whether customers of these services should be granted the same NECF consumer protections that would otherwise be available under the traditional models of retailer-supplied energy services. However, many energy regulators have identified that the new definition of essentiality will be a major consideration in the future regulatory reform of the NECF, and that there is a high likelihood that the essential nature of energy products and services will change as a result.[xi]

2.2     Consumer Confusion Surrounding Applicability of the ACL and NECF for Bundled Energy Services

As pointed out by the AER, the distinction between NECF-protected services, and non-NECF-protected services is becoming increasingly blurred with the introduction of new bundled energy services.[xii] Consequently, there is growing consumer confusion regarding their rights under the NECF versus the ACL for different aspects of their energy services. For example, many households with solar photovoltaic (PV) installations and battery storages also utilise, to some degree, retailer-supplied electricity from the grid. In this instance, their energy services are regulated under two separate consumer protection frameworks, namely, the ACL for the supply of the battery and solar PV systems, and the NECF for the supply of electricity from the grid.[xiii] This selectivity of consumer protection has been shown to lead to greater confusion regarding consumer rights and protections, as pointed out in a recent study on consumer complaints by the Water and Energy Ombudsman NSW.[xiv]

2.3     Regulatory Loopholes in the Definition of “Supply of Energy” within the Context of New Energy Services

Under the Retail Law (the governing legislation of the NECF) a retailer authorisation is required when the activity involves “selling energy to a person for premises”.[xv] Increasingly, however, new energy technologies, including shared or community water heaters, appear to fall outside this definition of “energy”, while arguably still meeting the requirement of essentiality as discussed in Part 2.1. For example, newer models of community or shared water heaters (seen typically in high-density apartment blocks) calculate usage based on the volume of heated water supplied to each customer (i.e., in litres). This differs from traditional household-level water heaters, which measure usage via the volume of energy consumed in the heating of water (i.e., in megajoules).

Customers who are supplied heated water through these newer technologies are therefore afforded fewer consumer protections than would otherwise be the case for traditional energy services. This is because the sale of heated water through embedded networks, when charged per litre, reveals two significant regulatory loopholes:

• First, that the NECF does not apply because the National Energy Retail Law defines energy as “electricity or gas or both”, and therefore implicitly excludes heated water services from its scope.[xvi]
• Second, that the sellers of heated or chilled water services are exempt from obtaining a licence under the Water Industry Competition Act 2006 (NSW), meaning that any specific consumer protections for water supply services also do not apply to community heated water systems.[xvii]

In 2020, the Water and Energy Ombudsman NSW found that 29% of gas-related complaints from customers in apartments or strata scheme complexes pertained to community hot water services, with many customers lodging complaints regarding inaccurate billing.[xviii] This highlights a demonstrable issue in the way that the National Energy Retail Law and the NECF define energy services going forward.

3. Filling the Gaps in DER Consumer Protections

Aside from the overarching regulatory uncertainties discussed above, there is additionally a suite of technical rules and regulations to fill in the consumer protection gaps created by DERs and associated energy technologies. A few of these key issues are discussed in the sections that follow.

3.1     Retailer of Last Resort Provisions

Retailer of last resort (RoLR) provisions are a key feature of the NECF, and form the fundamental regulatory tool to ensure the continuation of energy supply to customers in the event of retailer failures[xix]. Under the RoLR scheme, the AER makes arrangements to transfer customers of failed retailers to other retailers in order to maintain a constant supply of electricity or gas.[xx] The RoLR provisions are an integral component to protecting the essentiality of energy supply and ensuring that customers are not disadvantaged due to retailer failures.

DERs that do not fall under the scope of the NECF (for example, those that do not meet the criteria of “essentiality” or a “supply of energy” as discussed in Part 2 above) do not provide any RoLR protections for customers. As a result, customers of some DERs (such as battery storage devices) are left at risk of losing access to their energy without notice, in the event that their retailer’s business fails. As highlighted in the AER’s recent review of customer protections for future energy services, ensuring that the RoLR framework is expanded to encompass any potential changes to the definition of “supply of energy” under the NECF will be critical for ensuring suitable protections for DER customers.[xxi] As an added benefit, expanding RoLR provisions to encompass DERs can be reasonably expected to drive customer trust in, and therefore demand for, DER services and products themselves.

3.2     Retail Price Controls for Customers in Embedded Networks

Another significant regulatory issue that arises for customers of embedded networks is the frequency of tariff variations and insufficient price controls. Under the National Energy Retail Rules (NERR), traditional energy retailers are prohibited from charging customers more than the AER’s standing offer price cap. In other words, regulated retailers are legally obliged to offer customers, at most, the standing offer price cap.[xxii]

In its 2019 review of regulatory frameworks for embedded networks, the AEMC found that some customers in embedded networks were being charged more than the permitted maximum price for customers in traditional energy networks.[xxiii] These findings were also supported by a recent NSW Parliamentary Committee study into the regulatory frameworks for embedded networks.[xxiv] In light of this, the AEMC recommended that a new regulatory framework be adopted to provide greater access to retail competition for customers in embedded networks. It additionally recommended that the NERR be amended to provide greater clarity regarding the AER’s power to set a price cap for embedded networks that is lower than or equal to the standing offer.[xxv] While there has been considerable regulatory attention recently on the expansion of the standing offer to embedded networks[xxvi], to date this rule change is yet to be implemented.

It should be noted, however, that the AER’s standing offer price cap is representative of a pre-determined maximum price – meaning that, in many instances, this price can be reasonably higher than the market offer price. As a result, even with the potential implementation of the price cap to embedded networks, many on-sellers within embedded networks may have no incentive to acquire energy at a more cost-efficient market rate to pass on to their customers. Regulators and policy makers should therefore consider whether further regulatory reform is warranted to ensure that embedded network operators are afforded the right incentives to provide embedded networks customers the efficient price of energy.

3.3     Dispute Resolution Avenues 

Numerous recent national and jurisdictional-level policy enquiries have found that customers of new energy services are not provided the same access to independent and specialised dispute resolution services as customers of traditional energy services. This poses a significant risk of customers of new energy technologies not realising their customer rights, and new energy retailers not being subject to the same consumer protection regulations as retailers of otherwise traditional services.

In light of this issue, the AEMC’s 20 review of regulatory frameworks for embedded networks recommended that the jurisdiction of energy Ombudsman schemes be extended for new energy technologies and services – including those not currently covered by the NECF.[xxvii] Similarly, the 2020 report on the future of Ombudsman schemes (commissioned by the Australian and New Zealand Energy and Water Ombudsman Network), recommended that Australian Ombudsmen consider extending their jurisdiction to the “sale or supply of energy, or that may otherwise interrupt the supply of energy or impact upon the sale or supply of it”.[xxviii] While there has been no widespread expansion of Ombudsman jurisdictions as yet, the NETCC includes provisions to allow providers of new energy services to utilise local Ombudsman schemes for their dispute resolution processes.[xxix] Importantly, however, this code remains voluntary in nature and relies upon the initiative of service providers to become signatories to the code.

3.4     Access to Competition and Creation of Implicit Monopolies

One of the key issues associated with some embedded networks is the removal of customers’ access to market competition. For example, meters at customer connection points within embedded networks are currently not registered within AEMO’s retail market system – meaning that competing retailers are unable to locate customer data to provide quotations for services, or to transfer customers between retailers.[xxx] This creates a significant practical barrier for embedded network customers accessing competition and switching providers with relative ease, and has the negative effect of creating an implicit monopoly on energy supply.

Lowering barriers to entry and facilitating customer movement between energy retailers are both fundamental metrics of a well-functioning competitive market. Accordingly, considerable regulatory attention should be drawn to improving access to competition for embedded networks customers by integrating embedded networks data within AEMO’s systems. To this end, the AEMC’s 2019 review of embedded networks recommended a new framework to ensure that off-market retailers appoint metering coordinators responsible for registering customer connection points with the AEMO.[xxxi] While this recommendation would substantially lower the barriers to competition, considerable monitoring and verification may be warranted to ensure that customers in existing or legacy embedded networks also benefit from these rule changes.

4. Conclusion

The regulatory issues discussed here are by no means an exhaustive list of the challenges currently faced in providing consumer protections for customers of DERs. Rather, this paper simply points out the key reasons why DERs warrant a reconsideration of Australia’s consumer protection frameworks that have been designed to date with a traditional energy supply model in mind.

Overall, it is evident that the growth and uptake of new energy technologies has occurred at a pace far more rapid than policy and regulatory developments, consequently yielding some consumer protection loopholes and unfavorable outcomes for retail competition. Accordingly, there is a critical need to ensure that the NECF is future-proofed so that further advances in technology do not cause existing customer frameworks to become redundant. Regulators and policy makers should consider reforming the NECF to be robust in its consumer protections, yet flexible in its definition of energy supply going forward. And, as highlighted aptly by the AEMC, “consumer protections should be driven by the needs of consumers, rather than the business model of the supplier”.[xxxii]