Embedded networks live on as Victorian reform for residential embedded networks slowly takes shape

• New embedded networks in residential apartment buildings will be banned from January 2023 unless 100% of electricity is sourced from renewable energy, with at least 5% being sourced from on-site generation.
• Existing embedded networks in residential sites, including apartment buildings, retirement villages, social housing and residential/caravan parks, will transition to a new regulatory regime, moving through a revised exemption regime to a new licensing scheme over the next three to four years.
• Existing embedded networks will likely also need to meet the renewable energy requirement as part of the new licensing regime.

New embedded networks from 1 January 2023

The challenges of reconciling distinct policy interests have been confirmed with the recent release of the Victorian Government’s response to the Expert Panel’s final recommendations report on its Embedded Networks Review.

In a step away from the Government’s initial position of banning embedded networks in new residential apartment blocks except for those that use renewable energy micro grids to deliver low-cost renewable energy, the Government has announced instead that new embedded networks will be permitted from January 2023 provided that they source 100% of electricity from renewable sources with a minimum of 5% being generated on-site.

The practicalities of implementation of the Government’s initial intent were always going to be a challenge, with the Government’s position also being a departure from the Expert Panel’s recommendation that new networks use micro grids to generate at least 50% of the building’s electricity usage and that the renewable energy requirement not be met by purchasing renewable energy from the grid.

Noting that the Government’s stated purpose of banning embedded networks was to ensure that Victorian consumers in embedded networks can access the same competitive retail offers and consumer protections as other Victorian consumers, it remains curious that a carve-out for renewable energy had been a feature of the Government’s policy, because this exception has no bearing on access to competitive offers or other consumer protections.

Access to retail offers and enhanced consumer protections will arise through legislative changes, which will also apply to existing embedded networks, with a new licensing regime to be implemented. An exact timetable has not been set, with the Government stating that this will be a matter for the next term of government – the Victorian election is scheduled for 26 November 2022. Until then, a revised General Exemption Order (GEO) will apply.

Existing embedded networks

As with new embedded networks, existing embedded networks will ultimately transition from being regulated under conditional exemptions through the General Exemption Order to a new licensing regime under the Electricity Industry Act 2000 (Vic), which will extend to other forms of residential accommodation, including social housing, retirement villages and residential/caravan parks. The Government anticipates shifting compliance obligations to industry providers, rather than owners corporations.

However, the timing of this transition is not certain, with the Government noting much detail needs to be addressed and a new licensing scheme requiring changes in legislation. The Government has also expressed a commitment to making retail contestability in embedded networks a reality, which would include removing the impediment of meter exchange, but notes that multifaceted consultation will be required before that can be effected.

It is expected that a condition of licensing will be that the embedded network will also need to meet the renewable energy requirements, potentially phased in over a three year period.

While the Expert Panel’s timeline anticipated the new licensing regime phasing in between 2024 and 2026, the Government has only committed to addressing these issues in the next term of government.

What to do?

For those contemplating installing and operating new embedded networks in residential apartment blocks in 2023, there is now a degree of clarity with respect to the renewable energy requirements, and planning can be done to meet these requirements. As is often the case, the devil will be in the detail and therefore the new form of the GEO will be eagerly anticipated. The Government’s response expressly refers to apartment buildings, so we will also need to wait to see whether the revised GEO extends to other residential settings.

For those already owning and operating embedded networks in residential environments, it would appear the status quo is to remain for the time being, however we will await the new GEO to confirm.

Nevertheless, there will most likely be significant reforms to occur over the next three to four years, and there should be further opportunity to engage on the issue once legislative changes are publicly proposed.

What’s the situation for non-residential premises?

At this stage, there will not be any material changes for embedded networks in non-residential premises. The Expert Panel’s terms of reference were limited to residential apartment blocks, however the Expert Panel did recommend that the Government consider whether the Panel’s recommendations relating to residential embedded networks should be extended to small business customers.

The Government has stated that it supports the Panel’s recommendation in principle but considers that further assessment of potential impacts and appropriate timing would be needed before implementation.

Therefore, while the status quo will remain in the short term, it is expected that the reforms mooted for review in the next term of government will extend beyond the residential setting to small business as well.

For property owners, property managers and owners corporations with buildings containing embedded networks or who are contemplating installing embedded networks, Gadens is well-placed to advise on all relevant regulatory, compliance and contractual issues.

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Authored by:

Adam Walker, Special Counsel