AEMC announces significant changes for distributed energy resources

What you need to know:

• The AEMC has published its final rule and determination in its Access, pricing and incentive arrangements for distributed energy resources rule change on 12 August 2021.

• The final rule introduced a number of changes to the NER and the NERR, to be implemented gradually from 19 August 2021.
• Key reforms include:
  • export services will be recognised as a distribution service;
  • the prohibition on DNSPs charging for export services will be removed (however DNSPs cannot charge existing DER customers before 1 July 2025);
  • there will be a prohibition on DNSPs offering a static zero export limit on new connections (subject to exceptions);
  • DNSPs will be required to have a basic export level for export tariffs and must not charge retail customers for export up to that level; and
  • increased regulatory oversight, including requirements for the AER to publish new export tariff guidelines and customer export curtailment values, and review and update existing guidelines as necessary.

What you need to do:

• DNSPs should familiarise themselves with the new export services obligations under the NER and the NERR which are effective from 19 August 2021, and monitor developments for the publication of the updated AER guidelines (most new and updated guidelines are due by 1 July 2022).

Background

Distributed energy resources (DER) – small-scale generating units connected to the grid at distribution level (most commonly, rooftop solar PV systems) – have seen enormous growth in recent years as consumers have embraced renewables and in turn contributed to the decentralisation of energy supply in the Australian market. 

While this growth in DER has aided decarbonisation of the energy supply and decreased consumer reliance on large-scale generators, it presents significant challenges for grid security. Distribution networks and the associated regulatory framework designed with the capacity to support the one-way delivery of electricity to end consumers are now being used to support a two-sided market as those with DER export their surplus generation to the grid. These technical issues associated with the surge in DER uptake have prompted the lodgement of the Access, pricing and incentive arrangements for distributed energy resources rule change. We previously reported on the draft determination here. 

The final rule and determination in this rule change process was published on 12 August 2021. 

Final rule change

The final rule and determination has made pivotal market reforms across three main areas:

• clear obligations on Distribution Network Service Providers (DNSPs) to provide export services;
• enabling new network tariff options; and
• strengthening consumer protections and regulatory oversight.

These reforms impose significant changes for DNSPs, consumers and owners of DER.

Obligations on DNSPs to provide export services

DNSPs have been providing their customers with varied DER export services, however as the regulatory framework has lagged behind the trends in DER and failed to adequately recognise the two-way flow of energy, the obligations on DNSPs to provide these services have been unclear. The AEMC has attempted to resolve this issue in the final rule.

Export services are now distribution services

The NER will now explicitly provide that export services are a distribution network service, and as such make clear that export services are a core part of the services provided by DNSPs . It will effect this change by removing references in the NER to the direction of energy to accommodate the two-way flow of energy utilised by DER. 

The recognition of export services as a distribution service under the NER means that existing planning and investment requirements, incentive schemes and controls that currently apply to consumption will also apply to export services. 

Static zero export limits

Prior to the rule change, DNSPs were able to offer customers static zero export limits where sufficient grid capacity was available. The National Electricity Rules (NER) will now provide that DNSPs cannot offer a static zero export limit to a small customer who is seeking to connect DER to the network unless requested by the customer or an exception in the AER's connection charge guidelines applies. DNSPs will now be required to outline circumstances under which they may offer a small customer a connection with a static zero export limit as part of their proposed connection policy. However, where a DNSP cannot provide static zero export limits to a customer, this will not prevent a DNSP from offering a minimum level of export capacity. 

New DNSP reporting obligations for export services

The final rule also introduces measures to provide transparency on a DNSP's approach to integrating export services by requiring a DNSP to report on additional matters related to export services as part of a DNSP's planning and regulatory proposal.

New network tariff options 

The AEMC has included new tariff options for DNSPs to recognise the increased expenditure involved in DNSPs now being obligated to provide consumption and export services to their customers. The tariffs are included as a price signalling mechanism, targeted at smoothing demand for consumption and export services as much as possible, and as an alternative to unnecessary new investment in the grid to assist customers to utilise existing poles and wires. The AEMC also considers enabling export pricing options aligns with the broader ESB Post-2025 reform package which endeavours to support the transition to a two-sided market.

DNSPs can develop pricing options

The final rule removes the provision in the NER that prohibits DNSPs from developing pricing options for energy exported to the grid, and clarifies that tariffs can be used to incentivise customer actions that lead to more efficient operation of the network through reward pricing (for consumption and export services). 

However, there will be no obligation on DNSPs to develop and implement export pricing – this will be optional for DNSPs. Further, a proposal to implement export pricing for a DNSP would be subject to the regulatory determination process and required AER approval. As part of its regulatory proposal to the AER, DNSPs (even those which do not have short term plans to introduce export tariffs in the short term) will also need to include an export tariff transition strategy in their tariff structure statements.

The final rule will also prevent a DNSP from placing an existing DER customer on an export tariff until 1 July 2025 unless the customer or the customer's retailer has elected to be placed on the export tariff.

DNSPs to set basic export level

DNSPs will be required to include a basic export level for each proposed export tariff, allowing customers to export without charge up to a basic level for the DNSP's two upcoming regulatory control periods (10 years in total). The AEMC intends the basic export level to be set at a level where a DNSP can provide export services with minimal or no additional investment.

Increase to individual materiality threshold

In order to more practicably allow DNSPs to develop and trial innovative network tariffs, the final rule will also increase the individual materiality threshold within which DNSPs can implement new tariffs under the NER from 0.5 per cent to 1 per cent of the DNSP's annual revenue.

Regulatory oversight

As export services will be recognised as a distribution service under the final rule, existing regulatory frameworks will apply to export services. However, the final rule requires further changes and oversight, which the AEMC states is in recognition of the relatively new and evolving nature of export services.

Annual AER reporting on export services

The changes will require the AER to prepare and publish an annual report providing information about the performance of each DNSP in providing the export services to customers over the previous year. Reporting will be done in accordance with performance reporting metrics at the AER's discretion, as prescribed by the final rule. The report is intended to guide investment, operating, regulatory and policy decisions. 

AER review into incentives for DNSPs

The final rule also requires the AER to undertake a review to consider arrangements to incentivise DNSPs to provide efficient levels of export services. The AEMC considers the review should consider the practical feasibility of extending the service target incentive performance scheme to export services. The rationale for this change is that the AEMC considers that without reform, the incentive framework in the NER could incentivise DNSPs to reduce expenditure through the application of incentive schemes such as the capital efficiency sharing scheme and the efficiency benefit sharing scheme without providing effective incentives for DNSPs in relation to export service performance. The AER is due to report on this review by 31 December 2022.

AER guidelines

Further, the AER is required by the final rules to consult on and publish a guideline specific to export services by 1 July 2022 and update the connection charge guidelines to reflect the restriction on DNSPs' ability to offer static zero export limits. The final rule also requires the AER to develop customer export curtailment values to help guide efficient levels of network expenditure for the provision of, and network planning, investment and incentive arrangements for, export services.

The reforms will gradually come into effect from 19 August 2021.

Authors: Paul Newman, Partner, Andre Dauwalder, Senior Associate and Jacklin Molla, Associate