Microgrids

There is no definition of a ‘microgrid ’ in the National Electricity Law (NEL) or National Electricity Rules (NER) or state and territory energy laws. As such, it is often used by different parties to refer to different things, including isolated standalone power systems, embedded networks with distributed energy resources (DER) and standard connections with DER. In the context of this case study, we will use the term ‘microgrid’ to refer to electricity networks that can be isolated and operated independently of the interconnected electricity system (the ‘grid’). This includes pure standalone microgrids that do not have the capability to operate in a grid-connected mode and embedded microgrids which retain a single point of connection with the grid but can interface with the wholesale electricity market . Importantly, the capability to isolate and operate independently of the grid is what distinguishes an embedded microgrid from other standard embedded networks.

The regulatory regime applicable to a microgrid in Australia will differ significantly depending on several factors, including whether a microgrid is connected to the National Electricity Market (NEM), whether the proponent is a local distributor or another party, and the jurisdiction in which the microgrid is located. The regulatory frameworks are summarised in the table below.

State and territory regimes for microgrids - in particular, stand-alone microgrids - differ widely, including in relation to their application of energy consumer protections. For example, while most microgrid customers are limited in their choice of retailer and/or microgrid operator, many jurisdictions apply some pricing protections to these customers.

In addition, many jurisdictions have licensing and exemption regimes which enable the relevant state or territory regulator to apply certain regulatory obligations to licensees and exempt parties. Again, while the extent of these obligations can vary significantly between jurisdictions, parties wishing to sell, supply or generate electricity within a microgrid will generally be required to comply with some degree of energy-sector regulation.

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Through a cost-sharing arrangement, the Proponent plans to implement a community-ownership model which will give the community (individuals, households and businesses) the option to take partial ownership of the key local energy assets – that is, the wind turbines and battery energy storage system .  The Proponent will fill the funding gaps. Households will also be given the opportunity to own the rooftop solar PV (this would be optional). 

Given the size of the microgrid and its remote location, the Proponent plans to provide an 'all in one' service to households and businesses. The bundled service will include:

• local generation and energy storage services (electricity for supply and sale within the microgrid)
• network services (supply of electricity within the microgrid)
• retail services (sale of electricity within the microgrid), and
• supporting services, such as metering.

Using smart technologies developed in partnership with an innovative technology firm, the Proponent also plans to perform activities related to system operation, including system control, installation, operation and management of the remote electricity supply.

The National Energy Retail Law (NERL) and National Energy Retail Rules (NERR) do not generally apply to isolated microgrids operated by a person other than the local distributor.  However, unlike other jurisdictions, Queensland does not limit the application of the NERL and the NERR) to the sale of electricity to customers connected to the interconnected electricity system – that is, it also includes sale of electricity to customers connected to isolated systems.  As such, the Proponent will require either a retail authorisation or exemption from the Australian Energy Regulator (AER) to be able to sell energy to households and businesses within the microgrid .  Given that the primary relationship between the Proponent and its customers will be the sale of electricity, it is unlikely that the Proponent would be eligible for an exemption from the requirement to become an authorised retailer .³

The National Electricity Law (NEL) and National Electricity Rules (NER) do not generally apply to isolated microgrids operated by parties that are not the local distribution business.⁴  This means that the Proponent would not need to comply with the provisions of the NEL and NER, including the requirements related to registration and participation in the wholesale and retail markets, network connections and planning, economic regulation of networks, metering arrangements and system security obligations.

In Queensland,⁵ anyone intending to operate electricity infrastructure needs to hold an electricity licence (‘electricity authority’).⁶  Specifically, generators need a generation authority (unless the generating plant they operate has a capacity of 30MW or less), and network service providers need either a transmission or distribution authority.

Alternatively, a ‘special approval’ could be sought from the Queensland Department of Energy and Public Works which would enable a party to perform the activities of a generator , network service provider or both without having to hold the relevant electricity authority. Special approvals are commonly granted to resources companies and island resort operators that wish to generate and supply electricity at the site of their operations.

The licensing requirements (or exemptions) that are potentially applicable to this case study include:

• Queensland generation authority (or deemed special approval) - Given the Proponent will operate generating plant with a capacity of less than 30MW, it will be eligible for a deemed special approval allowing it to connect generation to the microgrid without requiring a generation authority.
• Queensland distribution authority (or special approval) - As the owner/operator of the supply network within the microgrid, the proponent would need to obtain a distribution authority containing certain conditions.

Safety provisions set out in the Electrical Safety Act 2002 (Qld) cover microgrid operators, as the provisions apply to both distributors and holders of special approvals under the Electricity Act 1994 (Qld).  The Electrical Safety Act also includes safety requirements for anyone performing electrical work (including designing, manufacturing, supplying and installing electrical equipment).

Other than in South East Queensland where electricity prices have been deregulated since 1 July 2016, retail electricity prices in Queensland are regulated by the Queensland Competition Authority. The uniform tariff policy means that the prices applicable to residential customers supplied by in a microgrid in regional Queensland will be no higher than the prices applicable to NEM-connected residential customers in regional Queensland.

The Queensland Electricity Distribution Network Code (2015) establishes guaranteed service levels for various services provided to customers by parties with a distribution authorisation, including specified service levels for customers of microgrids. If the service levels are not met, the distributor must pay the customers specified amounts.⁸

If the Proponent is considered a ‘retailer’ they will need to be a scheme participant under the Queensland Energy and Water Ombudsman Act (2006).

The microgrid Proponent would face all the consumer protections imposed on authorised retailers in the National Electricity Market (NEM) and the penalty arrangements (including in some instances civil penalties) for breaches. These obligations are diverse, change from time to time, and range from responsibilities for protecting life support customers from power outages through to customer hardship obligations for financially distressed customers.

Transitioning customers to a new model of supply will involve the transfer, removal or decommissioning of the set of assets previously used to supply the customers of the microgrid .  These assets could be owned by a local distribution business, another party or households and business within the community directly.  The transfers of existing assets would be governed by commercial negotiations between the Proponent and the existing owner(s), recognising that an existing owner may not wish to sell the assets, and the Proponent may not wish to purchase them.

Retail electricity prices are subject to some form of regulation in all states and territories, either under the Default Market Offer (DMO) or under jurisdictional price regulation. In some states and territories, those price caps also apply to microgrids, while in other jurisdictions they only apply to customers connected to the National Electricity Market (NEM). Microgrid proponents should obtain advice on the application and impact of price regulation in the relevant state or territory. Given the higher costs of supplying remote microgrid customers, the application of price regulation could result in prices being capped at below the operator’s costs unless it has access to other sources of funding to subsidise the costs.

¹Distribution businesses are permitted to provide standalone power systems to existing customers as an efficient alternative to upgrading or replacing an existing network connection.