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 consumer energy resources (CER) and standard connections with CER. 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 standalone 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 the size of the microgrid and 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. Regulated retail prices apply to all authorised retailers. As discussed above, the Proponent is likely to require a retailer authorisation from the AER due to the size and nature of the microgrid and will therefore be subject to regulated retail prices. 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). As discussed above, in Queensland regulated retail prices are set by the Queensland Competition Authority and apply to all authorised retailers, including microgrids operated by an authorised retailer. 

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.

The Proponent plans to implement an external ownership model whereby its subsidiary, the energy supply company, will be the sole owner and operator of the local microgrid and the solar PV and battery systems. To keep things in-house, the energy supply company will also be responsible for selling electricity to customers within the precinct. 

The energy supply company will coordinate the provision of the following services:

• to customers within the embedded microgrid:
  • local generation and storage services (for supply and sale within the embedded microgrid)
  • distribution services (the supply of electricity through the embedded microgrid)
  • retail services (the sale of embedded generation and the on-selling of electricity bought from an authorised retailer (where needed) to customers in the embedded microgrid)
  • microgrid operation (including supervision of energy transactions within and outside the microgrid). 
• with parties outside the embedded microgrid:
  • energy services (for supply and sale in the wholesale electricity market) through an Integrated Resource Provider (Small Resource) for the market connection point
  • market ancillary services (for supply and sale in the ancillary services market) through an SGA¹⁰ or Demand Response Service Provider (DRSP) for load connection points 
  • network support services (for supply and sale to the local distribution network service provider)
  • the purchase of energy and import from the grid to support on-site generation and storage when required.

The National Electricity Law (NEL) and National Electricity Rules (NER) apply to embedded microgrids. This means that the energy supply company would need to comply with the provisions of the NEL and NER, including the requirements for registration by AEMO set out in the NER where relevant. Parties must pay a fee to register with AEMO¹¹ and the process for registration is set out on AEMO’s website¹². 

The registration categories (and exemptions) that are potentially applicable to this case study include:

• Registration as a Network Service Provider – A person who owns, operates or controls a transmission or distribution system must register with AEMO as a Network Service Provider (NSP). However, the AER may exempt a person from registering as an NSP if the person meets specific criteria. An embedded network is a type of exempt network under the AER’s Electricity Network Service Provider – Registration Exemption Guideline (2018). An exempt embedded network service provider will still be subject to certain conditions set out in the Guideline, including in relation to consumer protections. It would also need to appoint an Embedded Network Manager for the microgrid, or be accredited by AEMO as an Embedded Network Manager, in accordance with the NER¹³.
• Registration as an Integrated Resource Provider – Any person who owns, controls or operates an integrated resource system connected to a transmission or distribution network must register with AEMO as an Integrated Resource Provider, except where they meet the exemption criteria. The solar PV and battery systems will constitute an integrated resource system for these purposes. In this case, the integrated resource system connected to the distribution system through an embedded network has a combined total nameplate rating of less than 5MW. This means that the Proponent will be automatically exempt from the requirement to register as an Integrated Resource Provider.

However, in order to be able to participate in the energy and ancillary services market (as an additional revenue stream to the Proponent) when connected to the grid, registration as an Integrated Resource Provider would be required, with the following classifications relevant to this case study:

•  
• An Integrated Resource Provider would need to classify the connection point for the integrated resource system as a market connection point. This classification means the Integrated Resource Provider will be taken to be a Small Resource Aggregator, enabling the small generating units or small bidirectional units to participate in the wholesale market.
• The Integrated Resource Provider could then also classify the plant at the market connection point as an ancillary service unit. This classification means the Integrated Resource Provider will be taken to be an Ancillary Services Provider, enabling the battery to participate in ancillary services markets¹⁴.   

Importantly, only one entity can be the financially responsible market participant for a connection point. For simplicity, this case study assumes that the authorised retailer is an existing Integrated Resource Provider and so can provide these additional services to the wholesale and ancillary services markets on behalf of the energy supply company. This avoids the need for the energy supply company to register as an Integrated Resource Provider.

In New South Wales, any person or business who sells energy to another person must either have a retailer authorisation or a retail exemption. The AER may exempt a person from the requirement to hold a retailer authorisation if the person meets specific criteria. Situations where a retailer authorisation is not necessary or appropriate include those where the seller is selling energy incidentally (i.e. the sale is not the seller’s core business), or where the cost of having an authorisation outweighs the benefits to customers, or where an insignificant amount of energy is being sold. Depending on the specific activity, selling energy in an embedded network is a type of exemption under the AER’s Retail Exempt Selling Guideline (version 6). An exempt energy seller will still be subject to certain conditions set out in the Guideline, including in relation to consumer protections. 

There are various categories of exemptions, most linked to the type and number of customers being sold or supplied energy.

The registration categories (and exemptions) that are potentially applicable to this case study include:

• Exemption from the requirement to hold a retailer authorisation – This scenario assumes the proponent will be selling electricity to more than 10 residential and business customers within the embedded microgrid and meets all the other conditions of the exemptions¹⁵. The activity of sale of electricity therefore meets all the requirements of the registrable exemptions applicable to a person who sells electricity to customers in an embedded microgrid.

Work Health and Safety Regulation 2017 (NSW) sets out a range of safety provisions that apply to electrical workers, electrical equipment and electrical installations. 

The AER’s Retail Exempt Selling Guideline includes a pricing condition on some retail exemption categories. This condition requires that an exempt seller must not charge the exempt customer tariffs higher than the standing offer price that would be charged by the relevant local area retailer for new connections, if the local area retailer were to supply that quantity, or estimated quantity, of energy directly to the premises of the exempt customer.

Independent Pricing and Regulatory Tribunal (IPART) is currently undertaking a review to make recommendations to the New South Wales government on setting maximum prices for electricity, gas and hot and chilled water supplied through embedded network in NSW¹⁶. This review is part of the New South Wales government’s New South Wales Embedded Network Action Plan  that contains a range of actions that impact the regulation of embedded networks in New South Wales¹⁷. If implemented, this maximum price will apply to the embedded microgrid in this case study and limit the amount the Proponent can charge customers for electricity services.  

A person who is exempt from holding a distribution licence must still comply with the majority of provisions in the Electricity Supply Act 1995 (NSW) and regulations to efficiently deliver a safe and reliable supply of electricity¹⁸.

Connection of an embedded microgrid to a local distribution network will require a connection agreement between the embedded microgrid owner/operator and the local distribution business. These agreements set out the obligations of the distribution business in respect of the provision of customer connection services to the connection point. They also set out various obligation on the customer (in this case, the embedded microgrid owner/operator) including in relation to information provision, life support equipment, and safety. For example, electrical networks, including embedded microgrids owned and operated by exempt entities, may be subject to mandatory load shedding requirements in emergency situations, in accordance with the NER.

To provide market ancillary services, the embedded network would need to meet AEMO’s requirements for the MASS and participate in central dispatch, which would require telemetry and other sophisticated equipment. This is required by Chapter 3 of the NER and is subject to civil penalty provisions.

AEMO’s MSATS/CATS procedures contain the core requirements and obligations of retailers and other parties to undertake and complete retail customer transfers. These are required by Chapter 7 of the NER and are subject to civil penalty provisions.

Electricity network service providers exempt by the AER from the requirement to be registered with AEMO and energy sellers exempt by the AER from the requirement to hold a retailer authorisation must understand and comply with all the obligations they have under their respective exemptions, and the New South Wales Electricity Supply Act 1995 and its Regulation. Given that the energy retail and distribution codes are varied from time to time, understanding the obligations and ensuring compliance will be an ongoing activity. 

The AER is currently undertaking a review of the exemptions framework for embedded networks.¹⁹ An issues paper was published in November 2023 and seeks feedback on several options for reforms to the network and retailer exemptions for residential embedded networks. If implemented, some of these options could have a material impact on the availability of exemptions for embedded microgrids and/or the conditions applying to exemptions. 

The pricing requirements set out in in the AER’s Network Exemption Guideline and Retail Exempt Selling Guideline applies to customers in microgrids and embedded networks in New South Wales. These guidelines set out the charging structure and maximum price that can be charged to exempt customers. The maximum price for retail activities regulated under the AER's Retail Exempt Selling Guideline, all-inclusive tariffs for small customers must often be no higher than the applicable standing offer of the local area retailer. As noted above, IPART also is currently undertaking a review to make recommendations to the New South Wales Government on setting maximum prices for electricity, gas and hot and chilled water supplied through embedded network in New South Wales. These price caps could affect the profitability of the project and the payback periods for the solar and battery microgrid assets the Proponent installs.

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