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.

The Use Cases on this website (‘Material’), are made available for use on the following basis:

• Purpose: The Material is provided for general information only. It is designed to assist you to gain a basic understanding of the subject matter and is not intended to be comprehensive. You are not permitted to commercialise it or any information contained in it. The Material is not and should not be regarded as legal, business or other professional advice. It should not be relied on and is not a substitute for obtaining independent legal, business or other professional advice relevant to your particular circumstances.
• Currency: The Material is based on publicly available information as at the date of its preparation. The Material is current as at 3 December 2021.
• Scope: The Material only covers energy market regulatory obligations that are administered by the Australian Energy Regulator (AER), the Australian Energy Market Operator or the relevant state or territory energy regulator. It does not cover other obligations that may apply, such as safety obligations, general consumer law obligations or obligations under the financial services regulatory framework. It also does not cover associated technical matters such as compliance with Australian standards or connection requirements.
• No reliance or warranty: The Material may be subsequently amended or updated. While reasonable care is taken in the preparation of the Material, the AER makes no representation or warranty, express or implied, as to the currency, accuracy, reliability or completeness of the Material, or as to its suitability for any purpose. In all cases, anyone proposing to rely on or use the Material should independently verify its accuracy, completeness, reliability and suitability for their own purposes, and obtain independent and specific advice from appropriate experts.
• Limitation of liability: To the maximum extent permitted by law, the AER and its officers, employees, consultants, contractors, and other contributors to the Material (or their respective associated companies, businesses, partners, directors, officers or employees) are not liable for any errors, omissions, defects or misrepresentations in the Material, or for any loss or damage suffered by persons who use or rely on such information (including by reason of negligent act, omission, misstatement or otherwise). If any law prohibits the exclusion of such liability, the AER’s liability is limited, at the AER’s option, to the re-supply of the information, provided that this limitation is permitted by law and is fair and reasonable.

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.

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), and
  • 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 a Small Generation Aggregator (SGA) for generation connection points
  • market ancillary services (for supply and sale in the ancillary services market) through a Demand Response Service Provider (DRSP) (which may be the precinct’s authorised retailer) for load connection points
  • network support services (for supply and sale to the local distribution network service provider), and
  • 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 the Australian Energy Market Operator (AEMO) set out in the NER where relevant. Parties must pay a fee to register with AEMO¹⁰ and the process for registration is set out on AEMO’s website.¹¹

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

• Registration as a Generator – Any person who owns, controls or operates a generating system connected to a transmission or distribution network must register with AEMO as a Generator, except where they meet the exemption criteria. In this case, the generating systems connected to the distribution system through an embedded network have a combined total nameplate rating of less than 5MW. This means that the Proponent will be automatically exempt from the requirement to register as a Generator.
• 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 act as the Embedded Network Manager for the microgrid , in accordance with the Rules.

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, the following registration categories would also likely be relevant to this case study:

• Registration as a Small Generation Aggregator (SGA) – An SGA can provide electricity to the National Electricity Market (NEM) from small generating units. An SGA can only provide energy services to the NEM, it cannot provide market ancillary services.
• Registration as a Demand Response Service Provider (DRSP) – A DRSP can provide (1) market ancillary services by offering a customer’s load, or an aggregation of loads, into frequency control markets and/or (2) wholesale demand response services by allowing large customers to enter a contract with a DRSP to provide demand response by reducing load.

Importantly, an SGA and a DRSP cannot both take responsibility for the same connection point.  To participate in the energy and ancillary service markets, load and generation within the embedded microgrid would need to have separate child connection points and metering so that AEMO is able to settle electricity generated and consumers at each connection point separately. Alternatively, rather than register with AEMO as an SGA or DRSP, the energy supply company could contract with an existing SGA or DRSP (which could be the authorised retailer selling electricity from the main grid to the embedded microgrid) to provide those services to the market on the company’s behalf. 

For simplicity, this case study assumes that the energy supply company would contract with an existing SGA and DRSP for these services.

In Victoria, a person must not engage in the generation of electricity for supply or sale or the transmission, distribution, supply or sale of electricity unless that person either holds the appropriate licences issued by the Victorian Essential Services Commission (ESC) or is exempt from the requirement to hold those licences.

Exemptions from the requirement to hold a licence are made by the Governor through an Order in Council in accordance with section 17 of the Electricity Industry Act 2000 (Vic). Exemptions can be issued for a specific entity and activity following an application process and approval by the relevant Minister.

In addition, certain activities related to the small-scale resale, distribution and generation of electricity are currently regulated under the provisions of an Order in Council, called the General Exemption Order. The Order provides for categories of ‘deemed exemptions’ meaning that no registration is required for the exemption to apply. The General Exemption Order also sets out the terms, conditions, and limitations that those operating under it must comply with to retain their exemption.

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

For the purposes of this case study:

• Exemption from the requirement for a Victorian distribution and supply licences – this scenario assumes that the Proponent will be selling and distributing electricity to more than 10 residential and businesses customers within the embedded microgrid and meets all the other conditions of the exemptions.¹²  The activity of sale and distribution of electricity therefore meets all the requirements of the registerable exemptions applicable to a person who sells and distribute electricity to customers in an embedded microgrid.
• Exemption from the requirement for a Victorian generation licence – the activity of generation of electricity within the embedded microgrid meets all the requirements of the deemed exemption applicable to small-scale generators (ie total output less than 30MW) connected either to a transmission or distribution network at a common point.

The Electricity Safety Act (Vic) sets out a range of safety provisions that apply to electrical workers, electrical equipment and electrical installations. While supply networks owned or operated by distribution or transmission companies are not considered to be electrical installations for the purposes of this Act, embedded microgrids owned and operated by exempt entities would be covered by the provisions on electrical installations.

Electricity prices charged both by authorised retailers and those exempt from a retail licence in Victoria for residential and small business customers with annual consumption up to 40MWh cannot exceed the regulated Victorian Default Offer (VDO) determined by the Victorian ESC each year. This means the VDO would apply as the maximum price that could be charged to the customers in this microgrid scenario.¹³

A person who is exempt from holding a distribution licence must still comply with the majority of provisions in the Victorian Electricity Distribution Code of Practice (EDCoP).¹⁴Clause 1.3.5 of the EDCoP sets out the list of provisions that do not apply to exempt entities, and these include provisions related to reliability of supply and guaranteed service levels.

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 National Electricity Rules (NER).

To provide market ancillary services , the embedded network would need to meet the Australian Energy Market Operator ’s (AEMO) requirements for the Market Ancillary Service Specification (MASS) and participate in central dispatch, which would require telemetry and other sophisticated equipment. This is required by Chapter 3 of the National Electricity Rules (NER) and is subject to civil penalty provisions.

The Australian Energy Market Operator ’s (AEMO) Market Settlement and Transfer Solutions (MSATS) / Consumer Administration and Transfer Solutions (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 National Electricity Rules (NER) and are subject to civil penalty provisions.

Electricity providers covered by the General Exemption Order (GEO) must understand and comply with all the obligations they have under the GEO and the Victorian Energy Retail Code of Practice and/or the Electricity Distribution Code of Practice. 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 Victorian Default Offer (VDO) applies to customers in microgrids and embedded networks as a maximum price cap. The VDO price cap is derived from the annualised cost of traditional grid-supply not a bottom-up view of the efficient costs of a microgrid operator. This means the cap could, for example, affect the payback periods for the solar and battery microgrid assets the Proponent installs.

How will the Proponent manage the economic risk created by the current policy uncertainty? The Victorian Government, through an Expert Panel, is currently reviewing the regulatory framework for embedded networks in Victoria. This review is being undertaken in response to an election commitment made by the Government to ban embedded networks in new residential apartment buildings, with appropriate exemptions for buildings that use renewable energy microgrids to deliver low-cost renewable energy to apartment buildings. The Panel was also asked to provide advice on (among other things) an exemptions pathway for innovative new technologies including in the form of microgrids. The Panel’s final report was released in January 2022 and proposes major reforms to how residential embedded networks are regulated in Victoria. The Panel proposed that the first stage of these reforms would be implemented in January 2023. The Victorian government’s response to the recommendations is expected in mid-2022. The uncertainty created by this review presents an economic risk to the Proponent which should be factored into its early decision making.

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