Embedded Networks: Positively Delivering for Customers

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By Jim Snow, executive director Oakley Greenwood & Adjunct Professor University of Queensland

Oakley Greenwood has been undertaking detailed work related to embedded networks, the commercial models that have been deployed, and how these interact with the grid, with the electricity market and how they deliver for customers.

Some of this work was undertaken for the Australian Energy Market Commission (AEMC) and some for a private owner of an embedded network village.

The latter was a very detailed modelling project where we looked at the integration of renewables into a grid-connected embedded electricity-networked village – a microgrid within a grid.

These embedded network arrangements are becoming very popular with developers and customers – and eating into the traditional growth for networks – but is it really a problem?

This project forensically examined and modelled the interaction with retail and network grid supply tariffs and how for customers in the village this can be a much lower cost hybrid.

Some 30 per cent savings over standing tariffs were observed with far more stable prices over time, avoiding a lot of the escalations that have occurred in the retail market.

The project also concluded that adding in the right economic levels of renewables, storage and demand side management would further reduce long-term costs, reduce emissions and is the preferred option commercially and socially – embedded networks are becoming attractive options for customers.

There is a lot for grid networks to learn from the project about optimising the outcomes for them and for the customers in these embedded network arrangements.

The learnings are:

  • Customers are typically better off financially and have more stable energy cost over time, and:
    • Customers are very well protected (now) by regulation, but there are regulatory conflicts that can occur within that protection mechanism between state and commonwealth requirements.
  • The key counter party becomes the network, but the pricing is retail-driven. Network ‘cost-reflective’ signals may not make it, but:
    • The tariffs for embedded networks are commercial ones and pass-through of ‘cost-reflective’ tariffs is evident in, for example, demand-based charging, but energy only and other options are also available – tariff analysis and modelling is essential.
    • The pricing structure significantly affects (even dominates) the investment decisions around renewable integration and net returns. A lot more work needs to be done on cost-reflective tariffs design, networks price to retailers, and embedded networks.
    • Uniform Tariff Policy subsidies in non-urban areas also look like they could be reduced or provided to less, or more targeted, users under this model. They generally don’t apply to embedded networks, yet the customer can still be better off.
  • Grid networks may potentially be better off financially if they could optimise offers to embedded networks and provide the right supporting services.
  • Export analysis and processes desperately need to be reformed.
  • Meaningful customer engagement needs to be undertaken – this is a key area of reform for networks and is not just about regulatory resets, it is about tariff design, cost-reflectivity, demand response and network optimisation. There are major gains to be made for them and customers (and the economy).
  • In an era of no limited merit reviews, demand side solutions could significantly lower regulatory risks for networks and embedded networks provide major opportunities – must engage though.
  • There is a strategic issues of when does an embedded network transgress a perceived network ‘franchise’? Is it an opportunity or threat? Will they just disconnect? The answer here is cost-reflective pricing so the network becomes indifferent to how customers use their network.
  • Potential role for gas generation and battery storage – this is developing rapidly and will impact further on networks, but again provides major opportunities.

This area of the market continues to grow rapidly and there are a lot more interesting and innovative developments coming.

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