Australia is in the midst of a once-in-a-lifetime energy transition as we strive to achieve our decarbonisation objectives. One of the policies the Federal Government is implementing in support of this is the roll out of 400 community batteries across Australia to lower bills, cut emissions and ease pressure on the electricity grid.

We take a look at how a recent decision by the Australian Energy Regulator (AER) has optimised the benefits of these batteries to the community through allowing distributors and third parties to partner together to deliver services to customers.

Powering Australia – Community Batteries for Household Solar

The Australian Government has committed to deploying 400 community batteries across Australia to lower bills, cut emissions and ease pressure on the electricity grid under its Community Batteries for Household Solar Program.[i]

The rollout will be administered in two tranches – initially by the Commonwealth’s Business Grants Hub and then the Australian Renewable Energy Agency (ARENA) over 2022-23 to 2025-26.

Australia’s energy system is undergoing a significant transition, moving away from large, centralised coal and gas generation to smaller scale dispersed generation that is increasingly renewable. Network service providers are essential partners in supporting government commitments to achieve a decarbonised, modern and reliable grid.

We have already seen successful use cases of distributors rolling out batteries, like United Energy’s Project Electric Avenue, Ausgrid’s community battery trial and Western Power’s community battery program. To maximise the benefits of these batteries to customers, Australia’s electricity networks need flexible, pragmatic regulation to support our accelerating transition to a decarbonised energy system.

Ring-fencing flexibility to better allow value-stacking partnerships

The AER’s ring-fencing framework currently prevents distributors from leasing excess capacity of any new batteries to third parties to deploy in the competitive market without an approved waiver from the AER.

The Distribution Ring-fencing Guideline includes waiver provisions as it recognises that strict adherence to ring-fencing obligations might result in outcomes that are not always in the long-term interest of customers.

In recognition of the practical role that distributors will need to have in the roll-out of projects under the government’s program and acknowledging that leasing capacity will expand the services the batteries can provide to the grid, the AER consulted with stakeholders on a class waiver that would allow distributors to lease spare capacity to third parties.

Distributors have an important role to play in facilitating the customer-driven transition to distributed energy, and networks strongly supported the development of the class waiver.

Without a class waiver, distributors would have been unable to partner with third parties to realise the full battery value stack, which would then limit the services and benefits that the community battery could provide to the electricity grid, and therefore, to electricity customers.

A class waiver will, for example, allow a smaller third-party retailer that may not have the resources or investment capital to rollout a community battery directly to instead partner with a distributor to provide energy storage services to its customers, thereby supporting retail competition.

Importantly, the AER recently introduced class waivers into its ring-fencing framework to improve the practicality of the waiver process and enable a more efficient solution. If the AER were to instead rely on its individual streamlined waiver process for the government’s program, it would unnecessarily slow down the roll out, introduce additional uncertainty, and require a material increase in resources and costs to develop and assess each individual battery waiver proposal.

Class waiver with strong customer and competition protections

This month the AER published a final decision to grant a class waiver that allows distributors to lease battery capacity to third parties for batteries funded under the government’s program, subject to strict controls and criteria.

“The AER considers that allowing DNSPs to operate community batteries on the terms of this waiver is in the long-term interests of consumers because it enables low-risk battery projects to be developed without adversely impacting competition in the emerging battery market.”[ii]

Critically, the design of the final class waiver ensures that the benefits of supplying battery services will be shared with regulated network customers.

The AER has established an apportionment approach designed to protect customers and competition.

Under it, a distributor can only allocate to the Regulatory Asset Base (RAB) the proportionate share of the total cost that is related to the forecast network benefit. This means that the full cost of the battery is not able to be allocated to the RAB and the allocation is instead weighted by the share of forecast network benefits to total (network and non-network) benefits.

Importantly, this reduces the costs to all customers of distributors providing regulated network services. As with every other asset owned by a network, costs are only recoverable if they are linked to delivery of a regulated network service. There are further controls placed by the class waiver that ensure that the costs to electricity customers do not exceed the benefits that they receive from the installation of community batteries.

Additional reporting requirements will also provide the AER with transparency over the use of the battery and the contract arrangements between distributors and third parties, which can be used to inform future decisions.

These obligations are in addition to the obligations outlined in the AER’s Distribution Ring-fencing Guideline. This prevents distributors from discriminating in contestable markets in favour of themselves or affiliated entities, ensures distributors handle ring-fenced information appropriately, and requires distributors to prepare and submit annual ring-fencing compliance reports to the AER that include an assessment of compliance undertaken by a qualified independent party.

The implementation of the class waiver does not automatically provide distributors with any exclusivity over service provision, nor does it imply that all distributors will seek or be awarded any Commonwealth funding for community batteries, which is instead subject to a separate rigorous independent process. Rather, it simply enables the potential for more service delivery options within the tight constraints of the regulatory framework.

Once in a life-time changes rarely happen all at once. These changes are key steps, however, to enable customers, the community, and the energy sector to learn and distribute the benefits of batteries across all our neighborhoods.

[i] Budget October 2022-23, Budget Measures, Budget Paper No.2, 25 October 2022, Page 69.

[ii] AER, Final Decision: Distribution ring-fencing class waiver for DNSP-led projects funded under the Australian Government’s Community Batteries for Household Solar Program, February 2023, Page 2.