Embedded networks: AER proposes further reform of exemptions framework

The regulatory environment for embedded networks in Australia is changing significantly. In 2025, the Australian Energy Regulator (AER) released its Final Decision on the exemptions framework for embedded networks, along with version 7 of both the Network Exemptions Guideline and the Retail Exempt Selling Guideline. Some changes have already taken effect, with others commencing on 1 July 2026.

On 18 May 2026, the AER released a consultation paper proposing further targeted amendments. The proposal aims to align the exemptions framework with forthcoming flexible trading reforms and reduce regulatory burden for commercial embedded network retrofits.

These proposals are relevant to embedded network operators, exempt sellers, property owners and energy service providers — particularly those involved in commercial developments and emerging consumer energy resource models.

Overview of the AER’s 2025 Final Decision

The exponential growth of embedded networks has intensified scrutiny of the existing exemptions framework. Originally designed for smaller, incidental energy on-selling, various inquiries found evidence of regulatory gaps exposing embedded network customers to inferior rights, opaque pricing, and difficulties accessing competitive market offers.

The AER’s 2025 Final Decision brought targeted reforms through new or strengthened rules in version 7 of the Network Exemptions Guideline, for all jurisdictions in the national framework, and the Retail Exempt Selling Guideline (all jurisdictions excluding Victoria), particularly relating to:

• visibility and governance of embedded network operations
• tariff and fee disclosure obligations
• ombudsman scheme and billing requirements
• closure of certain ‘deemed’ exemption classes and transition to registrable models
• procedural reforms to improve compliance monitoring
• family violence protections for energy customers.

The AER’s decision did not ban new embedded networks outright or require existing networks to transition to full retail authorisation. Instead, the approach emphasises incremental improvement, increased transparency and more robust consumer protections, while deferring broader system-wide reforms (such as Retailer of Last Resort arrangements and statutory price capping) to governments and policy-makers.

Enhanced visibility and registration requirements

Visibility is a recurrent theme in all regulatory reviews. The AER and state ombudsmen have long struggled to monitor compliance or pursue complaints due to patchy, outdated, or missing registrant details. Both Guidelines now feature enhanced obligations to keep the AER (and, if required, ombudsman schemes) apprised of network and seller contact details, ownership, and customer numbers.

Operators must ensure their internal records are current and promptly updated in the AER portal. Failure to comply may trigger warnings, infringement notices, or exemption revocation.

Notable reforms to Guideline conditions include:

• for NR2 exempt networks, annual reporting of residential customer numbers will be due between 1 July and 31 July each year from 2026
• with immediate effect, timely notification of contact changes is required
• the obligation to retain explicit informed consent for retrofit applications is reduced to two years, easing compliance obligations to align with retailer standards
• various condition revisions tighten metering, safety, and life support obligations, further aligning exempt networks with best practice standards for distribution network service providers.

Closure of deemed exemption classes and new registration obligations

A decisive structural shift in the new Guidelines is the closure of deemed exemption classes D1 (small business customers), D2 (residential) and ND1/ND2 for new applications, effective 1 January 2026. Future embedded network sites will be required to register under the analogous registrable classes.

This is a pivot from a self-assessment regime to one that is register-based, allowing greater visibility to regulators. Operators (and property developers) contemplating new embedded network sites must integrate registration, compliance planning, and potentially new commercial models into project planning.

Existing sites under D1/D2 or ND1/ND2 retain their deemed status unless a change in operation triggers re-registration.

Tariff publication and billing transparency

The most commercially consequential requirement for many operators is the obligation from 1 July 2026 to publish customer tariffs and display comparative pricing against the local area retailer’s standing offer.

Exempt sellers in residential classes D2, D6, R2 and R3 (e.g., apartments, retirement villages) must publish tariffs on the seller/billing agent website or in a common area if not online.

Pricing must clearly state the percentage difference to the local area standing offer.

This requirement does not apply to all business classes or certain small operators (e.g., caravan parks, land lease, and certain small-scale settings).

Exempt sellers subject to ombudsman membership requirements must also include Ombudsman scheme details on all customer bills from 1 July 2026.

This rule directly addresses longstanding criticism that embedded network customers are insufficiently informed regarding their rights and often pay more than if supplied directly from the grid. This may now bring greater expectations on operators to substantiate and communicate the value proposition of their offer. Retailers and operators without robust billing systems will face greater challenges in efficiently and effectively ensuring compliance. In NSW, operators must also be conscious of their obligations under the IPART-mandated maximum pricing and comparison rules.

Refund of customer credits and additional consumer-facing protections

From the August 2025 commencement of the Guidelines, a new condition 22(3) mandates prompt refunds of any customer credits or account overpayments on contact termination, requiring best endeavours to be used to refund the amount within 10 business days of becoming aware of the credit balance. This addresses a gap reported by ombudsman schemes and customer complaint data.

Other clarifications include:

• small business customers are now explicitly covered by conditions on claiming concessions and rebates
• credit card surcharges are confirmed as within the scope of “charges” for billing compliance purposes
• the “short-term accommodation” definition is revised for clarity and to better harmonize with residential tenancy legislation.

Family violence protections

One of the landmark changes in the Retail Exempt Selling Guideline is the introduction of condition 27, requiring most exempt sellers in residential and mixed used settings to implement dedicated family violence policies by 1 July 2026. This policy mirrors those already imposed on authorised retailers under the National Energy Retail Rules and addresses an emerging area of social risk in the essential services sector.

The 2026 consultation

On 18 May 2026, the AER released a consultation paper proposing targeted amendments to the embedded network exemptions framework in order to align the exemptions framework with forthcoming flexible trading reforms and to reduce regulatory burden for commercial embedded network retrofits while maintaining existing consumer protections.  Submissions are invited by 15 June 2026.

Alignment with flexible trading reforms

A central feature of the consultation is the integration of the Australian Energy Market Commission’s flexible trading framework into the exemptions regime.

The flexible trading reforms, with a 1 November implementation date, introduce secondary settlement points, which allow customers to separately meter and manage discrete energy uses (for example, EV charging or battery storage). These arrangements would provide an alternative to embedded networks.

The AER proposes to amend the Network Guideline to clarify that:

• a network exemption is not required merely because a metering installation is designated as a secondary settlement point
• a network exemption is not triggered where a third party (such as a financially responsible market participant or Small Resource Aggregator) operates customer‑owned CER behind such a point.

The AER explains that these changes are intended to avoid duplicative or unintended regulation where the National Electricity Rules have already excluded certain arrangements from the definition of a ‘distribution system’.

However, the consultation paper emphasises that:

• embedded network operators remain fully subject to existing exemption obligations where they continue to supply multiple customers
• the distinction between ‘single user networks’ and embedded networks will be critical in determining regulatory coverage.

Retail exemption treatment of flexible trading participants

The consultation paper also addresses how energy sales at secondary settlement points will be regulated.

The AER proposes that non‑authorised parties selling energy to large customers via secondary settlement points should rely on the existing R5 registrable retail exemption class, rather than a new exemption class.

This reflects the AER’s view that:

• existing exemption classes are sufficiently flexible
• creating additional classes would be unnecessary if appropriate conditions are already in place.

For small customers, the position differs:

• the National Energy Retail Rules require that only a single financially responsible market participant may serve both primary and secondary settlement points
• as a result, such arrangements are expected to remain within the authorised retailer framework, rather than the exempt selling regime.

Streamlining commercial embedded network retrofits

A second major limb of the consultation is the proposed reduction of regulatory burden for commercial embedded network retrofits.

Currently, commercial retrofit projects typically require:

• a network exemption approval process
• in many cases, an individual retail exemption application.

The AER proposes to:

• replace this with a new registrable retail exemption class for commercial retrofits
• remove the need for individual exemption applications and associated public consultation (where class criteria are met).

The proposed reforms are confined to wholly commercial embedded networks.

Under this model, applicants would:

• certify compliance with eligibility criteria;
• confirm that tenant consent thresholds have been met; and
• register exemptions via the AER portal without case‑by‑case assessment.

The AER’s position is that existing individual exemption conditions for commercial sites “generally align” with class exemption conditions, such that the additional process may be unnecessary.

To support this shift, the AER proposes to:

• develop standardised marketing and consent templates
• require use of minimum ‘plain‑English’ disclosures when seeking tenant consent.

The consultation paper confirms that:

• the 85% explicit informed consent threshold for commercial retrofits would be retained;
• requirements for marketing campaigns and tenant engagement will remain unchanged in substance.

Recent NSW initiatives

The moves from the AER follow action taken by Victoria (see our earlier article) and, more recently, New South Wales.  Among reforms that have occurred in NSW:

Strata schemes

From amendments arising from the Strata Schemes Legislation Amendment Act 2025:

• The maximum contract term for an embedded network agreement entered into by an owners corporation from 1 July 2025 must expire by the first AGM if signed before that meeting or otherwise within three years.  No subsequent agreement can last longer than three years.
• The existence of an embedded network must be disclosed in all sale and off-the-plan contracts, with a failure to do so potentially granting buyers the right to rescind.
• Strata information certificates must now clearly specify embedded network details and contract terms.

Further, if the Strata Schemes Legislation Amendment (Miscellaneous) Bill 2025 were to pass the Parliament, embedded network providers operating under an “exclusive supply agreement” would be prevented from recovering infrastructure capital costs from owners corporations at the end of the agreement, whether by way of an obligation to purchase the network infrastructure or to pay an amount that equates to a recovery of capital costs (e.g. an exit or termination fee).

New compliance obligations and regulatory intervention

The NSW Government has given new powers to IPART and will impose new obligations on embedded network sellers, particularly regarding billing requirements and maximum pricing.

From 1 July 2026, IPART’s new functions will include:

• recommending a methodology to the Minister for Energy for setting maximum prices for electricity, gas, hot water and centralised air-conditioning
• determining the maximum prices using an approved methodology
• recommending a billing standard to the Minister
• publishing any approved billing standard
• monitoring compliance and taking enforcement action.

For embedded network sellers, from 1 July they must:

• become a member of the Energy and Water Ombudsman of NSW
• publish prescribed information on their website about the embedded network, including pricing and location
• in the context of centralised air-conditioning, publish information on their website about the system’s energy efficiency.

Once maximum prices and the billing standard are introduced at a later date, embedded network sellers will also need to comply with those requirements.

What else is on the horizon?

The AER has noted that not all gaps can be closed at the guideline level due to statutory limits. Key issues reserved for further action by Commonwealth and state governments include:

• Retailer of Last Resort protections for embedded network customers
• price cap protections for customers of authorised retailers within embedded networks
• harmonisation of concessions and rebates eligibility
• improved access to full retail competition (especially for legacy embedded networks)
• structural reforms to transition existing residential networks into the national regulatory regime.

The Department of Climate Change, Energy, the Environment and Water’s ‘Better Energy Customer Experiences’ process, with recommendations due in 2027, and IPART’s review of price-setting methodologies in NSW are likely to set the next front for further reforms, particularly around price regulation and market contestability.

Compliance considerations

For developers, embedded network operators, energy retailers, the new Guidelines marked a shift to stronger and more visible regulation of embedded networks in Australia.

While embedded networks retain potential benefits, the Guidelines widen the scope of compliance risk and may present challenges for those who are not prepared to commit to best practice. Penalties for non-compliance include revocation of the exemption (i.e. removal of right to operate), infringement notices, enforceable undertakings, or court proceedings.

The AER’s new 2026 consultation signals a continued evolution of the embedded network exemptions framework, with a clear emphasis on facilitating new energy market models while recalibrating one regulatory process to be more efficient while maintaining consumer protections.

Property developers, embedded network operators and retailers should:

• Compliance reviews: Before implementing or acquiring an embedded network, review all contracts, customer communications, and reporting obligations for compliance with the new regime.
• Registration protocols: Ensure new network and retail activities are registered promptly, with key contacts up to date.
• Policy adoption: Develop (or update) family violence, hardship and privacy policies to the AER template standard.
• Tariff systems: Prepare to publish tariffs and ensure accurate price disclosure; upgrade billing software where needed.
• Ombudsman access: Join (as required) the relevant ombudsman scheme(s) and ensure compliant dispute resolution procedures.
• Contract risk management: In NSW, ensure all new contracts comply with the new limitations and disclosure regimes.
• Education and training: Ensure staff, especially those handling complaints and hardship requests, are aware of the new obligations.
• Impact of flexible trading: Flexible trading rules will allow customers to access CER services without the customer needing to be in an embedded network at all. This may reduce the commercial incentive to establish new embedded networks in the first place. For businesses exploring CER or flexible trading arrangements, they should assess whether proposed activities fall within the clarified “no exemption required” scenarios.
• Commercial retrofits: Should the need for an individual exemption fall away, nevertheless ensure that the conditions on which a commercial retrofit can be conducted are met, including the adoption of standardised consent materials and ensuring that existing engagement practices can be adapted accordingly.

Our team can assist with auditing embedded network portfolios, reviewing compliance strategies, and clarifying the operational impact of new and revised AER obligations.

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Authored by: 

Adam Walker, Partner