On 22 December 2011, the AEMC gave notice under section 102 and 103 of the National Electricity Law of the making of the "Inclusion of Embedded Generation Research into Demand Management Incentive Scheme" final rule and final rule determination.

The Commission's final rule expands the existing Demand Management Incentive Scheme (DMIS) for Distribution Network Service Providers (DNSP) to include incentives for innovation in connection of embedded generators.

Background

Embedded generating units are defined in the National Electricity Rules (NER or rules) as generating units that are directly connected to the distribution network and do not have access to the transmission network. Embedded generation offers customers a choice of substituting their consumption of electricity from the network with their own generation. A customer would seek to use embedded generation in this way where the benefits of doing so were greater than the costs.

The prospect of more customers using embedded generation as a substitute for electricity sourced from the main network is likely to grow given the increasing focus on climate change policies and various government schemes such as feed-in tariffs and rebates for photovoltaic solar energy.

DNSPs currently have strong incentives to focus on network reliability and safety and weak incentives to minimise costs associated with connecting embedded generators to their network.

To address concerns with the disincentives for DNSPs to undertake demand management the NER permit the AER to establish a DMIS to provide the DNSPs with additional incentives to implement efficient non-network alternatives or to manage expected demand in some other way.

The DMIS provides upfront funding allowances to DNSPs to conduct research and investigation into innovative techniques for managing demand so that, in the future, demand management projects may be increasingly identified as viable alternatives to expensive network augmentation.

There was no equivalent arrangement to the DMIS for DNSPs to undertake innovation associated with connecting embedded generators to their network.

Rule change request

To address this imbalance in incentives to undertake efficient innovation in connection, the MCE proposed a rule to expand the existing DMIS to include projects that explore innovation in efficient connection of embedded generators.

The rule as made

The Commission determined to make the rule as proposed by the MCE with minor drafting amendments.
The Commission determined that expanding the scope of the DMIS will be the most practical and effective way of encouraging DNSPs to consider more innovative and cost effective ways of connecting embedded generators to distribution networks.

Rule change process

On 4 November 2010, the MCE submitted a Rule change request in relation to the rule changes recommended by the AEMC in its Stage 2 Demand Side Participation (DSP) Review .

The MCE's Rule change request sought three separate rule changes related to Stage 2 DSP Review. As the subject matter of each proposed Rule was not inter-dependent, the proposed Rule changes were disaggregated into three separate projects to allow the AEMC to more efficiently assess each Rule on its merits within the Rule change process.

This rule change consultation related to expanding the existing DMIS for DNSPs to include incentives for innovation in connection of embedded generators component of the Rule change request.

The other proposed Rules were consulted on separately under AEMC project reference codes "ERC0127 - Efficiency Benefit Sharing Scheme and Demand Management Expenditure by Transmission Businesses" and "ERC0129 - Network Support Payments and Avoided TUoS for Embedded Generators".

On 23 June 2011, the Commission published a notice under section 95 of the National Electricity Law advising of its intention to commence the rule making process and the first round of consultation in respect of the rule change request. Submissions closed on 21 July 2011. Four submissions were received.

On 29 September 2011, the AEMC published a notice under section 99 of the National Electricity Law of the making of a draft rule and draft rule determination. The consultation closed on 11 November. Six responses were received.