AER seeks feedback on its Regulatory Sandbox Toolkit
Fast Facts.
On 10 November 2021, the AER published an Issues Paper on Regulatory Sandboxing with submissions due on 28 January 2022.
Technological change and innovation are transforming the energy sector. Regulatory sandboxing enables proof-of-concept trials under relaxed regulatory arrangements. The aim is to make it easier for businesses to develop and trial innovative technologies, projects and services that offer consumer benefits while managing risks.
The AER is consulting on its proposed regulatory sandbox toolkit following the Australian Energy Market Commission’s (AEMC) regulatory sandbox recommendations to the COAG Energy Council on 26 September 2019, and further advice on rule changes on 26 March 2020.
The Energy Council subsequently consulted on the legislative and rule change package in September 2020. Sandboxing legislation has been introduced into the South Australian Parliament with Rules expected to follow.
The AEMC’s recommended regulatory sandbox arrangements include three main tools:
An innovation enquiry service (IES) – to provide guidance and feedback to businesses to help facilitate trials under current laws and regulations;
A new AER regulatory waiver power – which can temporarily exempt trials from regulatory barriers created by existing rules; and
A new AEMC trial rule change process – that can temporarily change existing rules or introduce new rules of limited, temporary application to allow a trial to proceed.
The AER’s Issues Paper is consulting on the first two tools – IES and waivers, including the content of Trial Projects Guidelines.
In March 2022, the AER intends to publish a Position Paper and preliminary draft Trials Projects Guidelines for consultation.
Background
What are regulatory sandboxes?
The concept of an innovative sandbox was derived from nursery schools and kindergartens, where kids can play, imagine and create in a dedicated space. Regulatory sandboxes provide a framework within which participants can trial initiatives under relaxed regulatory requirements on a time-limited basis and with appropriate safeguards in place.
Regulatory sandboxes have been used by a range of jurisdictions, sectors and regulators across the globe to test innovations, including in the UK, Canada, the United States, Singapore and Africa. According to the World Bank there are over 73 regulatory sandboxes around the globe.
Why do we need regulatory sandboxes?
The national energy market is rapidly transforming with the emergence of new technologies, market entrants and business models. Innovative technologies can provide consumer benefits, support system security and reliability, and help reduce emissions.
In response to a request from COAG, the AEMC published a consultation paper in late 2018 seeking stakeholder feedback on the need for regulatory sandbox arrangements to support proof-of-concept trials. Stakeholders advised that there were barriers to conducting trials under the existing regulatory framework, and that arrangements were needed to provide flexibility to conduct trials and promote innovation.
AEMC recommendations
Following stakeholder consultation, and delivery of interim and draft advice, the AEMC’s final recommendations were provided as part of the 2019 Electricity network economic regulatory framework review.
The AEMC’s recommended regulatory sandbox arrangements included:
Coordinated feedback and guidance on regulatory issues, coordinated by the AER across the market bodes (not requiring legislative or rule changes);
A new AER regulatory waiver power to grant specific exemptions and waivers to facilitate the conduct of proof-of-concept trials, subject to new trial projects guidelines; and
A new AEMC rule change process to be used if an eligible trial requires new rules or the alteration of existing rules for a limited time.
Key Issues
The purpose of the AER’s Issues Paper is to consult with stakeholders on the its intended approach to delivering two elements of the regulatory sandboxing toolkit, including:
How it will deliver the Innovation Enquiry Service (IES); and
How it will assess waiver applications for regulatory sandbox trials, including the content of Trial Projects Guidelines.
Innovation Enquiry Service
The AER intends to implement the IES via a dedicated regulatory sandboxing website, as a first point of reference for guidance, interactive tools, anonymised case studies and frequently asked questions for innovators. This will be complemented by informal feedback on the regulatory implications of proposed trials and innovative products, services and business models, which will be managed by the AER working collaboratively with other market bodies, governments and regulators. As it will be an informal mechanism; the IES will not provide regulatory decisions, legal advice, formal endorsements or official AER views.
The Issues Paper also outlines the proposed process for engaging with the IES, and proposed web guidance. The AER is seeking stakeholder feedback on the information that should be captured and published on the sandboxing website.
Trial Waivers and Guidelines
Once the legislative and rule changes have been made, the AER will have the power to waive certain law and rules requirements for a limited period, enabling innovators to proceed with a trial, subject to meeting the eligibility requirements. These requirements include that:
The trial project is genuinely innovative;
The trial project has the potential to lead to better services and outcomes for customers;
The trial project is unable to be conducted without a trial waiver;
The trial waiver will be limited in time, scope and scale;
Adequate consumer protections will be maintained; and
Any other eligibility requirements specified in the Trial Projects Guidelines.
The AER is required to develop Trial Projects Guidelines setting out how the AER will assess trial waiver applications. The Issues Paper outlines the AER’s proposed trial waiver assessment and implementation process, including:
Assessing whether the information requirements have been met;
Assessing whether the information requirements have been met;
Considering whether the application is misconceived or lacking in substance;
Considering whether the trial project could be carried out under an existing or prospective trial Rule;
Verify whether the trial project is likely to be carried out; and
Testing the application against the innovative trial principles and eligibility requirements set out in the national energy laws and rules.
The AER is required to consult publicly on a trial waiver, unless it is unlikely to have an impact on other registered participants or customers. The AER proposes that it will aim to finalise applications within three (3) months but will allow for trial waivers to be determined within six (6) months.
It’s worth noting that the AER is not permitted to grant a trial that is the subject of a Trial Rule or Rule change request. However, there is no requirement for the AER to consider whether an application for a trial waiver is materially similar to another i.e., the AER may grant multiple trial waivers.
The AER’s Issues Paper has regard for international precent, and seeks stakeholder feedback on the proposed eligibility requirements, timeframes, the form of applications and information requirements, waiver consultation process, duration of trials, extending or varying waivers, waiver termination and opt out, and reporting obligations.
Timeframes
Stakeholder submissions to the issues paper are due on 28 January 2022. The AER intends to publish a Position Paper in March 2022 along with preliminary draft Trials Projects Guidelines for consultation.
Our Insights
Regulatory sandboxes are not a new concept; they have been used in a range of sectors across the globe and they tend to follow a similar design and process architecture. Sandboxing is, however, a new concept for the National Electricity Market.
Directionally, regulatory sandboxes are potentially an effective way of encouraging innovation in areas where there are regulatory barriers. The advantage of sandboxing trials is that new technologies, products or services that may benefit consumers and couldn’t otherwise be progressed, are able to be tested in real world conditions. Regulators globally have used the regulatory sandboxes as a means of providing “a dynamic, evidence-based regulatory environment for learning from, and evolving with, emerging technologies” according to the World Bank Group. They can provide a range of benefits (such as enabling routes to market and fostering partnerships) although their implementation can also pose risks (such as increased regulatory burden and unlevel playing fields) if poorly implemented.
The AER’s proposed process for delivering the IES and assessing trial waivers, seeks to promote the facilitation of innovative trials while maintaining consumer safeguards and managing risks. This will require careful and balanced design, and deliberate execution.
The next steps are therefore critical to the success of the initiative. The boundaries of sandboxing are yet to be determined by precedent, and the nature of the AER’s Guidelines will provide an indication of the extent of waivers that could be granted for the purposes of enabling an innovative trial. Clearly innovations which relate to competitive markets – for example new offerings in retail, or issues where network companies compete with third parties under ring-fenced arrangements – will introduce complex boundary issues. These are somewhat heightened by the costs of the sandbox process. To manage the risks and maintain consumer safeguards, the proposed process is necessarily complex, time consuming and resource intensive, which is likely to disadvantage companies that are unable to devote dedicated resource and in turn advantage larger players. This is an area where the AER may face challenge.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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