This article is about embedded networks in NSW including how to get out of an embedded network if the conditions are not favourable.
Table of Contents:
- QUESTION: What do you consider to be a reasonable maximum term for a contract with an embedded network provider? How often should it come up for review?
- QUESTION: When we bought off the plan in NSW, we had no idea we had an embedded network or what that involved. We have no choice in our provider. What can we do?
Question: What do you consider to be a reasonable maximum term for a contract with an embedded network provider? How often should it come up for review?
Answer: If you’re having infrastructure installed, and infrastructure is being provided to you by your embedded network operator, then I would we recommend a 10 year term.
It’s a really good question, and the answer is straightforward.
If you’re just appointing a provider to provide the retail services, like billing services and risk management services on your behalf, I would always recommend you go with a three year term minimum. The reason for that is, that provider needs to put out to contract your electricity load. The best way to get good pricing on the electricity load is to have a longer term contract. If you take a short term contract, you’re more likely to get a higher price contract. Three years is the sweet spot.
If you’re having infrastructure installed, and infrastructure is being provided to you by your embedded network operator, then I would we recommend a 10 year term. The reason we recommend the 10 year term is that’s the sweet spot by which you can install that infrastructure, recover the cost through the supply of services as opposed to a discrete fee, and not see a step up in the price that customers are expected to pay. Because obviously, that’s just a question of amortisation – over how long do we spread the investment that we’ve made to recover it? The longer it is, the lower the cost per unit, essentially a cost per kilowatt hour. So we normally recommend a 10 year term where there’s infrastructure involved, and actually that can vary depending on how much capex has been deployed at the site.
How often would it come up for review? Every business will do this differently. The way we do this is that we have termination for convenience. Our view is our services should be good enough that our clients aren’t locked into a contract where they can’t leave if they want to. So all of our contract clauses have termination for convenience. We do ask that if we deploy capital, that we’re able to recover that capital, so you have to buy out the asset, but we do it on a flat linear depreciation basis. It’s always at a cost. If we spend $100,000, the contract will say ‘If you terminate in year 1, you have to give us $100,000, back. If you terminate in year 2, it’s $90,000, $80,000, $70,000 and so on. It’s just a simple, flat linear.
The question of review, is really review it whatever time you feel is appropriate for your organisation. Typically, that’s if something’s going wrong and you’re not happy or someone’s offering you something else that you think is worth consideration. It shouldn’t be relevant that you have periodic reviews fixed in, in the contract because you should always have the ability to select a new supplier and have the freedom to choose if you want. That is different for each provider. If you’re negotiating a contract with a provider, you should insist on this because there are providers out there that are offering that. So if your current provider isn’t offering this and the fact that others are, they may consider changing their position.
This post appears in Strata News #568.
Question: When we bought off the plan in NSW, we had no idea we had an embedded network or what that involved. We have no choice in our provider. What can we do?
We bought and apartment off the plan and there was no mention of an embedded network being on our building. We found out at our first AGM and were asked to sign off on it without really knowing anything about it or how it worked.
We have no choice in our provider. If we want to buy it off the provider, it will cost a lot of money which we don’t have due to being a new building.
What will happen as the equipment ages and repairs etc need to be done? It is our building but the network is on our roof. The company owns the solar and sells the energy on. Also, what happens if the company goes out of business and we are stuck with something we never asked for in the beginning? We were told that if we want to change providers the new provider would still have to buy the electricity so it would still end up costing us more.
Answer: You probably have more options than you have been made aware of.
Without knowing the specifics of the site, I think it’s worth stressing that when we talk about the network, we’re talking predominantly about the reticulation of the community.
The owners corporation or the strata plan owns the reticulation infrastructure. It’s a fixture and fitting of the building. It’s not a discretionary asset. It’s no different to the floors and the hallway. It can’t be owned by a third party, it’s a core part of the building. What could be owned by the third party is the solar panels, metre assets, components of the switchboard. These are points along the network.
This gets us back to the question can you buy those assets out? You may well be in an arrangement that is giving you good value, and if it is giving you good value I guess the question would be why would you want to get out of that. But if it’s not giving you good value? Talk to another provider, because of course your existing provider is going to try and tell you that you can’t exit but that may not be the case.
If it absolutely is the case, check the contract? If the contract is so far in favour of one party and not another, it’s really questionable as to whether or not you should have some form of exit. You probably have more options than you have been made aware of and if you want to talk to us about it, we’ll show you what those options are. You’re not handcuffed into these things.
This post appears in Strata News #561.
Have a question about embedded networks in NSW or something to add to the article? Leave a comment below.
Looking for strata information concerning your state? For state-specific strata information, take a look here.
Are you not sure about some of the strata terms used in this article? Take a look at our NSW Strata Glossary to help with your understanding.