Hot water embedded networks

March 2021

The supply of hot water to NSW apartments should be simple, well-regulated and offer residents the same consumer protections as their gas and electricity supply. This isn’t the case. 

The rise of emerging technologies, third-party embedded network operators and business models that effortlessly sidestep energy regulation has culminated in the supply, billing and maintenance of hot water, and common hot water systems, becoming increasingly complex. 

More than 49,000 NSW residents are currently living in apartments where their hot water is supplied by a growing industry of embedded network operators and retailers. This has resulted in two distinct groups of hot water customers - those who are offered consumer protections, and those who fall outside of the safety net. 

The 252,841 households charged for hot water usage as part of their retail gas bill, benefit from the energy specific consumer protections outlined in the National Energy Consumer Framework (NECF). But an increasing number of customers whose hot water is supplied by gas and hot water embedded networks have no consumer protection and no access to rebates or concessions

EWON received 2,633 complaints from residential gas customers in 2020. At least 56% of these complaints were from customers living in apartments or strata scheme complexes. Hot water services were a factor in around 29% of the gas complaints made by residential customers living in apartments, with many of these complaints relating to high and estimated bills.

Spotlight On shines a light on the importance of hot water as an essential service; its regulation in NSW, the need for residents to be covered by energy specific consumer protections, and most critically, why residents living in hot water embedded networks across Australia need access to Energy & Water Ombudsman schemes now and in the future.

• Definitions of key terms
• How common hot water systems work in NSW.

Common hot water systems versus embedded networks

In many residential buildings across NSW, customers are supplied hot water through a common hot water system, rather than each apartment having its own water heater. Customers have an individual hot water meter maintained and read by the gas network provider, Jemena. This means that hot water charges appear on the customers retail gas bill, and therefore the customer benefits from energy specific consumer protections. 

A hot water embedded network is an apartment building with a common hot water system where the hot water meters for each individual apartment are owned, maintained and read by a third-party, and not network providers. In this case, there is no relation to a customer's retail gas bill and the sale of hot water is not covered by energy specific protections. 

There are differences in the way both models operate, and the protections offered to customers. 

Although both types of hot water systems operate differently, complaints to EWON hinge on the same consumer issues that emerge from other essential services, including gas and electricity:

•  high bill disputes
• estimated bills
• customer service issues
• opening and closing accounts
• credit issues, including affordability.

EWON is faced with a situation where we receive similar customer complaints from customers within both systems, however only one customer group, those with common hot water systems maintained by Jemena, is afforded appropriate consumer protections.

Read case studies for examples of how we've helped customers. 

The regulation dilemma

Hot water embedded network operators can choose which regulatory framework is most beneficial for the operator.

A hot water embedded network relies on two central inputs: energy and water. When the operator of a hot water embedded network on-sells energy and water as hot water, the existing regulations designed to protect energy and water customers no longer apply. This is because:

• The National Energy Retail Law (NERL) defines energy as: ‘electricity or gas or both’. This definition excludes hot water services from the consumer protections designed specifically for metered essential services in NECF. 
• The regulations to the Water Industry Competition Act 2006 (WICA) exempts entities selling heated or chilled water to provide heating or cooling services from obtaining a WICA licence. The NSW Government does not require operators of hot water embedded networks to obtain a WICA licence.  

This situation leaves it open to the hot water embedded network operator to choose the regulatory framework it wants to operate in. The operator does this by structuring the charges on the customer's bill. For example, if the operator does not want to attract energy regulations, it can choose to itemise the customer’s charges in cents ($) per litre of hot water (L) rather than cents ($) per megajoule of gas (MJ), or cents per ($) kilowatt hour of electricity (kWh). The choice of how to bill customers is therefore in the hands of operators whose focus may be profit maximisation rather than balancing business effectiveness with consumer protections / social licence.

Any customer billed in cents ($) per litre does not have guaranteed access to the consumer protections included in NECF, including EWON’s free, fair and independent advice and dispute resolution service. Access to EWON requires the hot water seller to be a member of EWON and while some EWON members operate in this market sector, other entities in this market sector are not required to be EWON members.

Consumer protections across the energy and water sector

Consumer Protections	Metered gas and electricity supply	Metered water supply	Gas embedded networks*
	National Energy Customer Framework (NECF)	NSW legislation and regulations	Unmetered gas or 'gas cooktop' supply	Metered hot water supply
Pricing controls or access to retail competition
Rights to access essential services and/or obligations on seller to supply
Rebates & concessions (NSW only)
Internal dispute resolution procedures
Access to external dispute resolution
Minimum contractual standards
Billing, tariff and payment minimum requirements
Protections for vulnerable customers
Protections against disconnection

*EWON notes that hot water embedded networks can be powered by gas or electricity. We are focused on gas powered hot water embedded networks because the number of sites powered by electricity is limited. We are also unaware of any substantial growth in the number of hot water embedded networks powered by electricity. However, we consider that all hot water customers should benefit from increased consumer protections.

Metered hot water is an essential service

The NECF provides consumer protections guaranteeing electricity and gas customers access to an affordable energy supply, ensuring customer contracts are fair and reasonable, and includes provisions to keep households experiencing vulnerability connected. 

The NECF recognises energy (electricity and gas) as an essential service. Energy is needed to heat water, an essential element of day to day life, which requires regulation and additional consumer protection. Over the last decade, new energy technologies and business models such as solar, battery storage and hot water embedded networks, mean energy is increasingly sold outside of the regulatory framework designed to protect consumers – it is essentially being eroded.

When the sale of hot water is separated from the sale of energy and water, and becomes unregulated, it places the security of one of our long-standing essential energy services at risk.

The Australian Energy Market Commission’s (AEMC) recent review of consumer protections in an evolving market looked at how NECF should evolve to respond to emerging energy technologies and business models. A report commissioned by the AEMC as part of this review defined an essential service as: 

• the ability of consumers to connect to at least one (reliable) energy source 
• protection from disconnection for consumers who rely on only one source of electricity 
• the ability of those on life support equipment to access a reliable source of energy. 

Access to hot water supply should be viewed through this lens.

What's at stake?

The AEMC's report identified five key areas of risk to consumer protections, relating to new energy products and services:

Risk one: consumers cannot access at least one reliable energy source for health, safety and wellbeing

  Consumers cannot access at least one reliable energy source for health, safety and wellbeing

The ability to heat water for the use in our homes has always been a central part of why we consider energy to be an essential service, along with lighting, heating, the use of electric devices and communications.

The guarantee that all residential gas and electricity customers have the right to open an energy account, and access an energy supply, is fundamental to all the protections contained in NECF. This single consumer protection is the basis for all the other rights extended to energy consumers in NSW - such as default/standing offers, protection from disconnection, protections for customers experiencing vulnerability, deemed arrangements for move-in customers, and fair and transparent contract terms.

When consumers only have access to one source of hot water, without the option to find an alternative service, a significant power imbalance is created between the customer and the supplier. The customer no longer has the power to negotiate price, or contract terms, and it can be much more difficult for customers to resolve disputes i.e. they would need to access NSW Civil & Administrative Council at their own cost. Customers are therefore in a position where they need to pay what is being billed or risk being denied access to hot water and/or other essential services.  EWON is yet to receive a complaint from a customer that has been denied hot water by a hot water embedded network operator – but there may be customers currently in that position.

In order for a customer living in an embedded network to access one reliable source of energy, they are forced to open multiple accounts for separate energy services. In a residential building that has been established as an embedded network, it is common for most of the utility services to be provided by a single operator. For instance, the embedded network operator providing electricity, will usually provide other services, such as gas, hot water and metered air conditioning. Customers must open an account for each of these services with the embedded network operator or retailer. Customers do not have the option of selecting which services they would like to use within the building (e.g. hot water or air conditioning) and if situations arise where customers are unable to afford to pay for one service, they risk being disconnected from other services (see Case Study 6).  

The provision of electricity and gas is tied to the customer also opening a hot water account – the customer cannot access at least one service which would ensure their health, safety, and wellbeing.

Risk two: consumers cannot exercise choice or access retail competition

  Consumers cannot exercise choice or access retail competition 

Competition between energy retailers is designed to keep energy prices affordable. Competition also helps to lower the cost of additional services offered by retailers, such as metering, and drives energy retailers to provide better customer services. 

Hot water embedded networks are a monopoly and hot water embedded network customers do not have access to retail competition. If there is a problem with price, supply or dispute resolution, customers do not have the option to find a new retailer. Switching retailers is a common tool for solving issues and without it, customers can be stuck with a service they are not satisfied with.

Currently, there is no regulatory framework to support the design and delivery of hot water within residential buildings. This includes defining the relationship between hot water meters and the energy retail market. This leaves customers in hot water embedded networks with no guarantee for how their hot water charges are determined or calculated, and no ability to switch to a better offer.

Risk three: consumers do not understand terms and conditions of unfamiliar products

  Consumers do not understand terms and conditions of unfamiliar products

The NECF provides energy customers with a range of consumer protections that specifically regulate how providers bill customers. These protections are designed specifically for charging customers for a metered service. Billing protections for energy customers include:

• Undercharging/overcharging: ‘backbills’ are bills issued to customers that include charges not previously included on the customer’s bills. Mainly this is due to incorrect initial bills resulting from an estimated meter reading. However, backbills are also issued if retailers make an error on a previous bill relating incorrect tariffs or calculations. Rules for backbilling are critical for customers who are retrospectively charged for a metered energy service.
• Information contained on bills: it is important that energy consumers have access to relevant information about their energy usage and information about how their charges have been calculated. This information helps customers monitor their energy usage and it provides billing transparency.
• Standard contracts terms and conditions: When consumers choose an energy retailer, rules preventing unfair contract terms and conditions establish an equitable basis between retailer and customer.

There are no consumer protections that cover the billing of customers in hot water embedded networks. The complaints EWON receives from hot water embedded network customers demonstrate the importance of rules for billing a metered hot water service. Customers’ complaints include:

• a lack of negotiating power
• a lack of transparency on the calculation of charges and tariffs
• billing delays, billing errors and backbills.

It is clear that operators are aware of the lack of regulation around the sale of hot water. Too often we have heard from customers whose hot water retailer has told them specifically that there is no limitation on the backbilling of hot water services (refer to Case Study 4).

Risk four: consumers experiencing vulnerability do not have appropriate protections

  Consumers experiencing vulnerability do not have appropriate protections

EWON has received many complaints about the impact that common hot water services have on household energy affordability. In an embedded network where a common hot water service is provided, hot water charges can make up a large proportion of a customer’s overall energy costs. 

There are already strong protections for energy customers experiencing vulnerability relating to energy affordability. The energy affordability framework is not perfect however it is in stark contrast to customers with hot water charges, who do not have access to any specific consumer protections and rely on the goodwill of their retailer.

When energy provided to a single household is fragmented into discrete services, such as electricity, unmetered gas, hot water and even air-conditioning, the portion of the customer’s total energy costs that are covered by the energy specific affordability protections is diminished and customers are placed at a greater risk of spiralling debt and disconnection.

Risk five: consumers do not have access to accessible dispute resolution

  Consumers do not have access to accessible dispute resolution

A customer living in a hot water embedded network can currently make a complaint about their retailer to NSW Fair Trading or the NSW Civil and Administrative Tribunal (NCAT). However, these customers do not have access to an industry ombudsman scheme for free, fair and independent advice and dispute resolution. 

Where complaints are made to EWON, we are limited to encouraging operators to agree to a conciliated outcome (refer to Case Study 1 and Case Study 3), or referring customers back to their provider or to Fair Trading.

Hot water is an essential service. Hot water customers deserve protection against these five risks and access to energy specific external dispute resolution schemes.

Change needs to be initiated

Complaints to EWON have put the spotlight on hot water embedded networks but we do not have the ability to address the regulatory imbalances without support. As the number of customers living within hot water embedded networks grows, regulatory change in NSW, and beyond its borders, is required. 

We call upon government and policy makers to work with us to find a solution. EWON is positioned to convene a roundtable discussion and will reach out to policy makers to take a chair and initiate exploring solutions including:

• amending the National Energy Retail Laws to include hot water within the definition of energy which could enable the Australian Energy Regulator (AER) to apply the exemption to hot water embedded networks; and or
• calling on the NSW Government to require hot water embedded network operators to be regulated by WICA.

For queries about policy issues raised in Spotlight On, contact Rory Campbell. For media queries contact Fran Strachan.