Embedded Networks in Shopping Centres

Embedded Networks in Shopping Centres

• Why do Shopping Centre owners implement embedded networks?
• Are retail tenants obliged to buy their power from centre management?
• Is it a good deal for the shops?

In the dark, in the basement

One of the capital costs associated with a shopping centre is the electrical infrastructure. The switchboard is not actually a board but a row of brightly painted humming cabinets located in the dark reaches of the basement. Power at 240 volts comes into the switch room via three cables each the thickness of your wrist. Typically these cables connect into a power factor correction unit which harmonises the incoming alternating current with the various motors in the centre. Once the three phases of power gets into the cabinetry, they are usually piped around not by wires and cables, but by naked bars of copper. Circuits split off to deliver electricity to emergency services, common area and tenancy meter panels. Each shopping centre is likely to have multiple incoming supplies and associated switchboards. The shopping centre owner invests in all of the infrastructure downstream of the high voltage sub-stations.

Having installed the infrastructure, the owner – typically a Real Estate Investment Trust (REIT) – needs to ensure it is actively maintained. Periodically, thermal imaging and ultrasonics are used to inspect switchboards. Any damage to cabling from vermin or pestilence is the responsibility of centre management.

Who Owns the Meters?

The three layers of the electricity supply industry are generation, distribution and retail. The distribution businesses (known as Local Network Service Providers) are natural monopolies recovering their investment by charging network tariffs, but subject to a stringent regulatory regime. They are often refereed to as “poles and wires” companies, but they also own the sub-stations outside the shopping centre. In instances where there is not an embedded network, they will also own the electricity meters that are located inside the shopping centre taking benefit from all the complex infrastructure funded by the owner.

On the other hand, a shopping centre owner can logically argue that since they invest in the capital and the maintenance of everything electrical, then it makes perfect sense for them to own the metering regime as well. An embedded network enables this.

Small, Medium and Large

A large market customer is someone who typically uses more than 160MWHrs of electricity a year equating to a run rate of about $40,000. These customers will fund their own meter and will receive an “unbundled” bill that itemises network tariffs, ancillary charges and the cost of electricity consumption. They have enough leverage to negotiate with electricity retailers for the consumption costs, but the other parts of the bill are more or less fixed.

Smaller customers will receive a simpler bill that “bundles” in all the costs. Some small customers nevertheless may have high enough energy demand that requires three phase power. The motors that drive commercial freezers and refrigerators typically rely on the higher voltage that can be attained from three phase power. The tenancies of a shopping centre will be supplied via a mix of single or three phase meters.

Higher use customers pull so much power that the current will simply melt a normal electricity meter. In these instances, a clamp is placed around the feed. As electricity flows through the conductor, an induction current occurs in the clamp. Measurement of the induction current can be related and calibrated to the actual power. This is called current transformer or CT metering. It is essential that the calibration factor (sometimes referred to as K Factor) is determined and taken into account in the meter data processing. The additional cost of CT metering is borne by the customer.

Choice of Electricity Retailer

Much of the recent refinement to the regulatory regime for embedded networks has been to ensure that consumers (tenants) can choose to buy power from the EN owner or from an authorised electricity retailer. Historically, this has been possible in all jurisdictions apart from Queensland and the ACT. National chain stores and food outlets have national energy buying leverage and they can usually get energy rates better than the shopping centre can offer. Also some “chains” prefer bill aggregation services that consolidate the energy from multiple stores.  In these instances, the end-consumer should have the ability to buy the cheapest power. Most embedded networked shopping centres in Victoria and NSW will find that 10% of the tenancies prefer to buy power from the energy market.

Where an embedded network consumer exercises their right to receive electricity supply from their retailer of choice, they become what is known as a “child” of the energy market.

It is important to note here that an energy bill is made up of two major parts; the cost of the power and the network distribution charges. Even though a “child” might have a national deal for the energy consumption, they will have to pay network charges. These charges vary depending on where they are located. Because the shopping centre will be paying network charges for all the consumption within an EN, it is only fair and reasonable that they recover those charges from the end-consumer.

There are different approaches to this challenge in different jurisdictions.

Qld and the ACT have simply disallowed choice and contestability within EN’s. There are pending changes to this in Qld proposed 1 December 2017, but for the time being there is no competitive tension in these states.

When a shopping centre undertakes a brownfield conversion to an EN, it is essential to sort out the child metering details. Someone has to crunch a keyboard accessing the national market system and put in all the national meter identifiers for every child tenancy. Relying on distribution businesses or electricity retailers to do this is fraught with difficulty. From 1 December 2017, every shopping centre embedded network will require an accredited Embedded Network Manager who (among other things) is charged with sorting out meter registration issues.

The commitment of REITS to energy and Solar

Not only does the REIT have an interest in the infrastructure, but they are  large users of electricity in their own right to service mall lighting, people movement, heating, ventilation and air conditioning. Most REITS have undertaken energy efficiency initiatives coupled together with energy reporting. Many shopping centres will have building management systems that can detail the energy performance at a granular level. However, unless it is an embedded network, then they have no perspective of tenancy energy usage.

They already have to purchase power for the common area. If the shopping centre is set up as an embedded network, they can purchase bulk power for the entire centre.

The application of roof top solar photovoltaic (PV) has reached a commercial and technological tipping point for the shopping centre industry. Whereas there were some PV installed on shopping centres to nominally help with green star ratings, the current cost dynamics means that REIT’s can get a viable return on investment for solar installations. Simply powering the common area by solar is an underachievement and there is no benefit in dribbling excess power to the grid. If a REIT takes appropriate control of the centre’s electrical infrastructure by means of an embedded network, then it can fully maximise the benefits of solar PV installations. The retail tenants will get some of the green power.

There is also a model whereby the REIT engages an external solar/embedded network service provider to invest in the plant and pay the REIT a roof-top lease. It is up to the embedded network service provider to formulate a commercial model for both the PV electricity and the grid electricity that is on-sold in the shopping centre.

Billing and Collections

There are two models for billing and collections with no correct answer as to which is best.

Some REIT’s include embedded network electricity as a line item on the monthly rental invoice. They are required to supplement this invoice with an industry compliant statement of electricity usages. Collection for electricity is effectively stapled to the rental payment and managed by the centres collection team.

An alternative is to use a third party embedded network service provider who can offer independent invoice branding and a call centre for customer service. Collections is more challenging because of the separation between rent and power as distinct transactions. The service provider is required to follow the relevant energy retail code for managing debt collection.

Supermarkets

Large department stores will typically have their own substation and switchboards. Supermarkets may either have their own feed or be wired into the embedded network. Interestingly, parent companies of the supermarkets themselves own shopping centres and they invariably install embedded networks. However, they somehow seem to object to having their supermarket stores inside an embedded network owned by one of the other REIT’s. In addition to supermarket stores, they also own smaller liquor stores and they extend the objection to them as well.

Supermarkets will be “unbundled” customers with national electricity contract with an electricity retailer like Origin, AGL or Energy Australia. The network tariff that is itemised on the account for a stand-alone supermarket will vary according the geographic location and physical connection to the distributors network, but is collected by the electricity retailer on behalf of the distribution business. If the store is inside an embedded network, then the network tariff is payable to the REIT as the embedded network owner. There are some minor opportunities to finesse load factors, but by and large, the network tariff is simply passed through by the REIT to account for its own network tariff commitments. Because the supermarket buys its power from the electricity market, the REIT really doesn’t make any surplus out of the arrangement. The supermarkets seem to resent having any commercial relationship with the REIT other than leasehold despite the fact that unbundled network tariff is a financially neutral relationship.

Benefits from Smaller Retail Tenancies

Smaller independent retailers within a shopping centre have to buy their own power. Quite often they take the advice of another tenant in the mall who has done the market research on the best SME energy deal. One challenge is that discount SME energy deals are structured to entice you in, then the discount fades over time. A well managed embedded network will follow the market energy prices and set a tenant tariff that is always at a discount to the prevailing conditions. The fact that the EN owner does this eliminates one worry for the shop.

In the event that the REIT is able to invest in solar on the roof, then all the tenants within the shopping centre have access to a proportion of green power.

Well run embedded networks will provide monthly billing based on actual meter reads – not estimates. Indeed, they can provide the customer with detailed usage data that can be helpful in identifying poorly performing appliances.

At the end of the day, choice is preserved. The ability to select electricity retailer of choice is a fundamental. If the REIT, as owner of the EN fails to deliver, then the tenant can insist on being a “child”.

Taking Full Advantage of Embedded Networks

Some shopping centres run their own embedded networks. They may contract out the meter reading and tariff calculation, but the management and optimisation of the network is left with centre management. Areas where centre management expertise sometimes fall short are:

Compliance

The regulatory regime has progressed through 10 years of almost constant change and refinement. Embedded networks must be registered. Electricity invoices must accord to a standard. Payments and debt collection processes need to follow the relevant rules.

As of 1 December 2017 an Embedded Network Manager needs to be appointed. It is a lot of information for centre management staff to understand.

Audits for non-technical losses

The physical environment of a shopping centre changes over time. There are tenancy splits and mergers that all impact on the metering. Some third parties (like communications companies) undertake electrical works, and hopefully they don’t tap into the common area circuits. As discussed above, the calibration factor of the CT meters is a constant challenge. It is quite common for technical audits of embedded networks to reveal significant opportunities for financial improvement.

Common area apportionment and reporting

Ultimately, the cost for common light and power is divided up into tenant outgoings and some traders reasonably complain that they shouldn’t have to shoulder the burden of extended hour’s mall light and power that is necessary for the supermarkets. It is possible to take building management system data to devise a fair and equitable model for cost apportionment. This level of data analysis to establish an automated report is generally beyond centre management.

Recovery of network tariffs

An alternative to separate billing for child network tariffs is to recover the network charges from the electricity retailers used by the tenants. Electricity industry market participants have business to business relationship with the electricity retailers. They can provide this as a service to the REIT, but it is unlikely that centre management will be able to directly recover lost network tariffs from the energy retailers.

Tenant power diagnostics

One service that the embedded network owner can offer is to assist tenants with energy performance. The interval data in modern meters is very informative and can highlight errant motors or refrigeration switches.