Strata law expert calls on governments to stop developers locking energy users into inflated electricity, gas and water prices

Cathy Sherry says one of the main challenges to overcoming a massive and growing problem with embedded energy networks, is “the sheer boredom of strata law.”

“I'm allowed to say this, because I'm an expert in strata law,” Sherry, Professor of Law at Macquarie University, told the SwitchedOn podcast. “I'm not deluded. I can see people's eyes glaze over, and they look for the nearest exit to see if they can make a run for it when I say our research strata law.”

But Sherry’s expertise in strata law has helped identify a major problem with the embedded energy networks that are now being installed in apartment blocks, caravan parks, retirement villages, and for commercial tenants in shopping centres.

In theory embedded networks allow for the bulk purchase of energy or water from an energy retailer at a discount.

The reality for many owners and tenants on an embedded network is very different. Not only are they not getting a discount, they’re often paying well above ordinary retail rates for their power and water.

Most of these buildings are those built by developers. “There's certainly no obligation for them to pass on the savings that are made through bulk purchase.”

Sherry cites one example of a customer being billed $9,700 for 14 months of hot water.

To make matters worse, owners and tenants are getting locked into inflated contracts for years.

“They simply can't escape. There's no alternative. They can't get out of the embedded network. They can't get electricity directly from other suppliers.”

Sherry says the problem has to be urgently fixed not only to ensure greater energy equity, but because of net zero targets.

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The problem is growing

There are now thousands of embedded networks in Australia, and they’re growing rapidly, particularly in new apartment buildings.

“In New South Wales we started out in 2013 with 900 households in electricity embedded networks,” says Sherry. “That’s actually ballooned to 95,000 households in electricity embedded networks, and 64,000 with gas and hot water embedded networks by 2022.”

Sherry says embedded networks have ballooned because of the increase in high density and masterplan development, particularly in Sydney and Melbourne.

“The NSW government is very, very big on high density development to try and solve Sydney's housing problem.”

The other factor driving the increase is councils are keen to approve them because they want new developments to have good energy infrastructure.

“What's actually driven quite a lot of these embedded networks are local councils approving developments that might have green infrastructure.” This is despite the fact there are no obligations on developers to use renewable energy for embedded networks.

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How it works

“Developers are getting embedded network operators, which are third party companies, to install the energy and other infrastructure, for free,” says Sherry. In return, “the developer causes the owners corporation to enter into a long-term contract with the embedded network operator.”

So whilst the developer gets to connect gas, electricity, hot water, and increasingly electric vehicle infrastructure for free, the owners and tenants are bound by a long term contract to pay for inflated electricity, hot water, and even fossil gas.

“This is a long-standing practice in strata,” says Sherry. “Anyone who knows anything about property in New South Wales knows that the property industry has always had a very, very heavy hand in property regulation and in particular strata.”

Sherry says embedded networks are just another example of what's been happening for decades in strata - developers using their initial power to control a development that forces owners corporations to enter long term contracts for the benefit of the developer, but don’t benefit the people who live in the building and pay for the energy.

Sherry is blunt in her criticism of developers and government. “It’s a poor system to start. Maybe they shouldn't be putting this infrastructure in for developers for free in the first place. Maybe it should be just something that developers pay for.”

And although infrastructure and energy contracts in strata schemes are limited to three years, Sherry says embedded networks are exempt, because “people thought it was a good idea that we have embedded networks.”

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The solution

Sherry argues that energy regulators have not been on top of the problem, despite three parliamentary inquiries, in Victoria, NSW and federally.

“There is a major problem in government. There is so little understanding of strata title law within government, it's shocking.”

“Nobody in government seems to actually understand the absolute basics of the legal structure of the strata scheme, and so when it comes to things like embedded networks, it's really hard to fix this problem if nobody understands how a body corporate works and how a developer can manipulate it.”

She argues governments need to prohibit developers causing bodies corporate to enter into any kind of contract.

“[Contracts should be] negotiated by the people who own the building and own that infrastructure. They should be chosen by the people who are actually going to be using that energy and paying for it.”

In America, the strata title industry, known as condominiums, almost collapsed in the 1970s because of what Sherry calls ‘developer abuse’. It resulted in legal reform which allows owners to terminate any contract formed by a developer with 90 days’ notice.

“What that does is remove the incentive for any business, like an embedded network …. to provide services to a developer for free in return for a long-term contract, because there's no guarantee that they'll get a long-term contract.”

Sherry argues Australia “desperately needs” similar provisions. “We can't necessarily dream up what developers are going to think of next.”

In relation to the customer who was charged $9,700 for 14 months of hot water, “I immediately knew some clever lawyer has worked out energy is regulated, water is regulated, put the two together, hot water is not regulated - it falls between two stools in relation to the legislation.”

“If you put in specific provisions of legislation like that, you end up just having to play Whac-A-Mole when a developer thinks of yet another way they can get around to exploit it.”

“We definitely need a broad provision that just says any contracts.”

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You can listen to the full interview with Cathy Sherry on the SwitchedOn podcast here.