A proposed energy market rule change that could save NSW consumers $1.2 billion by 2050 has been all but ruled out by the Australian Energy Market Commission.

The Local Generation Network Credits rule change was put forward by the City of Sydney, the Total Environment Centre and the Property Council of Australia, and has been separately modelled to reduce network expansion costs by 59 per cent.

It proposed allowing local businesses, community groups and councils to sell and share the solar power they generate with their neighbours.

The change would mean sites like City of Sydney's Redfern Oval could share excess power generated by its 220 solar panels with buildings next door, without paying expensive network charges to do so.

But in a draft rule determination on Thursday, the AEMC advocated rejecting the request, arguing it would build "a new, expensive subsidy into the regulatory framework ... achieving little but higher prices for all consumers".

City of Sydney lord mayor Clover Moore said the council did not accept the findings of the AEMC, arguing the regulator had "missed an opportunity" to modernise Australia's energy market regulations.

"The decision by AEMC means city residents will continue to pay for upgrades to an ageing and inefficient network that transports coal-fired power all the way from the Hunter Valley to Sydney."

Cr Moore said producing energy locally helped "avoid expensive upgrades to the NSW electricity grid of poles and wires, which have pushed up power prices".

Support for the rule change was offered by a federal government-funded study this week, which found that combining local network credits with a measure allowing businesses and communities to trade electricity could provide an overall economic benefit of about $1.2 billion by 2050.

Local network credits are tariffs received by a generator for electricity used within a defined local network area, to recognise that only part of the network is used.

The study, conducted by the UTS Institute for Sustainable Futures (ISF), involved five trials of proposed local energy projects at council and utility sites around the country, including solar PV, wind energy geothermal and co-generation.

In a modification of council and industry's rule request, the ISF team excluded small-scale generators and all existing generators, as they found benefits were maximised by restricting payments to systems between 10 kilowatts and 30 megawatts.

Project director Jay Rutovitz​ said the AEMC's decision showed they were "out of touch with consumers and where the whole energy system [was] going".

"This was a rule about making a level playing field, so that if you have a council with a building on one side of the street, they can generate electricity to use at buildings on the other side of the street and not pay as if it's coming from 400 kilometres away."

However the commission disagreed that credits would offer a financial benefit, and instead proposed a draft rule that required network businesses to publish an annual "systems limitations report".

"The regulatory framework already provides a range of incentives to network businesses to provide a safe and reliable electricity supply at the lowest possible cost," said AEMC chairman John Pierce.

"Our analysis shows that paying credits to embedded generators would likely result in higher costs for all electricity customers because payments would be made regardless of whether the embedded generator is located where it provides value."

But NSW executive director of the Property Council Jane Fitzgerald said the risk the AEMC described was "theoretical" and not what was actually occurring.

"It seems to us the regulator should be on board with the post-Paris mission and everything about the determination suggests they are not."

Community Power Agency director Nicky Ison​ said the determination was a "huge missed opportunity".

"Hundreds of new mid-scale clean energy power projects are effectively blocked as a result of the decision."

While the draft determination is open to submissions until November 3, Ms Ison said she was "pessimistic" the decision would change substantially.

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