From the editor’s
desk…
Welcome
to Pipes & Wires #107. This month we start by examining the likely
reshaping of the gas transmission sector in Western Europe, and then look at
how nuclear policy is unfolding in South Africa, India and Japan. We also take
a quick look at feed-in tariffs in China. We then look at some electricity
transmission tariff decisions in New Zealand, the Netherlands and Finland and
some other wider regulatory policy issues in the US and the Netherlands. This
issue ends with a quick look at the winner of the UK pylon design competition.
Utility
Consultants is also launching a new Facebook page, primarily as a portal to the
main website, but also to post topical comments. If you haven’t already done
so, could you please pick
this link and then hit the Like button so I can get enough Like’s to
register a short name.
Industry
reshuffling
Europe
– E.On looks to sell gas transmission network
Introduction
E.On seems so ubiquitous in shaping
Europe’s energy sector there seemed to be heaps of angles from which to
approach the likely divesting of gas transmission business Open
Grid Europe. However the best angle seems to be from the perspective of
E.On migrating its capital away from pipes & wires both in accordance with
the EU’s
Third Package (which requires separation of energy and lines) and a planned
sell down of about €15b of assets to reduce debt.
What
exactly is Open Grid Europe ?
Open Grid Europe (OGE) is a gas
transmission business comprising 11,500km
of high-pressure pipelines that sits within E.On’s subsidiary Ruhr
Gas. Annual gas throughput is about 75 billion cubic meters.
OGE was functionally separated from Ruhr
Gas on 1st September 2009 to provide independent system operator
functions.
E.On’s
plans
E.On has been characteristically guarded
about exactly what its’ plans are. However the hiring of Goldman Sachs to run a
sale process timed to start early in 2012 with an expected sale closure late in
2012 would suggest a firm eye to selling OGE.
In terms of strategy this would be
consistent with E.On’s previous sale of the electricity transmission grid subsidiary
Transpower
Stromübertragungs GmbH to Dutch transmission grid operator TenneT. It would also seem
consistent with E.On’s jockeying for position with rival RWE that recently sold its gas transmission grid
unit Thyssengas
GmbH.
Likely
buyers for OGE
The global trend for pipes & wires
ownership has been towards other grid owners, pension funds, and in Germany’s
case, municipalities. A key characteristic of these entities is a desire for
the modest but predictable returns offered by most regulatory regimes, and an
absence of the either generation or the gas reserves necessary to offset the
trading risks that makes retailing an undesirable activity.
And the likely sale price ? Just taking a
few simple scale measurements, Thyssengas owns 4,100km of pipelines and has an
annual throughput of about 10 billion cubic meters, and was sold for €500m. So
on the face of it, we might expect OGE (with 3x the pipeline length and 7x the
gas throughput) to sell for anywhere from €1.5b to €3b.
Any sale of OGE will be a major chunk of
the EU energy reshuffling, so Pipes & Wires will report back as the sale
process progresses.
Energy
markets
China
– setting the feed-in tariffs
Introduction
Feed-in tariffs are the understandable
cornerstone of solar energy policy, however the last few years have seen a
rapid decrease in the level of feed-in tariffs payable in many jurisdictions.
This article examines the new feed-in tariffs in China, and then also re-caps
some of the wider issues.
China’s
feed-in tariff
China is aiming for a 10-fold increase in
solar energy over the next 5 years. The recently announced prima facie feed-in tariff will be 1 Yuan (about US$0.156) per kWh,
with variations up to 1.15 Yuan per kWh in certain locations and times. Current
electricity prices in China appear to be about 0.6 Yuan per kWh, indicating
that the initial feed-in tariff is about 1.8x the prevailing price.
Trends
in feed-in tariffs
Pipes &
Wires #96 and #101 noted
a rapid decline in feed-in tariffs in France and parts of Australia (and noted
that it seems to be global trend). A major concern was that the high feed-in
tariffs were causing “inflation” in the solar sector and leading to “excessive
returns” by people wealthy enough to buy solar panels.
Given that the Chinese feed-in tariffs have
been set at an apparently lower level, it will be interesting to see what the
trend over time with respect to uptake will be.
Energy policy
South
Africa – nuclear power back on the agenda
Introduction
Nuclear power seems to have made a rapid
transition back into hiatus land after the difficulties encountered at Fukushima
earlier this year (and more recently the furnace explosion at the Marcoule nuclear reprocessing
facility in southern France). Hence it was somewhat surprising to read in the
news that South African Energy
Minister Dipuo Peters signed off a proposal for 9,600MW of nuclear capacity
that will go to Cabinet soon for consideration.
The
proposal’s timeline
The proposal’s timeline is broadly as
follows...
·
Cabinet
decision – end of 2011.
·
Bidding
starts – early 2012.
·
Commissioning
– 2024 or 2025.
Examining
South Africa’s nuclear energy policy
The Energy Act 2008
aimed to diversify South Africa’s energy sources. Of the anticipated 42,000MW
of new generation by 2030, about 18,000MW is expected to be renewable, about
9,600MW of nuclear, and the balance being about 14,000MW of thermal (although
those figures appear to be a bit “fluid”).
So the policy has certainly contemplated
new nuclear stations, and it is noted that the Fukushima radiation leak did
prompt a significant review of safety issues (it is not clear whether the Marcoule
explosion also prompted a review). The view that Eskom will own and operate all new nuclear
stations may have been a result of this review, suggesting that private
ownership of nuclear stations may well have been contemplated.
Pipes & Wires will re-examine this
issue once the Cabinet decision has emerged.
India
– “reviewing” nuclear safety
Introduction
India has an established fleet of nuclear
power stations, and a well established plan for new nuclear stations. Like many
countries, the radiation leak at Fukushima
and the furnace explosion at Marcoule
prompted a bit of a rethink about the safety of nuclear plants. This article firstly
enumerates India’s existing and planned nuclear fleet and then examines the
recent “review” of nuclear safety.
Current
fleet of nuclear stations
India currently has 4,780MW of
nuclear generation capacity comprising 20 reactors and 6 sites. Some of the
smaller units such as Tarapur and Rajasthan are now 40 years old, whilst some
of the newer units (also at Rajasthan) are only 1 year old. All of these
stations are either Boiling
Water Reactors (BWR) or Pressurised
Heavy Water Reactors (PHWR).
Nuclear
stations under construction
India currently has 9 reactors under
construction at 5 sites totaling 6,700MW. Six of these reactors will be PHWR,
the single 500MW reactor at Kalpakkam will be an Indian-designed Prototype Fast Breeder Reactor
(PFBR), whilst the two 1,000MW reactors at Kudankulam
will be Soviet-designed VVER-1000
reactors (similar to a PWR, and quite different to the RBMK reactors used at Chernobyl).
“Reviewing”
the nuclear safety policy
India has a very ambitious nuclear energy
policy, and plans to have 20,000MW commissioned by 2020 and 63,000MW by 2032 (one
way or another, that will require commissioning about 2½ big (approx. 1,000MW)
reactors each year for the next 20 years !!!). Interestingly enough there are a
couple of somewhat unique features to India’s nuclear policy...
·
Very
limited (until recent discoveries) indigenous Uranium reserves made India
dependent on imported nuclear fuels. This was a driver of India’s PFBR program
which aims to exploit India’s natural reserves of Thorium.
·
Because
India’s nuclear weapons program excluded it from the Nuclear
Non-Proliferation Treaty, it was unable to trade in materials, fuel or
weapons-related technologies until 2009.
Given the very firm resolve toward a
growing nuclear fleet, any “review” or “rethink” would seemingly need to be pretty
substantial to derail a program like that. That “review” took the form of a safety review by the Atomic Energy Regulatory Board which
concluded that while India’s 18 PHWR’s contain a number of inherent safety
features, the 2 BWR’s at Tarapur lack any provision for reactor cooling during
a prolonged station black-out (considered to be about 1 week). The review also
noted some interim safety modifications had already been made including
provision to flood the reactors with nitrogen to avoid hydrogen explosions
(which did occur at Fukushima).
Japan
– re-thinking a nuclear future
Introduction
The recent radiation leak at Fukushima
has clearly demonstrated that nuclear power is a global issue in which emotion
vastly outstrips reason. This article examines Japan’s recent decision to
re-think plans for meeting about 50% of its electricity demand with nuclear by
2030.
Japan’s
nuclear energy program
Japan’s nuclear energy policy began in
1954, but it took until 1966 for the first nuclear station to be commissioned
at Tokai
using a British Magnox
design. The program grew over time to a fleet of 22 stations that dampened
Japan’s dependence on imported coal and oil for electricity generation.
A less obvious strategic aspect is that
Japan’s sourcing of Uranium from Australia, South Africa, Canada and France
reduced their dependence on oil-exporting nations that (at the time) were
becoming increasingly hostile to the West. An additional aspect of this is
approach is Japan’s sourcing of LNG from Australia ... very clever, eh.
Japan’s
nuclear power stations
Japan has 22 nuclear
power stations (including 2 under construction and 2 being decommissioned)
comprising 53 operating reactors. These collectively represent about 20% of
Japan’s installed generation capacity of 280,000MW, and generate about 25% of
Japan’s electricity. A further 12 reactors totaling 16,000MW are planned.
Key
aspects of Japan’s nuclear policy
Japan’s energy policy has been driven by an
overarching need for security of supply (too bad some other nations hadn’t done
that). Not surprisingly, key elements of Japan’s nuclear energy policy have
included making nuclear generation a priority, recycling and breeding fuel, and
managing the public perception of nuclear power.
Key
aspects of the re-think
The Industry Ministry has recently formed a
panel to examine the energy path that Japan should take for the next 100 to 200
years. Despite the recognition of the important role of nuclear power and a
determination to re-start those reactors that were shutdown following
Fukushima, the panel has reluctantly accepted that public support for nuclear
power has plunged and that it would be difficult to build any new reactors.
So a worst case scenario is an eventual
run-down of something like 55,000MW of nuclear generation in the face of a
simultaneous increase in demand of about 25,000MW. Fortunately Japan appears to
have a significant reserve capacity margin that could be used, but one way or
another some hard decisions will need to be made.
Regulatory
decisions
NZ
– setting the electricity grid revenues
Introduction
The allowable revenue for New Zealand’s
national grid owner, Transpower, is set by the Commerce Act (Transpower
Individual Price-Quality Path) Determination 2010. This article re-caps the
development of that Individual Price-Quality Path and then examines the maximum
allowable revenue (MAR) for Years 2, 3 and 4 of the Path.
Background
Until a few months ago, Transpower operated under an administrative settlement with the
Commerce Commission (refer Pipes
& Wires #72) which expired on the 30th June 2011.
The
subsequent passage of the Commerce Amendment Act 2008 (which amended the Commerce
Act 1986) introduced a range of new regulatory instruments and also
established several statutory procedures that the Commission must follow. The
Commission recommended to the Minister that Transpower should be subject to
Individual Price-Quality regulation (as described in s53ZC
of the Act) because that instrument is more likely to promote the s52A
Purpose Statement than Default Price-Quality regulation or Customised
Price-Quality regulation
Key features of the IPP
Key
features of the IPP that will cover the regulatory control period (RCP1) from 1st
April 2011 to 31st March 2015 include...
· A
maximum allowable revenue (MAR) of $644m for the 1st April 2011 – 31st
March 2012 year (referred to as the transition year).
· A
requirement for Transpower to submit
forecast MAR’s for the remaining 3 years by 21st October 2011.
· A
requirement for the Commerce Commission
to determine forecast MAR’s for the remaining 3 years by 30th
November 2011, based on the information submitted by Transpower.
· A
requirement for Transpower to certify each year that it has complied with the
forecast MAR.
· Quality targets for the year ending 30th
June 2012 of...
· A
requirement for Transpower to determine quality targets for the years ending 30th
June 2013, 2014 and 2015 by 30th November 2011.
· A
requirement to annual disclose the MAR, CapEx, Opex and Economic Value Added
(EVA).
Key
features of the final decision
The key features of the Commission’s final
decision that will apply for the final 3 years of RCP1 (ie. 1st July
2012 to 30th June 2015) include....
·
A
nominal OpEx of $847.3m, to be apportioned over the 3 years.
·
A
minor CapEx of $825.1m, to be apportioned over the 3 years in accordance with
the forecast commissioning schedules.
·
Reliability
targets of 21 events greater than 0.05 system minutes, 3 events greater than 1
system minute, an unplanned HVAC unavailability of 0.054%, and total system
interruptions of no more than 16.69 system minutes.
·
A
requirement to advise the Commission of progress on implementing a pre-defined
range of business improvement initiatives.
The
allowable revenues
Transpower’s MAR’s will be as follows...
|
Regulatory year ending 30th June |
2013 |
2014 |
2015 |
|
Forecast MAR |
$783.8m |
$906.4m |
$958.9m |
|
Pass-through costs |
$13.4m |
$14.4m |
$15.4m |
|
Recoverable costs |
$9.7m |
$10.0m |
$4.8m |
|
Forecast
revenue |
$806.9m |
$930.8m |
$979.1m |
Netherlands
– increasing the electricity grid tariffs
Introduction
Grid tariffs everywhere are increasing year
upon year to fund increased growth and renewal CapEx. This brief article
examines state-owned transmission grid TenneT’s
proposed tariff increases for its 220kV and 380kV grids for the 2012 year,
and also examines TenneT’s appeal against the Dutch Competition Authority’s (NMa’s)
Fifth Method Decision.
TenneT’s
regulatory framework
Key features of the regulatory framework
that TenneT is subject to include...
·
The
basis of regulation is the “classical” RPI-X regulation, although prior to each
period the NMa describes what regulation should look like through a “Method Decision”.
·
A
period is typically 3 to 5 years, and TenneT is currently in its 4th
regulatory period.
·
After
publishing its’ method decision, the NMa then publishes the X-factor that will
apply for the period based on a proposal submitted by TenneT.
·
Under-recovery
or over-recovery of MWh-based revenue due to variances from the proposal are compensated
for in the subsequent year on an ex-post basis, significantly reducing TenneT’s
volume risk exposure.
·
Although
the Electricity Act does allow recalculation of TenneT’s revenue under
specified circumstances, the NMa has proven hesitant to actually do so.
·
In
addition to these specific features, the regulatory framework embodies the
usual financial and economic assumptions.
TenneT’s
proposed tariff increases
TenneT’s revenue comprises 2 major tariff
components...
·
System
Services Tariff which recovers the costs of safe and secure operation of the
grids in accordance with the System
Code, covering such matters as maintaining reserve capacity, and maintaining
black start capability.
·
Transmission
Tariff which recovers the costs grid operations, maintenance and CapEx.
TenneT has proposed the following tariff
increases for the 2012 tariff year...
·
A
3% increase in the System Services Tariff, which largely reflects inflation.
·
An
11% in the Transmission Tariff for the 2012 tariff year. This reflects the
costs of new assets such as the new grid exit point at Bleiswijk, and the new
220kV line from Zwolle to Groningen.
TenneT’s
appeal against the Fifth Method Decision
In September 2010 the NMa decreed that some
of the 220kV and 380kV assets built before 2001 were not economically
efficient, and that TenneT would have to take an impairment charge of between
€100m and €200m to its RAB for the 2008 – 2010 regulatory period.
Understandably, TenneT appealed this decision.
In July 2011 the Trade & Industry
Appeals Tribunal (CBb) found in favor of TenneT’s appeal, and instructed the
NMa to firstly reverse its decision and secondly to recalculate the Method
Decision in accordance with the Tribunal’s ruling.
Finland
– increasing the electricity grid tariffs
Introduction
This brief article examines the tariff
increases proposed by transmission grid utility Fingrid, which follows Pipes
& Wires on-going coverage of electricity transmission price decisions.
A
bit about Fingrid
Fingrid is the national electricity
transmission grid operator in Finland, owning and operating 14,000km of 110kV,
220kV and 400kV grids including interconnections
with Sweden, Russia, Estonia and Norway. Annual revenues are about €460m,
and the EBITDA margin of 31% gives a return on capital of about 9%.
Fingrid’s
proposed tariff increases
Fingrid is proposing an average increase of
transmission tariffs by 30% for the 2012 year, ostensibly to fund renewal and
growth CapEx of €1.7b over the next 10 years. This is expected to include about
3,000km of lines and 30 new grid exit substations.
Although that proposed 30% increase seems
high, it must be recognised that Fingrid has not increased its tariffs to
achieve its allowable regulated return. Over the past 4 years Fingrid has
under-recovered about €250m (which will not be recovered by future tariff
increases).
US
– recommending the Laredo – Lower Rio Grande Valley line
Introduction
Recommending the approval of 163 miles of
345kV line probably seems a bit of a non-issue to write an article about.
However some wider thoughts might include the recent rejection of another major
transmission line, namely the Potomac-Appalachian
Transmission Highline (Pipes &
Wires #97 and #100).
This article examines the Laredo – Lower
Rio Grande Valley line recommendation and contrasts that with the rejection
of the PATH.
Description
of the proposed line
The proposed 345kV line will stretch 163
miles from Lobo Substation near Laredo to substations north of Edinburgh in
southern Texas, and is expected to cost $300m. A parallel project to
re-conductor 2 existing 345kV lines and upgrade several substations at a cost
of $225m was also approved.
The owner of the proposed line is Electric Transmission Texas LLC, a joint
venture between American Electric Power (AEP)
and MidAmerican Energy Holdings.
Recommending
the line
The Electric
Reliability Council Of Texas (ERCOT) has recommended that the Public Utilities Commission Of
Texas (PUC) approve this line, deeming it “critical” to ensuring reliable
supply to the Lower Rio Grande Valley area. This area is currently supplied by two
345kV lines that both originate near Corpus Christie and run parallel to the
Gulf Coast, making the Valley supply very vulnerable to interruption. It would
therefore appear that this line is a security of supply investment.
The ERCOT expects to file a Certificate Of
Convenience And Necessity (CNN) application with the PUC in 2012 and complete
the line in 2016.
Comparison
to the PATH rejection
The biggest contrast between this line and
the PATH was that the PATH was...
·
Planned
for a “crowded market” in which the investment decision of any single grid
owner affects the need for other grid owners’ investment plans (it was noted
that the proposed Mid-Atlantic
Power Pathway (MAPP) in conjunction with the Mount Storm – Doubs line
rebuild would eliminate the reactive power excursions used to justify PATH
until 2019).
·
Due
to a languishing economy, the demand forecasts used to justify the PATH were
considered excessive.
It will doubtless be interesting to see
what the PUC’s response to ERCOT’s “critical” assessment is.
Netherlands
– refunding the gas transmission customers
Introduction
Re-visiting past regulatory decisions usually
creates unease for investors. This article examines the Dutch Competition
Authority’s (NMa) decision to redefine the tariff Method Decisions applying to
gas transmission utility Gas
Transport Services BV (GTS) that will result in €400m being refunded to
connected customers by way of future discounts.
The
Method Decisions
Broadly speaking, the Method Decision sets
out the details of how specific aspects of a pipes & wires business will be
regulated, which in GTS’ case includes transmission, balancing and quality
conversion. These Method Decisions must be consistent (or at least, not
inconsistent) with the prevailing legal framework (in this case the Gas Act).
Under its powers, the NMa has defined
Method Decisions for the 2 regulatory periods 2006 – 2009 and 2010 – 2013
respectively.
Challenging
the Method Decisions
Challenges to the Method Decisions have inter alia been as follows....
·
The
NMa established its Method Decision for the 2006 – 2009 period, as it was
expected to do.
·
GTS
appealed that Method Decision to the Trade & Industry Appeals Tribunal
(CBb).
·
In
November 2006 the CBb ruled inter alia
that the NMa Method Decision was inconsistent with the prevailing legal
framework.
·
In
July 2008 the Minister of Economic Affairs used his powers under the Gas Act to
set a new regulatory framework (which the NMa did not appeal). The NMa then
decided not to issue a new Method Decision for 2006 – 2008, and instead
concentrated on developing a Method Decision to cover 2009 and on into the 2010
– 2012 periods.
·
In
June 2010 the CBb allowed appeals from energy users against the Method
Decisions for 2009 – 2012. The CBb concluded that the Minister had in fact
over-stepped his powers by setting a highly prescriptive Method Decision that
was considered to the prerogative of the NMa.
·
The
CBb also reversed the NMA’s previous decision not to issue a new Method
Decision for 2006 – 2008, effectively requiring the NMa to set a revised Method
Decision for 2006 – 2009.
·
In its draft
decision of May 2011, the NMa proposed to adopt an asset valuation method that
was more like the 2005 Method Decision rather than the Minister’s valuation of
2008. The adopted valuation approach led to a lower asset value, which would
understandably result in lower tariffs that should’ve been applied over the
period 2006 to 2011. At the draft stage, it was thought that this could amount
to about €1b.
·
In
October 2011, the NMa released its final decision that this “over-charging” was
of the order of €400m, which would be refunded over the 2012 and 2013 years by
way of discounts.
The contrasting viewpoints
The NMa understandably claims that its
decision will not impact on GTS’ pipeline investment plans. However, GTS’s
first reading of the decision is that it will have a negative impact.
Asset
strategy
UK
– winner of the pylon design competition
Introduction
UK transmission grid owner National Grid
recently ran a competition to choose a new design for the many new pylons it
expects to build in the coming years.
Background
Since its establishment in the late 1920’s,
National Grid has built about 88,000 pylons across England, Wales and Scotland.
Even though the skill of the famous architect Sir Reginald Blomfield
was engaged to smooth the harsh lines of pylon designs from other European
countries that were considered to have more state intervention, the UK pylons
have still been considered by many to be intrusive.
To this end, National Grid and the
Department of Energy & Climate Change ran a competition through the Royal Institute of British Architects
to choose a new pylon design. Pipes & Wires #106 noted the 6 short-listed
entries (of which 4 were of mono-pole design).
And
the winner is....
The winner of the competition is .... Danish
architect Bystrup’s T-Pylon.
National Grid will work with Bystrup to further develop their winning concept,
and will also work with 2 other short-listed designs by Ian Ritchie Associates
(entry #12) and Newtown Studio.
A bit of light reading…
Wanted – old electricity history books
If
anyone has an old copy of the following books (or any similar books) they no
longer want I’d be happy to give them a good home…
·
White Diamonds North.
·
Northwards March The Pylons.
·
Two Per Mile.
·
Live Lines (the old ESAA journal)
Conferences & training courses
The following
conferences and training courses are planned...
·
Fundamentals
of the NZ electricity industry – Wellington, 8th – 9th
May, 2012.
·
Fundamentals
of the NZ electricity industry – Auckland, 22nd – 23rd
May, 2012.
·
2nd
Infrastructure: Investment & Regulation Conference – Bundaberg area, 31st
May – 1st June, 2012.
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Disclaimer
These articles
are of a general nature and are not intended as specific legal, consulting or
investment advice, and are correct at the time of writing. In particular Pipes
& Wires may make forward looking or speculative statements, projections or
estimates of such matters as industry structural changes, merger outcomes or
regulatory determinations.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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