From the
editor’s desk…
Welcome
to Pipes & Wires #108. This issue starts with a look at some gas supply
issues in the UK, and then looks at shifting energy policies in New Zealand,
Germany and Spain. We then examine 2 mergers in the US and then conclude with a
look at 4 regulatory decisions in New Zealand and Australia.
Utility
Consultants has also launched a new Face
Book page, primarily as a portal to the main website, but also to post
topical comments. I’d also like to wish you and your families a very Merry
Christmas and a Happy New Year.
Energy
markets
UK
– securing the gas supplies
Introduction
Most of us have a vague idea that the UK’s
gas supplies are becoming less and less secure – certainly those who have
attended my Electricity Industry training course will be aware of this. This
article takes a look at OFGEM’s recently
announced investigation into the UK’s gas supplies, but first some facts.
Some
UK gas facts
Some UK gas facts include....
·
The
world’s first importation of LNG occurred at Canvey Island in October 1964.
·
Gas’
share of the primary energy market increased from 5% in the early 1970’s, to
40% by 2004.
·
The
Interconnector between the UK and Belgium commenced operation in 1999, with a
view to exporting gas from the UK. This effectively “plugged in” UK gas prices
to prices in Europe, which are in turn oil-indexed.
·
Liquidity
and traded volumes began to decline, pushing up prices. Moreover the UK
migrated from being a significant exporter to a major importer.
·
Currently
about 50% of the UK’s gas is indigenous, but this is expected to fall to about
20% by the year 2020.
·
Wholesale
gas prices have continued to rise, rising 40% this year alone.
All these facts point towards tightening
supply and increasing prices.
The
Annual Statutory Security Of Supply Report
The Department
Of Energy & Climate Change (DECC) and OFGEM
recently tabled their second Annual
Statutory Security Of Supply Report in Parliament. This report noted that
in the short-to-medium term, Britain’s gas supply is resilient to all but the
most severe supply shocks. However, in the medium-to-long term, there are
likely to be “challenges”, with perhaps the most significant challenge being
increased gas-fired electricity generation.
OFGEM’s
investigation
Energy
& Climate Change Secretary Chris Huhne has asked OFGEM to investigate
whether Britain’s medium-to-long term gas supplies are secure. Key issues noted
include...
·
An
expected increased reliance on imported gas.
·
Political
instability in the major gas exporting and gas transmission countries.
·
The
knee-jerk closure of many nuclear power stations following the Fukushima
earthquake, which has driven gas prices to new highs.
·
The
expected role of gas-fired power stations to meet the gap between existing
coal-fired plants closing and the new nuclear stations opening.
Pipes
& Wires will examine OFGEM’s report when it emerges.
Energy policy
NZ
– post-election energy policy
Introduction
Unfortunately energy has become thoroughly
politicised, and the for’s and against’s the SOE
partial sell-downs as part of the 2011 election campaign are certainly no
exception. This article examines New Zealand’s likely energy policy positions
now that a National-led Government
has returned to office for a 2nd term.
The
most visible campaign claims
Certainly the most visible campaign aspect
of energy policy was National’s plans to sell-down 49% of the state-owned
generation companies Meridian Energy,
Genesis Energy and Mighty River Power (and also 49%
of Solid Energy and Air New Zealand). Opposing asset sales has
equally formed one of Labour’s key
policy positions, using an image of a red banner unfurled down the
face of Benmore dam (the advert on TV started with threats of increased
electricity bills under partial privatisation, but with no mention that
electricity bills increased something like 50% in real terms when Labour were
in office and they were state-owned).
Only slightly less visible are the now well
understood left-of-center and right-of-center policy positions on renewables...
·
Labour
vigorously promoted the 90% renewables target that was a key aspect of their
energy policy when they were in office, with little thought for how a modern
economy might function with an increasingly intermittent electricity supply.
·
National
seemed to still have the 90% renewable target in mind, but certainly in the
context that a secure electricity supply requires a
balanced portfolio of generation including fossil-fired thermal generation.
Beneath this tier of policy positions is a
whole tier of low-level “just get on and do it” sort of stuff like increasing
the national grid capacity, insulating old houses, and improving NZ’s oil and
gas exploration prospects.
Emerging
policy positions
Now that the election has settled (yay ....
no more endless political debates on TV), the following policy positions are
starting to emerge...
·
The
proposed 49% sell-off of SOE stakes seems certain to proceed, even though potential
coalition partners had opposed any sell-off prior to the election.
·
The
Maori Party appears to have changed its “anti-sale” position, and now seems keen
for Iwi (Maori tribes) to invest in any SOE stakes.
·
A
likely increase in off-shore oil and gas exploration.
·
One
of the hopeful Labour-leaders claiming that a Labour-led government “would not
rule out” buying back any SOE stakes that are sold.
So, probably nothing really fundamental has
emerged that wasn’t immediately obvious from the results on election night. Pipes
& Wires will make further comment as detailed work streams emerge.
Germany
– the shifting sands of the nuclear phase out
Introduction
Germany’s phase out of nuclear power has
been a recurring topic of Pipes & Wires over the last few years. This
article examines the “crunch time” after the most recent lurch back into
anti-nuclear territory following the Fukushima earthquake and tsunami.
Background
The following events are significant in
Germany’s recent history of nuclear power (Pipes
& Wires #102)...
|
Phase
out |
Back
in 2000 the German coalition government announced its intention to phase out
nuclear power. |
|
Phase
out of the phase out |
In
early 2008 Angela Merkel and her party shifted to an open opposition of the
nuclear phase-out and rejected a compromise by the SPD to postpone further
shutdowns in return for a ban on new nuclear plants. |
|
Phase
out of the phase out of the phase out |
The radiation leaks from Fukushima
prompted vigorous protests from the anti-nuclear brigade, but also prompted
something of a quick policy U-turn by Merkel who announced that last year’s
life extension decision of 17 plants has been suspended for 3 months, and
that shutdown of the 7 oldest reactors will proceed. |
Recent
events
The following recent events have
occurred...
·
The
decision to close several reactors following the Fukushima earthquake has led
to both RWE and E.On
reporting 30% and 40% reductions in earnings respectively from the previous
year.
·
Courts
in both Hamburg and Munich have ruled that the tax on nuclear fuel ...
apparently still payable even though units have been shutdown ... is probably
illegal. In RWE’s case, this tax amounts to just over €200m.
·
Spot
prices on the Power Exchange
Central Europe (PEX) jumped about 23% after the nuclear closures.
·
After
being a nett exporter of about 14,000 GWh in 2010, Germany is expected to
import about 4,000 GWh this year. Funny that most of that imported electricity
will almost certainly be nuclear from either France or the Czech Republic.
·
Many
in Belgium are now questioning the wisdom of their own
nuclear phase out, given their dependence on electricity imports from
Germany which are now understandably under pressure
due to Germany’s reduced exports.
So the apparently simple act of closing a
few nuclear stations could well have wider implications. Pipes & Wires will
follow this one over the coming months.
Spain
– post-election energy policy
Introduction
It seems that many center-left governments
in Europe are being punished by the electorate for the nations’ economic woes,
with clear swings to the center-right. As Pipes & Wires has previously
noted, those swings tend to usher in dramatic changes in energy policy. This
article takes a quick look at the recent change of government in Spain and
considers how that might change their energy policy.
Spain’s
energy policy pre-election
On the face of it, Spain’s energy policy
combines the following broad elements....
·
Recognition
of the EU priorities of reducing CO2 emissions and increasing
bio-fuel use.
·
An
orderly shut-down of nuclear power stations which, to its credit, appears to be
keeping one eye on security of supply.
However below the waterline, this policy is
seen as erratic and incoherent by many critics who cite the unsustainable
subsidies paid to the solar industry, the decline of Spain’s domestic coal
industry in the face of cheap imported coal, and the accumulating deficit
between regulated tariffs and the cost of supply that the government can no
longer afford to subsidise.
Characteristics
of left-to-right energy policy shifts
So what are some of the policy shifts that
we could see in Spain ? My guess is a mix of the
following will emerge....
·
A
sharp reduction in the subsidies paid to the solar industry (we are already
seeing reductions in PV feed-in tariffs in many other jurisdictions).
·
A
likely push-back against the CO2 emission reduction targets imposed
by Brussels (we saw this resurgence of national interest pitted against pan-EU
interests with the formation of energy champions a few years ago).
·
An
increased understanding of the importance of security of supply in underpinning
economic growth.
·
A
more balanced view of nuclear power and its’ role in CO2 emission reductions.
·
Increased
nervousness amongst investors of all political shades, leading to capital
flight.
·
Increased
certainty for coal-fired generation, perhaps something like a stay of
execution.
Spain’s economic woes are likely to be a
top priority for the incoming government, but given the economic impacts of
renewable subsidies and doubts about reliable supply to industry, my guess is
that some serious shifts in energy policy will come sooner rather than later.
Pipes & Wires will revisit this in a year or so to see what has happened.
Mergers
& acquisitions
US
– Central Vermont and Green Mountain merger almost complete
Introduction
Pipes &
Wires #102, #103 and #106
examined competing bids for the Central Vermont
Public Service Corp (CVPSC) from 2 Canadian utilities, Fortis and Gaz Metro Limited
Partnership. Gaz Metro’s bid also paved the way for a merger with Gaz
Metro’s other investment, Green Mountain Power. This article examines some
final detail issues prior to the expected completion of the CVPSC acquisition
and the GMP merger around April 2012.
The
merged company
The merged entity will be known as Green
Mountain Power, and will have about 256,000 electric customers across Vermont.
The enlarged GMP is expected to have about a 70% share of the Vermont retail
electricity market.
The
issue of naming and branding
It would seem that much soul-searching
preceded the decision to name the enlarged company Green Mountain Power, in an
effort to reflect the history and local traditions of community electricity
supply. The 3 GMP brands (Cow Power, Smart Power and Plug N’Go) will also be
retained.
Anyone who has been through a merger will
know full well that reprinting stationery and repainting vehicles is not cheap,
and is an especially sensitive issue when customers face increasing electricity
tariffs (which CVPSC is seeking to recover increased costs). It seems that this
issue was high in the minds of both GMP’s and CVPSC’s management, as the trucks
color schemes will be migrated over time to a single brand embodying GMP’s
green and yellow and CVPSC’s orange and white.
Completion
of the merger
The merger is expected to be completed
around April 2012, so Pipes & Wires will make a few closing remarks about
then.
US
– progress on the Exelon – Constellation merger
Introduction
Pipes
& Wires #101 and #103
have examined the early stages of Exelon’s
bid for Constellation Energy, and
noted the approval of the Public
Utilities Commission of Texas. This short article recaps the merger, notes
the details of the all-important shareholder approval, and notes the
outstanding regulatory approvals.
Summary
of the deal
The proposed bid offered 0.93 Exelon shares
for each Constellation share, valuing the deal at about $7.7b. If the merger
proceeds to completion, the resulting utility will have annual revenues of
about $33b, about 44,000 MW of generation and about 7,200,000 customers. Exelon
shareholders would own 78% of the merged entity, with constellation
shareholders owning 22%.
Shareholder
approval
Of the 71% of Exelon shares that voted, 97%
were in favor, and of the 78% shares of Constellation shares that voted, 87% were in favor. So ... shareholder approval has been
obtained, another major step.
Outstanding
regulatory approvals
The following regulatory approvals are
still required...
·
Federal Energy Regulatory Commission (FERC).
·
Nuclear Regulatory Commission (NRC).
·
Maryland Public Service Commission.
·
New York Public Service Commission.
The
uglier side of it all
One of the things we are seeing more of
(and this deal is no exception) is calls from various interest groups and from
politicians for state regulators to impose conditions, extract concessions or
simply withhold approval for the deal. In this case, Senators
Pipkin and Rosapepe
are urging the Maryland PSC to require Constellation to spin off Baltimore Gas & Electric as a stand-alone
utility prior to the merger occurring.
I guess this must put regulators in a very
difficult position of trying to assess the deal against established criteria
and not allowing additional or alternative criteria to be introduced. Pipes
& Wires will re-examine this deal as the approvals and political
machinations come to completion.
Regulatory
decisions
NZ
– draft gas distribution determination
Introduction
In September 2011 the Commerce Commission signaled the likely
features that would be embodied in the impending gas distribution and gas
transmission determinations, which was examined in Pipes
& Wires #105. This article examines the key features of the
Commission’s recent draft gas distribution determination, whilst the parallel
article below examines the gas transmission determination.
Prevailing
regulatory framework
The prevailing regulatory framework is Part
4 of the Commerce Act 1986. The determination is made under s55E(2).
Key
features of the determination
Key features of the gas distribution
determination include...
·
The
determination will commence on 1st July 2012, coinciding with the
expiry of the current Gas
Authorisations that apply to Powerco
and to Vector’s
Auckland network. The determination will conclude on 30th
September 2016.
·
The
starting price for Powerco and for Vector’s Auckland network will be the prices
that apply at the end of the Gas Authorisations.
·
The
starting price for the other networks (not subject to the Gas Authorisations)
will be the prices that apply at the 30th June 2010.
·
The
annual rate of change will be 0% ie. X = 0%.
Submission
process
The Commission will receive submissions on
this draft determination until 5pm on Monday 19th December 2011.
Aus
– the Powerlink draft decision
Introduction
Pipes
& Wires #103 introduced the revenue reset that will apply to
Queensland’s electricity transmission grid company, Powerlink, for the 5 year control
period starting on 1st July 2012. This article examines the Australian
Energy Regulator’s draft decision which was issued in late November 2011.
Key features of Draft Decision
Key
features of the AER’s Draft Decision include...
|
Parameter |
Proposal |
Draft Decision |
Revised Proposal |
Final Decision |
|
Total
OpEx |
$1,002m |
$920m |
|
|
|
Total
CapEx |
$3,484m |
$2,360m |
|
|
|
Opening
capital base |
$6,579m |
$6,576m |
|
|
|
Rate
of return |
10.30% |
8.31% |
|
|
|
Revenue
requirement |
$5,954m |
$4,563m |
|
|
Pipes & Wires coverage will continue as
the Revised Proposal and the Final Decisions emerge.
NZ – draft gas transmission
determination
Introduction
In September 2011 the Commerce Commission signaled the likely
features that would be embodied in the impending gas transmission and gas
distribution determinations, which was examined in Pipes
& wires #105. This article examines the key features of the
Commission’s recent draft gas transmission determination, whilst the parallel
article above examines the gas distribution determination.
Prevailing
regulatory framework
The prevailing regulatory framework is Part
4 of the Commerce Act 1986. The determination is made under s55E(2).
Key
features of the determination
Key features of the gas distribution
determination include...
·
The
determination will commence on 1st July 2012, and concludes on 30th
September 2016.
·
The
starting prices will be the prices that apply at the 30th June 2010.
·
The
annual rate of change will be 0% ie. X = 0%.
Submission
process
The Commission will receive submissions on
this draft determination until 5pm on Monday 19th December 2011.
Aus
– the Aurora Energy draft decision
Introduction
In May 2011 Aurora Energy submitted its Regulatory Proposal for the 5 year period beginning 1st
July 2012 to the Australian Energy Regulator,
effectively marking the end of the 1st round of revenue decisions
under the AER’s jurisdiction. This article summarises the key features of the
Proposal and of the recently released Draft Decision.
Legal
framework
The broad regulatory framework is Chapter 6
of the National
Electricity Rules. These rules set out the issues that a distributor must
address in its Proposal, and the criteria against which the AER must assess the
Proposal.
Summary
of key parameters
Key parameters of the decision process to
date are...
|
Parameter |
Proposal |
Draft Decision |
Revised Proposal |
Final Decision |
|
CapEx |
$672.3m |
$535.8m |
|
|
|
OpEx |
$340.1m |
$311.0m |
|
|
|
Revenue |
$1,536.3m |
$1,305.4m |
|
|
|
Opening RAB |
$1,484.9m |
$1,439.0m |
|
|
|
Closing RAB |
$1,891.2m |
$1,740.7m |
|
|
|
Nominal vanilla WACC |
10.33% |
8.08% |
|
|
Pipes & Wires will continue this
article as the process progresses.
Disclosure
of interest
Utility Consultants advised Aurora Energy
on parts of its Proposal.
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).
·
The Engineering History Of Electric Supply In New Zealand.
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 – Sydney, 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
contents of Pipes & Wires including any loss, damage or exposure to
offensive material from linking to any websites contained herein, or from any
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