From the editor’s
desk…
Welcome
to Pipes & Wires #110. This issue covers a wide range of stuff, from gas
pipelines in eastern Europe to water in the UK to feed-in tariffs in South
Africa. Apologies that this issue didn’t get published in March but it seemed
that a lot of clients wanted on-site help for various year-end matters.
Utility
Consultants has also recently launched a new Face Book 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.
What have I been doing lately ?
It
seems that every conversation I have with industry participants inevitably
turns to “what have you been doing lately”, so I thought I’d run a small
regular feature summarising recent work in a form that is suitably
confidential....
·
Advising an electricity company on how
to strengthen its asset management practices to assist complying with the
proposed Asset Management Maturity Assessment Tool (AMMAT).
·
Discussing the very preliminary aspects
of Customised Price Paths with a few lines businesses, including the likely costs
and risks.
·
Advising several electricity companies
on how to establish KPI’s for their PSMS, and how to strengthen their wider
practices to strengthen their PSMS’s.
·
Preparing several electricity asset
management plans for submission by 31st March 2012.
Feel
free to call me on (07) 854-6541 or pick here
to email me if there is anything you’d like to discuss.
Energy
markets
Europe
– does the Nabucco gas pipeline have a future ?
Introduction
Most of us have a general awareness that
central and western Europe’s gas supplies come from around Russia and Iran via
several large transmission pipelines that have mystical sounding names full of
capital letters such as TAG and MEGAL. This article examines the planned Nabucco pipeline,
and the uncertainties surrounding it.
What
exactly is Nabucco ?
Nabucco itself is a company of which the
shareholders are Bulgarian Energy Holding,
Botas, FGSZ, OMV,
RWE and Transgaz.
The planned pipeline itself will be a 100 bar, 1,420mm diameter, welded steel
pipeline stretching 3,893km from Ahiboz
in eastern Turkey to the Baumgarten gas
hub in Austria that will include an expected 11 compressor stations. Nabucco’s
annual throughput is expected to be 31 BCM (about 1,155 PJ).
Planning began in 2002, and by 2009 an
inter-governmental agreement between Turkey, Romania, Bulgaria, Hungary and
Austria had been signed. It was originally anticipated that the pipeline would
be finished by 2017.
What
other pipelines are there ?
There are many other existing and proposed
transmission pipelines between the general Russia – Iran area and central
Europe. The major pipelines include....
·
Nord Stream (commissioned
in 2011 - 55 BCM per year).
·
White Stream (planned for
2016 – 32 BCM per year).
·
South
Stream (planned for 2015 – 31 BCM per year).
·
Trans Adriatic Pipeline
(planning underway in 2011 – 20 BCM per year).
·
Blue
Stream (commissioned in 2005 – 16 BCM per year).
So there is certainly no shortage of
transmission capacity (at least in a general east-to-west sense).
What
are the issues threatening Nabucco ?
A few of the issues that seem to be
swirling amongst the pipelines and their owners include...
·
The
possibility of over-capacity. Russia in particular appears to have a preference
for consolidating some separate projects into a single pipeline (but could this
just be a veiled argument for strengthening control of the east-to-west gas flows
?).
·
Diverging
views amongst the many countries that have had to agree to each pipeline. The
gap appears to be between those countries that have the gas, and those who
don’t.
·
The
advent of shale gas may reduce the forecast east-to-west transmission volumes,
similar to how legacy flows and volumes in Canada and the US have altered (and
reduced revenues).
·
The
likely respective roles of gas and coal-fired generation as substitutes for
declining nuclear generation in Europe may well upset the expected throughput
volumes.
So there’s obviously a whole range of very
complex and inter-related issues effecting pipeline dvelopment. The size of
Nabucco alone makes it worth checking up on once a final decision is made.
Regulatory policy
Aus – classifying of distribution
services for the next electricity reset
Introduction
The Australian Energy Regulator (AER) is
preparing for the 2nd round of electricity distribution revenue
resets, starting with the ACT and NSW (for which the regulatory control period
starts on 1st July 2014). This article examines the AER’s recently
published consultation
paper on the classification of distribution services, which forms part of a
the wider Framework & Approaches work stream.
Background
The National
Electricity Rules (NER) requires the AER to inter alia set out whether or not it intends to regulate
distribution services. The AER must commence this process at least 24 months
prior to the end of the current control period (30th June 2014).
The basis of classifying services
The
basis of defining a “distribution service” is a core component of compiling a
revenue reset, because only the costs that are incurred in the delivery of a
distribution service can be recovered by regulated revenue.
AER’s initial thinking classification
of services
At
the time of writing this article, the AER was seeking comments on inter alia the following matters with
respect to the ACT and NSW...
·
Whether miscellaneous & monopoly
(M&M) services should be classified as standard control services.
·
Are emergency recoverable works a
“distribution service” ?
·
What control mechanism should be
applied to M&M and to emergency recoverable works.
·
Whether certain metering services
should be regulated, and if so, what should the control mechanism be ?
·
Whether the new connection activity
should be split into 4 or more distribution services to which more appropriate
service classifications and forms of control might be applied.
Next steps
The
AER expects to publish its’ draft Framework & Approaches Paper in late June
2012, and a final Paper in late November 2012.
NZ – reviewing the transmission pricing
methodology
Introduction
Correct
allocation of costs amongst grid users is essential to ensuring an economically
efficient transmission system. This article examines the key features of the
proposed economic framework underpinning the Transmission Pricing Methodology
(TPM) which the Electricity Authority (EA)
has recently consulted on.
The regulatory framework for the TPM
Section
16(1)(b) of the Electricity Industry Act 2010 requires the EA to make and
administer the Electricity
Industry Participation Code (the Code). Part
12, sub-part 4 of the Code sets out the requirements for establishing and
reviewing a TPM, which is itself set out in Schedule 12.4.
Key features of the proposed economic
framework
The
key features of the proposed economic framework include....
·
A desire to include as many market
mechanisms as possible to ensure that prices reflect underlying costs, whilst
also acknowledging that conventional transmission grids offer only limited
scope for such market mechanisms due to market power and externalities.
·
A possible option of forcing the
exacebator to pay for the action or inaction that results in costs. A major
issue is the need for a consistent process for ex-ante identification of the
exacerbator, along with the ability for the exacerbator to understand the cost
implications of their behavior and then change that behavior before the cost is
incurred.
·
An alternative option of forcing the
beneficiary of incurred costs to pay. It is acknowledged that identifying the
beneficiaries may be difficult, but that it could be usefully applied to the
HVDC.
Next steps
The
EA expects to publish further papers on the TPM process in June 2012, so that
will be a good time for Pipes & Wires to make further comment.
UK – limiting future water prices
Introduction
In
the 22 years since the UK water industry was privatised, costs have fallen and
service levels have markedly improved. The key issues ahead of the industry and
its’ regulator, OFWAT, are the exhausting of efficiency gains and the diverging
views on “profit”. This article examines a model
proposed by OFWAT last year (mid-2011) that aims to improve customer focus,
improve the incentives to innovate, and use water more efficiently.
Why change the current regulatory model
?
First
up we need to examine the need for changing the current regulatory model. The
reasons include....
·
OFWAT acknowledges that regulatory
controls have become complex. This is supported by industry commentators who
have gone much further with accusations of micromanaging.
·
Considering whether the current
approach of regulating the entire vertically integrated water supply chain is
in fact the best approach.
·
Heightened recognition of the declining
affordability of water and water services.
·
Increasing population densities in
south-east England where water is already scarce.
·
Declining water inflows due to changing
weather patterns.
·
A view that water supplies need a
further step-up in pressure to provide better services.
·
A need for incentives to ensure that
the suppliers investment is allocatively, productively and dynamically
efficient (water suppliers have indicated that they value the investment
certainty of the current regulatory model).
Features of OFWAT’s preliminary model
The
underlying premise of OFWAT’s model is that the current vertically integrated
water and sewage businesses could be split into 2 wholesale (water resources,
and network) and 1 retail (sale of water and water services) activities under
an accounting separation model. OFWAT believes that the optimal model would be
where retail purchases bulk water supply and sewage disposal, and network
services and then on-sells to customers at a regulated price. OFWAT also
acknowledges that the final regulated retail price will need to strongly
reflect the network RAB in order to maintain strong investment certainty, and
has grappled with whether this might be best achieved by capping retail prices
or by a set of “sub-caps” on individual activities.
OFWAT
has indicated that a decision should emerge in the (northern) Spring of 2012,
so Pipes & Wires will make further comment then.
Aus – amending the electricity regulatory
framework
Introduction
Two
decades on from the first round of energy sector reforms, policy makers all
over the world seem to be re-thinking how infrastructure regulation will work
in the future. This article provides a brief introduction to the Productivity
Commission’s (PC) public inquiry into aspects of national electricity
regulation in Australia to provide some context for future analysis.
The terms of reference
The terms of reference specify that the PC
should...
·
Examine the use of benchmarking under the
regulatory framework, incorporating any amendments introduced in the review
period, in the National
Electricity Rules and provide advice on how different benchmarking
methodologies could be used to enhance efficient outcomes.
·
Examine whether the regulatory regime, with
respect to the delivery of interconnector investment in the National
Electricity Market (NEM), is delivering economically efficient outcomes.
The
PC will consider the concurrent work being carried out by the Standing Council on Energy & Resources,
the Australian Energy Regulator (AER), and
the Australian Energy Markets Commission
(AEMC).
Some of the issues raised in the Issue
Paper
A
couple of issues raised in the issues
paper are worth noting...
·
That benchmarking is a distinct
alternative to the bottom up approach involving the hypothetically efficient
new entrant.
·
There is a strong recognition that
benchmarking must compare “apples with apples”, and that issues such
topography, customer density and temperature extremes must be correctly
accounted for. Indeed, the issues paper correctly recognises that incorrect
classification of an outlier as “inefficient” can lead to economically
inefficient investments.
·
There is recognition that it is
difficult to accurately assess whether asset renewal is occurring at the
optimal time.
·
There is recognition of the need to
correctly detect whether policy and regulatory settings are resulting in
inefficient investment decisions.
·
There is acknowledgement of the
practical difficulties and the real usefulness of some benchmarking data.
·
A recognition that the (distribution)
industry has been through a period of transition characterised by catching up
with low historical growth CapEx, increasing renewal CapEx, increasing air con
demand and increasing requirements for new lines to be underground that has
simply required individual DNSP’s to be effective rather than worrying about
being efficient.
The AER’s proposed rule change
The
AER has proposed
a rule change that specifically addresses the following issues...
·
The AER’s restrictions on objectively
assessing the efficiency or the necessity of expenditure proposed by
electricity businesses.
·
The need for a more consistent approach
for setting the rate of return of investment for both electricity and gas
businesses.
These
2 issues quite obviously cut deep into the heart of the PC’s terms of
references, so it will be interesting to see what emerges.
Next steps
The
PC’s draft report is expected in about September or October 2012. Pipes &
Wires will provide further analysis then.
NZ – update on the legal challenge to
the mid-term reset
Introduction
Previous
articles in Pipes & Wires have examined the first of 2 legal challenges to
the Commerce
Commission’s proposed mid-term reset that it intended to apply to
non-exempt electricity distribution businesses (EDB’s) on 1st April
2012 for the 3 years ending 31st March 2013, 2014 and 2015. This
article examines the High Court’s more recent decision on various procedural
matters of the mid-term reset.
The first legal challenge
The salient
points of the first legal challenge are....
·
Because the Input Methodologies were
still being compiled in November 2009, the Commission was able to invoke
s54K(3) of the Act which provides for the 2010 – 15 DPP to be reset if the
final Input Methodology would’ve resulted in a materially different DPP. The
Commission has argued that it would’ve, hence it is justified in resetting the
2010 – 15 DPP. Those resets were tabulated in Pipes
& Wires #104.
·
Vector
appealed the proposed decision on the basis that the Commission should’ve
compiled a broader range of Input Methodologies.
·
The commission argued that the
investment certainty sought by further Input Methodologies would be provided by
the mid-term reset.
·
The High Court ruled
in favor of Vector, concluding that the Commission had had misinterpreted
Part 4 to the extent inter alia that
it had not determined a starting price adjustment Input Methodology. Relief
included the compilation of a stand-alone starting price adjustment Input
Methodology.
·
The
Commission announced that the proposed mid-term DPP reset would be
suspended.
The second legal challenge
The
salient points of the second legal challenge (with specific regard to Vector) are...
·
Vector argued that the Commission had
acted in a procedurally unfair manner by not advising Vector that it would take
a cross-sectoral approach, thus depriving Vector of the opportunity to make
submissions on the Electricity and Gas Input Methodology determinations.
·
Vector argued that the Commission had
created a legitimate expectation that a sector-specific approach would be
adopted.
·
Clifford J rejected both of these
arguments.
·
Vector also argued that the Commission
did not have regard to specific material that Vector submitted during November
and December 2010. In his ruling, Clifford J rejected Vector’s argument.
The
overall conclusion was that the High
Court ruled in favor of the Commerce Commission.
Energy policy
South Africa – reducing the feed-in
tariffs
Introduction
Downward
pressure on feed-in tariffs appears to be a global phenomena, but amongst the
wailing and gnashing of teeth the real issue appears to be the retrospective
reduction of the feed-in tariff applying to existing renewable generation and
not just to new renewables. This article examines recent moves along those
lines in South Africa.
The feed-in tariff framework
In
2007 a model for purchasing renewable electricity at pre-determined prices was
developed. In March 2009, the National
Energy Regulator (NERSA) proposed some of the highest renewable feed-in
tariffs in the world, in an effort to encourage 10,000 GWh of renewable
generation per year by 2013. The feed-in tariff for concentrated solar was
particularly high.
However,
like in many other countries, these high tariffs were reviewed (in 2011 in
South Africa’s case) and it was concluded that the tariffs would need to be
reduced by up to 40% in some cases. The underlying reasons include the
declining cost of solar panels, the declining cost of debt, and increasing
electricity prices (the avoided cost from the solar panel owners’ perspective).
In particular, it was noted that a key driver of increasing electricity prices
is in fact the renewable feed-in tariffs themselves. For a country that relies
on cheap electricity to attract energy-intensive industries such as ore
processing, such price increases would be disastrous.
The real thorny issue
The
real thorny issue amidst the wider debate is whether the reduced feed-in
tariffs should be retrospectively applied to solar panels installed before the
tariff review. The companion article on feed-in tariffs in the UK in this issue
of Pipes & Wires notes that a very high level legal spat has resulted from
such a move.
The need for investment certainty
It
is abundantly clear that both policy makers and regulators recognise the need
to give investors certainty, at least in the context of renewables. It would be
nice to think that the underpinning mainstay of the electricity supply chain
(ie. traditional generators and networks) would be given similar investment
certainty.
UK – appealing the proposed feed-in
tariff cuts
Introduction
Downward
pressure on feed-in tariffs is occurring in many countries as authorities have
become uneasy with the whole notion of subsidies (and perhaps even uneasier
with the idea that people are installing solar panels simply to make money
rather than save the planet). This article examines the recent legal wrangling
over the UK Government’s plans to reduce feed-in tariffs from 1st
April 2012.
The UK feed-in tariff framework
The
feed-in tariff became available on 1st April 2010, and would
initially pay the operator of a solar panel installed after 15th
July 2009 (the eligibility date) about 40p/kWh for 25 years (inflation indexed)
depending on their precise circumstances. Since that start date, however, the
price of solar panels has declined significantly whilst the price of
electricity has increased, leading to an almost doubling of the rate of return
on investment. This has understandably led to a concern at Whitehall that the
subsidy implicit in the feed-in tariff is placing an unnecessary burden on both
electricity consumers and on the subsidy fund.
However,
the result of a Department
of Energy & Climate change (DECC) review confirmed that new tariffs
would apply from 1st April 2012 for all solar panels installed on or
after 3rd March 2012. Solar panels with an eligibility date between 12th December 2011 and 3rd March 2012 are
the subject of a legal wrangle.
The legal wrangling
So
what exactly is the legal wrangle all about ? The sequence of events is...
·
Initial feed-in tariff framework locks
in the tariff for 25 years. A lot more solar panels are installed than was
originally anticipated, whilst the costs decline and the avoided costs increase.
·
A review was announced on 7th
February 2011. DECC undertook a further review and public consultation in
October 2011, which included the view that solar panels with an eligibility
date between 12th December 2011 and 3rd March 2012 would
receive their current tariff for that period and a different tariff thereafter.
Not surprisingly, there was a huge flurry of solar panel installations in the 6
weeks prior to 12th December 2011.
·
A judicial review was filed against the
proposal to reduce tariffs for solar panels installed after 12th
December 2011.
·
The High Court ruled in December 2011
that such a proposal would be unlawful, and this was upheld by a Court Of
Appeal ruling on 23rd January 2012.
·
On the 19th January 2012,
the Government introduced regulations to Parliament that would reduce the
tariffs paid to all solar panels installed after 3rd March 2012
effective from 1st April 2012.
·
The Government is seeking permission to
appeal the Court Of Appeal’s ruling to the Supreme Court. This could result in
future legislation being introduced that would reduce the tariffs payable to
solar panels installed between 12th December 2011 and 2nd
March 2012.
So
... it’s all very complicated. Pipes & Wires will examine this further as
matters progress, noting that it has overarching consequences for the renewable
sector.
The issue of investment certainty
It
would seem that one of the key issues underlying this story is providing
investment certainty for people who install solar panels (and indeed, other
renewables). We might well ask why the authorities don’t apply the same zeal
towards providing investment certainty for large scale generators and regulated
networks.
South Africa – the push towards nuclear
Introduction
Pipes
& wires #107 examined the South African governments’ plans for a
further 9,600 MW of new nuclear generation, and anticipated a Cabinet decision
sometime in late 2011. This article examines recent moves.
Recent moves on the policy front
The
first big step was Cabinet’s approval to establish the National Nuclear Energy
Executive Coordination Committee (NNEECC) at its meeting on 10th
November 2011. The purpose of the NNEECC is to “lead, monitor and ensure
oversight” of the implementation of the nuclear policy, whilst media comment by
the Energy Minister Dipuo
Peters suggests that the NNEECC will actually have the authority to approve
construction contracts without reference to Cabinet. This has raised the ire of political opponents,
who are understandably concerned that the NNEECC could spend anywhere from R400b to R1,000b (US$52b to US$128b) without Cabinet approval
or with any degree of transparency.
What about the fuel ?
Recent
announcements from the Minister indicate that there will also be a significant
backward integration into fuel supply. This is likely to include a Uranium
converter plant, an enrichment plant, and a fuel manufacturing plant.
Recent moves on the planning front
Meanwhile,
Eskom is continuing its “project development activities” across a range of
power source options, in line with the Integrated
Resource Plan. It appears that several specific locations including Brazil, Schulpfontein,
Bantamsklip
and Thyspunt have
been identified for further study, with Thyspunt being viewed as the most
suitable.
Regulatory
decisions
NZ
– finalising Transpower’s CapEx Input Methodology
Introduction
Pipes
& Wires #105 examined the components of the Commerce Commission’s Final
Decision that will apply to national grid operator Transpower for the remainder of 1st
Regulatory Control Period (RCP1). This article follows that broad theme by
examining the Commission’s Final
Determination of Transpower’s CapEx Input Methodology.
Regulatory
framework
The regulatory framework for electricity
lines and gas pipes businesses is set out in Part
4 of the Commerce Act 1986. A key component of that regulatory framework is
the setting of Input
Methodologies, which codify how certain building block components must be
compiled.
Specific
requirements of the CapEx Input Methodology
The requirements of the CapEx Input
Methodology are set out in s54S
of the commerce Act 1986. The Input Methodology must include...
·
The requirements that must be met by Transpower, including
the scope and specificity of information required, the extent of independent
verification and audit, and the extent of consultation and agreement with
consumers; and
·
The the criteria the Commission will use to evaluate
capital expenditure proposals; and
·
The time frames and processes for evaluating capital
expenditure proposals, including what happens if the Commission does not comply
with those time frames.
This is broadly similar to Part 6A.6.7 of
the National
Electricity Rules in Australia.
Key
components of the CapEx Input Methodology
Key components of the CapEx Input
Methodology include....
· Prior to the start
of the Regulatory Period, Transpower must submit an Integrated Transmission
Plan (ITP), which includes a Base CapEx Proposal.
· During each
Disclosure year, Transpower must submit various documents that support the ITP
to the Commission.
· A requirement to
perform a cost-benefit analysis and customer consultation for all Base CapEx
projects or programs in excess of $20m.
· A requirement to
notify the commission of its intention to plan a Major CapEx project, and then
to submit a Major CapEx Proposal.
· The process the
commission must follow for amending an approved Major CapEx project.
· The process by
which the commission may calculate an efficiency adjustment after a Regulatory
Period.
· The criteria that
the Commission must follow in assessing a Base CapEx Project or a Major CapEx
Project.
This concludes Pipes & Wires coverage
of development the Transpower regulatory framework.
Aus
– appealing the Victorian electricity distribution Determinations
Introduction
The 5 electricity distributors in the
Australian state of Victoria (Powercor,
Jemena, CitiPower, United Energy and SP AusNet) appealed various aspects of
the Australian
Energy Regulator’s (AER) Final Determination of October 2010. This article examines
the Australian
Competition Tribunal’s preliminary findings.
Legal
framework
The electricity distribution Determination
was made by the AER pursuant to s6.11.1 of the National
Electricity Rules. The 5
distributors applied for a review under s71B of the National
Electricity Law.
The
Tribunal’s preliminary findings
The Tribunal’s preliminary findings are
extensive, and are summarised as follows....
|
Issue |
Tribunal’s preliminary decision |
Tribunal’s final decision |
|
Public lighting issues. |
The AER’s decisions were affirmed |
|
|
United Energy’s OpEx, Internal, and
Related Party costs. |
The AER’s decisions are confirmed |
|
|
Closing out the (former) ESC “S Factor”. |
The AER erred in its approach because it
did not have the power to close out. |
|
|
Establishment of the RAB’s (Capitalised
Related Party Margins). |
The AER’s decisions are affirmed. |
|
|
Establishment of the 2016 RAB’s
(Depreciation). |
The AER’s decisions are affirmed. |
|
|
Indexing the RAB for inflation. |
The AER erred in its methodology |
|
|
Debt Risk Premium (Annualisation &
Methodology). |
The AER erred and was required to replace
the determined DRP’s with prescribed figures |
|
|
Jemena’s Broadmeadows Relocation Project. |
The AER erred in its decision to disallow
the proposed 2011 CapEx. |
|
|
Disallowing certain Jemena Enterprise
Support Function Cost Centers. |
The AER erred in disallowing certain
costs |
|
|
Gamma. |
The AER erred and shall reduce the
allowed Gamma from 0.5 to 0.25. |
|
|
Materiality Threshold For Nominated Pass
Through Events (SP AusNet). |
The AER’s decision is affirmed. |
|
|
Insurance Event Issue (SP AusNet). |
Subject of a separate ruling |
|
|
Efficiency Carryover Mechanism
(Vegetation Management OpEX) from Powercor. |
The AER erred in its approach |
|
|
Bushfire Nominated Pass Through Events
(CitiPower and Powercor). |
The AER’s decision is affirmed |
|
|
Accrued Negative Carryover (Powercor). |
The AER erred, Powecor’s determination
varied by excluding the accrued negative carryover from 2001 – 2005. |
|
|
Vegetation Management OpEx Step Change
(CitiPower and Powercor). |
The AER erred procedurally by
substituting an alternative estimate of costs. |
|
Pipes & Wires will provide a further summary
once the Tribunal’s final decision is made.
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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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
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