From the editor’s
desk…
Welcome
to Pipes & Wires #111. This month covers a lot of diverse happenings in
Europe, and some regulatory matters in Australia. We also examine a major
disconnect around recharging electric cars – join the debate at Pipes &
Wires Linked In page.
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.
Pipes & Wires goes audio
I‘m
considering making .mp3 downloads of Pipes & Wires that can be added to an
iPod or SmartPhone so you can listen to Pipes & Wires at the gym, on the
bike, mowing the lawns ... whatever. Try this sample from Pipes & Wires
#110 NZ
– Reviewing The Transmission Pricing Methodology and then pick one of these
links to indicate your interest...
·
I’d
be interested in the whole Pipes & Wires as an .mp3.
·
I’d
be interested in NZ and Australian articles as an .mp3.
·
I’m
happy enough to read it.
If
there is sufficient interest (like say a hundred people), I’ll give it a try.
Guide to NZ electricity laws
I’ve
compiled a “wall chart” setting out the relationship between various past and
present electricity Acts, Regulations, Codes etc in sort of a chronological
progression. To request your free copy, pick here.
Energy
markets
France – merging the gas zones
Introduction
Long-time
readers might remember from Pipes
& Wires #86 that the Commission de
Régulation de l’Énergie (CRE) wanted to see further consolidation of
France’s 3 legacy gas balancing zones. This article follows up on that issue,
noting recent decisions by the CRE and also the role of the Third Package
(apologies that this article is a bit behind the times).
The legacy position and its associated
difficulties
The
market for high-pressure transmission has been organised into 3 balancing zones
since 1st January 2009. Transmission System Operator (TSO) TIGF operates the south-west zone,
whilst GDF-Suez subsidiary GRTgaz operates the remaining 2 zones. This
arrangement gave rise to the following difficulties...
·
Access to the south of France remains
difficult, with no access for the Fos-sur-Mer LNG terminal.
·
The desire to interconnect with the
Spanish gas transmission system.
·
The need to strengthen gas import
capacity from North Africa.
A
number of structural and tariff options were considered at the time.
Reshaping the market
The
following mechanisms were proposed by GRTgaz and TIGF...
·
There will be additional north-to-south
transmission capacity investment in the GRTgaz north zone.
·
Imbalancing settlements should be based
more on market prices.
·
Balancing gas should be bought and sold
on the PowerNext exchange.
·
The imbalancing reference price should
be changed from Zeebrugge to a new index based on the PEG Sud hub end-of-day
spot price.
The
CRE has broadly accepted these proposals, albeit with some modifications.
The role of the Third Package
Most
of us have heard of the EU’s
Third Package, and in particular the requirements to separate networks from
energy supply. Not surprisingly, the Third Package also requires market-based
balancing with charges that reflect underlying costs and encourage users to
assist balancing the system as part of the consolidation of a single EU gas
market.
It
will be interesting to see how well GRTgaz and TIGF’s work comes together.
Pipes & Wires will re-visit this matter later in 2012.
Mergers & acquisitions
Poland – EDF increases direct stake in
Kogeneracja
Introduction
At a
time when Electricité de France (EDF) appeared
to be selling assets, news emerges that it has increased its’ stake in Polish
electric and heat utility Zespol
Elektrocieplowni Wroclawskich Kogeneracja (Kogeneracja). This article
examines the acquisition, and then examines EDF’s apparent strategy.
A bit about Kogeneracja
Kogeneracja
is based in the Polish city of Wroclaw, and has 360MW of electricity generating
capacity and a further 1,080MW of district heating capacity. The company has
been listed on the Warsaw Stock Exchange
since 2000.
EDF’s increasing stake
Prior
to this transaction EDF directly held a 33% stake in Kogeneracja. After buying
out German utility EnBW’s
stake in Kogeneracja, EDF holds 50% plus 1 share. However there is more to what
appears to be the simple increasing of a stake after a partner exits - until recently,
EDF owned 45% of EnBW, so in effect the transaction has transferred EDF’s
shareholding in Kogeneracja from indirect to direct.
EDF’s strategy
I
guess the most visible aspect of EDF’s international strategy has been its
migration of its capital from UK distribution to UK generation – the rest of
EDF’s strategy seems to have gone below the radar. A couple of salient points
are worth discussing...
·
EDF’s equal shareholding in EnBW was
considered troublesome to EnBW’s other shareholder (a confederation of German
municipalities) which is now considering floating its 90% stake in EnBW.
·
EDF’s shareholding in EnBW proved
troublesome to French politicians who seem keen to capture a piece of everyone
else’s liberalised energy market but won’t liberalise their own.
·
EnBW’s earnings are expected to decline
over the next 3 years as German regulation toughens, a tax is imposed on
nuclear to fund renewables, and fuel costs increase.
·
This specific opportunity arose as EnBW
decided to withdraw from non-strategic investments and focus on migrating its
capital to renewable generation in its core market of Germany.
·
EDF saw the opportunity to strengthen
its position in a target market.
Examining
EDF’s actions against these strategic issues would all seem to make good sense.
US – closing the Constellation – Exelon
merger
Introduction
Pipes
& Wires has been examining Exelon’s bid
for Constellation Energy for the
last year or so. Last time we examined this merger in Pipes
& Wires #108, a couple of routine regulatory approvals were still
awaited but there was also some political horse-trading going on in Maryland.
This article follows up on those issues, and notes the completion of the deal.
Regulatory approvals
Progress on the following regulatory
approvals is as follows...
|
Approvals outstanding in early December 2011 |
Progress to late April 2012 |
|
The FERC approved the deal on 9th
March 2012. |
|
|
The NRC approved the deal on 16th
February 2012. |
|
|
The MPSC approved the deal on 17th
February 2012. |
|
|
The NYPSC approved the deal on 16th
December 2011. |
An additional series of concessions were
extracted by the Maryland state government (refer below) in return for
approving the deal.
The political horse-trading
Pipes
& Wires #108 noted that Senators
Pipkin and Rosapepe
were urging the Maryland PSC to require Constellation to spin off Baltimore Gas & Electric as a stand-alone
utility prior to the merger occurring. The original deal proposed $250m of
investment in Maryland including a $100 credit to all BG&E customers. The
final deal included concessions worth about $1b including the construction of
300 MW of new generation, establishment of about 6,000 jobs, and a clause
requiring the merged company to sell BG&E if considered necessary to
protect customers’ interests.
The deal closes
The
deal closure was announced on 12th March 2012, creating an enlarged
company with 6,600,000 residential electric and gas customers and 35,000 MW of
generation. This marks the end of Pipes & Wires coverage.
Regulatory
decisions
France – increasing the gas
transmission tariff
Introduction
Like
many pipes & wires utilities, French gas transmission utility GRTgaz is subject to a multi-year revenue
control mechanism. This article examines the components of a recent 4.9%
revenue increase determined for GRTgaz by the Commission
de Régulation de l’Énergie (CRE).
The overall regulatory framework
GRTgaz
is subject to a 5 year regulatory control period, starting on 1st
January 2009. This control is pursuant to an Order of 6th October
2008 which includes a requirement to update the price schedule on the 1st
April each year from 2010 onwards to account for variations in planning
variables.
Components of the determination
GRTgaz
has been allowed to increase its authorised revenue for the year ending 31st
March 2012 to €1.483b, an increase of 4.9%. Key drivers of this increase are...
·
An increase in CapEx of €28.5m,
contributing 2% to the revenue increase.
·
An increase in OpEx of €17.5m,
contributing 1.2% to the revenue increase.
·
An increase in gas prices of €23.2m,
contributing 1.7% to the revenue increase.
Both
the CapEx and OpEx increases were in line with the overall revenue path
compiled in 2008.
Aus
– the Victorian gas transmission Access Arrangement
Introduction
APA GasNet
Australia Pty Ltd (GasNet) has recently submitted a (Revised)
Original Access Arrangement to the Australian
Energy Regulator (AER) for the gas transmission system in the state of
Victoria, for the period 1st January 2013 to 31st
December 2017. This article notes that document.
Legal
framework
The prevailing legal framework is the Natural
Gas Law, and Part 8 of the Natural
Gas Rules.
Assets
covered
The assets covered are the Victorian
Transmission System (VTS), which includes about 2,000 of pipelines and 5 main
injection points. The VTS is owned by APA and is operated by the Australian
Energy Market Operator (AEMO).
Key
features of the (Revised) Original Access Arrangement
The key features of the (Revised) Original
Access Arrangement are the Injection Tariffs and Withdrawal Tariffs set out in
Sections A.2 and A.3 (there is too much to summarise into a brief table). Most
of the individual tariffs will be subject to an X factor of -3.00%.
Pipes & Wires will comment further as
the AER makes its decisions.
Regulatory policy
Global – making electric cars work
Introduction
Most
of us in the power industry fully understand the peak demand implications of recharging
electric cars, whilst many of the advocates of electric cars appear to have
correspondingly little understanding. This article explores the apparent
disconnect in those advocates thinking.
What are the real issues ?
There
are 2 engineering issues with recharging electric cars...
·
The peak demand aspect. If electric
cars are recharged at peak times, that simply adds more demand which requires
more capacity along the entire electricity supply chain – generation,
transmission and distribution. If recharging is limited to off-peak periods,
however, the demand simply fills the demand profile troughs which should
require little if any additional capacity. In case anybody is thinking that
this is a recent issue, a poster published in the Christchurch Star in July
1917 showed how off-peak recharging of electric cars could fill in the valleys
in the City’s demand profile.
·
The energy aspect. If electric cars are
recharged at peak times, in most countries that electricity will almost
certainly be generated by expensive fossil-fired power stations. Even if
recharging is limited to off-peak periods, that electricity will still be
supplied by fossil-fired power stations in many countries.
An
increasingly important 3rd issue is that of national security.
Recharging electric cars with indigenous fossil-fuels such as coal or gas
reduces the West’s dependence on imported oil (which could be a useful adjunct
to shale gas).
The apparent disconnect
The apparent
disconnect I’m talking about is that those who are advocating electric cars
without understanding the need for recharging at off-peak periods appear to
also be those who advocate inter alia
peak demand reduction. The little bit in the middle – the “recharging a car
creates the very demand we want to reduce” – seems to be completely lost from
the debate. Perhaps we in the industry need to steer the debate in a more
helpful direction.
Go
to Pipes
& Wires Linked In page to comment on this article (the above argument
will posted there as a starting point).
Switzerland – reducing the feed-in
tariffs
Introduction
Reduction
of feed-in tariffs seems to be a
common occurrence all over the world. After examining the reduction of feed-in
tariffs in South Africa, the UK, China, France and Australia, this article
looks at the recent reductions in Switzerland, and re-caps the key reasons for
these reductions.
Key reasons for reducing the feed-in
tariffs
The
key reasons for reducing feed-in tariffs are...
·
The rapidly declining cost of solar
panels.
·
The declining cost of debt.
·
The increasing cost of grid-connected
electricity, increasing the benefit (or avoided cost) of using solar panels.
These
factors are converging to lead to unacceptably high rates of return on solar
panel installations, with recognition that the subsidies themselves (such as
feed-in tariffs) are causing inflation in the renwables sector.
The Swiss feed-in tariff framework
Key
aspects of the Swiss feed-in tariff policy appear to be similar to those of
most other jurisdictions, except as follows...
·
The feed-in tariffs are paid from a
fund derived from a €0.005 per kWh levy on electricity, which provides about
€300m per year into a capped fund. It appears that this fund is so small that
many renewable projects are languishing.
·
The tariffs payable are rather high, at
around €0.5 to €0.6 per kWh.
Recent moves in Switzerland
The Federal Department of Energy
(DETEC) recently announced the following reductions in feed-in tariffs...
·
A cut of 8% for solar panels in January
2012.
·
A further cut of 10% from 1st
March 2012 for new installations.
The
tariffs will be re-visited in mid-2012, and further reductions are possible.
The global trends
The
clear trend is that feed-in tariffs are being reduced. Precisely why seems a
bit less clear ... affordability certainly seems to be an issue, and appears to
be over-taking the need to reduce CO2 emissions.
Aus – defining the control mechanisms
Introduction
Pipes
& Wires #110 examined the Australian
Energy Regulator’s (AER) initial thoughts on classifying distribution
services as part of the Framework & Approaches for the next electricity
distribution revenue determinations. This follow-on article examines the possible
control mechanisms that the AER might adopt.
Regulatory framework
The
requirement to impose one or more control mechanisms is set out in the National
Electricity Rules (NER) at Clause 6.2.5.
What exactly is a control mechanism ?
Essentially
a control mechanism is the means by which either the price, the revenue or both
the price and the revenue of a direct control service, is controlled. The
control mechanism may consist of any one or any combination of the following...
·
A schedule of fixed prices.
·
Caps on the prices of individual
services.
·
Caps on the revenue to be derived from
a particular combination of services.
·
Tariff basket price control (weighted
average price cap).
·
Revenue yield control.
Each
of these various control mechanisms are currently applied to different services
in different states, and understandably have inherent advantages and
disadvantages.
Choosing the best control mechanism
As
noted above, each control mechanism has its inherent advantages and
disadvantages. Clause 6.2.5(c) of the NER sets out a number of criteria that
the AER must have regard to when deciding upon a control mechanism. Not
surprisingly, these include...
·
The need to encourage efficient tariff
structures and efficient prices
·
The likely costs of administration
·
Continuity with previous arrangements
·
Minimising volume forecasting risk
·
Encouraging demand side management.
The
AER has assessed each of the allowable control mechanisms against each
criteria, and notes its initial preference for a revenue cap because it
provides DNSP’s with more certainty of revenue recovery, reduces the risk
associated with forecasting sales volumes 5 years ahead, and encourages demand
side management.
Pipes
& Wires will comment further as the various aspects of the Framework &
Approaches emerge.
Energy policy
Japan – which way with nuclear ?
Introduction
A
while ago Japan was on the edge of formally not restarting 53 of the 54
reactors already shutdown. This article examines a recent re-think of this move,
and looks at the political motivations behind that move.
Shutdowns following the earthquake
After
the March 2011 earthquake, Fukushima
units 1, 2 and 3 were promptly shutdown (Units 4, 5 and 6 were already shutdown
for planned maintenance). In the following months, all except 1 of Japan’s remaining
reactors were shutdown for safety inspections.
The politics and public perceptions of
the shutdowns
In
an apparent re-think of the shutdown the government requested the urgent restart
of 2 reactors, apparently to create the public perception that nuclear power is
needed. The thinking was that it would be harder to claim that nuclear is
necessary if people observed Japan getting through a hot summer without
blackouts.
A
little research reveals that on 26th June 2011, the reserve capacity
margins for Tokyo, Kansai and Tohoku Electric Power Company’s
networks declined to between 9% and 12% after substantial energy savings
by customers and with 40% of the nuclear capacity still operating. Now
that almost all of the nuclear capacity has been shutdown, it would seem that
Japan faces the following options...
·
Increase thermal generation (which did
happen, with thermal generation in March 2012 being 66% of total generation, up
from 45% in March 2011).
·
Operate with a reduced reserve capacity
margin.
·
Face on-going rolling blackouts as a
way of life.
Credible policy options going forward
So
which option is likely to emerge ? Prior to the earthquake, Japan had expected
the current annual nuclear contribution of 27% to increase to about 40% by
2017. It now appears that policy options going forward include a reduced
contribution from nuclear, and even a complete shutdown of all nuclear
capacity. My guess is that the Japanese public simply won’t accept rolling
blackouts, and that a reduced reserve capacity margin would also be
unacceptable. This would appear to leave increased thermal generation as the
only credible short-term option.
UK – pulling the plug on nuclear ?
Introduction
Pipes
& Wires #96 identified a raft of strategic issues that limit the UK’s short-term
energy policy options (and possibly medium-term options as well), and which
also indicated a bright future for nuclear. This article examines several
recent events that may have converged to cause the fading of that brightness.
Getting price certainty
The
UK government has offered a fixed carbon price and a “contract for difference”
mechanism to provide nuclear investors with price certainty. However, one of
the major players (GDF Suez) has
indicated that the proposed mechanisms are not sufficient. In particular, the
governments’ estimates and the nuclear players estimates of the price required
for viability are “far apart”.
Credit downgrades
It
was recently revealed that Moody’s had
signaled to 2 further players (EDF and Centrica) that they could face credit
downgrades if they were to proceed with the UK nuclear stations. Along with
high costs, uncertainty over future electricity prices was cited as a key
reason.
Parent company financial difficulties
A
further 2 players, E.On and RWE, have scrapped their UK nuclear plans due to
the financial difficulties of their respective parent companies and the
difficulty of making long-term investments in the current financial climate
(the joint venture company indicated that their decision was not related to the
UK’s energy policies).
So the future doesn’t look bright at
all
Given
that 5 players have all cited different reasons, it would seem unlikely that
any 1 single, simple policy fix could re-ignite their interest. So it could be
back to the energy policy drawing board for the UK, but as noted above it is
not clear what other options are available.
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 – Auckland, 22nd – 23rd
May, 2012.
·
Certified Energy
Manager – Gauteng, 21st – 25th May, 2012.
·
Certified
Measurement & Verification Professional – Gauteng, 23rd – 25th
May, 2012.
·
Certified Energy
Auditor – Gauteng, 21st – 24th May, 2012
·
2nd
Infrastructure: Investment & Regulation Conference – Sydney, 31st
May – 1st June, 2012.
·
17th Asia Oil Week 2012
– Singapore, 25th – 27th June, 2012.
·
Certified Energy
Manager – Gauteng, 15th – 19th October, 2012.
·
Certified
Measurement & Verification Professional – Gauteng, 17th – 19th
October, 2012.
·
Certified Energy Auditor
– Gauteng, 15th – 18th October, 2012
·
19th Africa Oil Week
2012 – Cape Town, 29th October – 2nd November, 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.
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Consultants Ltd accepts no liability for action or inaction based on the
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