From the
editor’s desk…
Welcome
to Pipes & Wires #113. This month we start be examining a raft of energy
policy issues from around the world before examining 2 current deals. We then look
at a recent Court ruling in New Zealand, and then focus on Australia where we
look at a draft regulatory decision and 2 industry reshufflings.
Re-vamped website
My
website has been substantially re-vamped, with some up-dated content to better
reflect my experience and emerging industry issues. Please pick here and take a browse around.
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.
Guide to UK energy policy
Arup
have compiled a really cool Emissions – Energy – Efficiency timeline setting
out the various policy frameworks and for the UK - pick here
to download a copy. Thanks to Steve Argent for pointing this out.
Energy policy
UK
– re-thinking energy policy
Introduction
The UK’s difficult energy position is no
stranger to the pages of Pipes & Wires. This article examines a Draft
Energy Bill introduced by Energy & Climate Change
Secretary Ed Davey in May 2012 that is intended to remedy the situation.
Recapping
the UK’s problems
A quick recap of the UK’s energy woes
include...
·
About
half of the UK’s electricity is generated by gas. Much of this gas is sourced
from Russia, which has demonstrated a tendency toward “gas tap diplomacy”.
·
A
further quarter of all generation is from coal. Many of these coal stations
will be closed to comply with the EU
Directive on Large Combustion Plant.
·
The
closure of the old nuclear stations.
·
A
contribution from renewables of about 7%, a figure that languishes far behind
government targets.
·
An
estimated spend requirement of between £110b and £200b by 2020 depending on
sources (about 2.5x to 5x the current annual spend)
when customers are already struggling to pay their electric and gas bills.
·
Increasing
demand as the uptake of electric transport increases.
Davey’s
Draft Energy Bill
The full text of Davey’s Draft Bill is 308
pages, however the DECC’s website provides a succinct
summary. The Draft Bill was laid before Parliament in May for scrutiny
before appearing as a Full Bill in autumn of 2012.
The key thrust of Davey’s Draft Bill is to ensure
that the private sector faces strong and correct incentives to actually make
the £110b of required spend occur. The Draft Bill has a short term recognition
of the importance of gas (and sets an emissions limit that effectively
side-lines coal), but its’ long-term focus is renewables and a transformation
to a low-carbon economy.
What
do we make of all this ?
A couple of observations from where I sit
(pretty much diagonally opposite on the world)...
·
The
Draft Bill doesn’t appear to recognise the possible role of shale gas as a
low-cost and secure generation fuel.
·
Care
will be needed to ensure that the government’s incentives actually encourage
investment rather than simply not discourage investment.
·
The
lines sector and the nuclear and fossil generation sectors have been seeking
improved investment incentives for years to little avail ... how come the
renewable sector gets them now ?
·
UK
energy commentators are already questioning the wisdom of Davey’s policy.
Pipes & Wires will comment further later
in 2012 as the Full Bill enters Parliament.
US – recharging electric cars gets some
official recognition
Introduction
Whilst many of us in the industry fully
understand the need to recharge electric cars at off-peak periods, the message
seemed to be getting lost at policy-maker level. This article briefly examines
a recent forum held by the Pennsylvania
Public Utilities Commission to explore this and other related issues.
The
forum
The forum was hosted by the PPUC at Drexel University on 31st May to
“explore policies to support investments in natural gas and electric vehicles”
(although this article will limit its’ focus to electric vehicles). Whilst
promoters of electric vehicles advocated policy frameworks that encourage
investors to build recharging stations and prevent regulated utilities
competing with private suppliers, the PUC pondered the possibility of electric
vehicles overwhelming the electric grids.
Peak
time recharging
According to the regional grid operator, PJM, smart recharging between midnight and 7am
could cope with about 25,000,000 electric cars (the good news) but uncontrolled
recharging eg. after work at 5pm could easily cause a
voltage collapse (the bad news). Nothing new there, but it is very comforting
to know that a state regulator is seriously considering the implications of
peak time recharging.
Competition
for recharging
One of the less obvious issues that seems to be emerging is private recharging suppliers
advocating for a policy framework that prevents the incumbent regulated utility
from competing with them. Would that be the same regulated utility that will be
supplying their recharging stations ? I guess the next
step will be that the recharging station owners will be lobbying to prevent the
incumbent regulated utility from imposing a peak-demand charge so the
recharging station owners can capture all the margin
and transfer the growth CapEx costs on to the local electric company.
Europe
– a new role for pumped storage
Introduction
Most of us have at least some idea that
increasing penetration of renewable generation will require the intermittent
nature of that generation to be mitigated. This article examines the recent
signing of an agreement between Germany, Switzerland and Austria to support
joint development of pumped storage specifically to mitigate that intermittent
nature.
The
role of pumped storage
Most of us are familiar with the role that
pumped storage plants were originally designed for, namely day-night balancing
of must-run generation such as nuclear. In many areas that role has now changed
to one of unplanned fast response for situations such as forced outages. As
wind farms in particular become larger and more common, the need for unplanned fast
responses in the order of several hundred MW is increasing.
The
dilemma of pumped storage
The mountainous regions of Central Europe
would appear to be ideal for pumped storage, but community opposition to a
pumped storage plant already under construction in the Black Forest is high.
Indeed, many knowledgeable energy sector commentators are expressing concern
that feasible, large-scale energy storage schemes are still decades away.
The
agreement
The agreement
calls for the development of more pumped storage plants, declaring that pumped
storage is essential to Europe’s energy and climate policy objectives. The
initiative also notes that pumped storage is “the only industrially available
storage technology at present” and that the development of pumped storage is
essential to “offset the volatile supply of wind and solar systems”.
It’s pleasing to see this issue being
recognised at a policy level. No doubt other countries will also pick up on the
potential usefulness of pumped storage.
US – enshrining Michigan’s renewable
targets in law
Introduction
The
US state of Michigan is proposing to enshrine its target of 25% renewable
energy target by the year 2025 into law. This article examines Michigan’s
target, the current pressures on that target, and whether enshrining it in law
might be a good thing.
Michigan’s target
Michigan’s
current renewable target is 10% by 2015. However current renewable energy is
about 4% due to inter-state imports of coal-fired electricity, which makes the
target of 25% by 2025 seem a long stretch.
Moving
beyond whether 25% is an appropriate or achievable target, the current issues
are whether that target should be enshrined in law, and even more so whether
that enshrining should be done by the state legislature or by a popular vote.
Current pressures on that target
Most
of us accept that renewable generation is more expensive than coal-fired
generation, even when the price of carbon is included. Cheap gas from the
impending shale gas revolution is likely to make renewable generation even more
expensive vis-a-vis the cheapest alternative.
Might enshrining 25 x 25 in law be a
good thing ?
Undoubtedly
the answer depends on which side of the renewable divide one sits.
Understandably the pro-renewable side is keen for the targets to be enshrined
in law, and is working hard to secure the 322,000 signatures necessary to get
the matter on to the ballot paper for 6th November. Correspondingly the
electric companies and large energy consumers are concerned that enshrining the
targets in law will result in an inflexible energy policy that is likely to
increase costs.
Court rulings
NZ – the Court of Appeal decision on
the Input Methodologies
Introduction
The
current regulatory framework for inter
alia electricity distribution is set out in Part 4 of the Commerce Act 1986.
Subpart 3 provides for Input Methodologies to be compiled by the Commerce
Commission to provide regulated suppliers with increased certainty.
This
article recaps the recent Court action taken by Vector arguing that the mid-term re-set of
the Default Price Path should be covered by an Input Methodology, and notes the
Appeal Court’s ruling in favor of the Commerce Commission.
Mid-term re-set of the DPP
Non-exempt
electricity distribution businesses have been subject to a default
price-quality path (DPP) since April 2010. The regulatory framework provides
for the Commerce Commission to reset
that DPP if the recently developed Input Methodologies would have resulted in a
materially different DPP had they applied in April 2010. The operative
component of the regulatory framework is s54K(3)
of the Commerce Act 1986 which states “If an input methodology is published after
1 April 2010 and if, had that methodology applied at the time the default
price-quality paths were reset as required by subsection (1), it would
have resulted in a materially different path being set, then the Commission may
reset the default price-quality paths in accordance with section 53P and may apply claw-back,
despite section 53ZB(1)”.
Events to date
Key
events to date include....
·
The Commerce Commission releases its
Draft Decision to re-set the DPP’s mid-term (refer to Pipes & Wires #104).
·
Vector challenges the Draft Decision on
the basis that Parliament clearly intended that the Input Methodologies would
include such matters as re-setting prices (refer to Pipes & Wires #106).
The Commission argues that its legal authority to reset prices should be
certainty enough, and that an electricity lines business that is not satisfied
with its’ DPP can apply for a CPP.
·
The High Court ruled in favor of
Vector, concluding that 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 suspended further work on the mid-term re-set.
·
The Commission announces that it will
appeal the High Court decision.
·
The Court of Appeal overturns the High
Court’s ruling, ruling in favor of the Commerce Commission (refer below).
The Court of Appeal ruling
The
Court of Appeal released its ruling
on 1st June 2012, which broadly concluded that the High Court ruling
interpreted s54k(3) too narrowly and that a wider basis for resetting prices is
permitted.
Vector’s response
In
late June 2012, Vector announced that it will appeal the Court of Appeal ruling
to the Supreme Court.
Mergers & acquisitions
US
– the Duke & Progress merger – almost there !!
Introduction
Last time we looked at the Duke Energy – Progress Energy merger (Pipes
& Wires #109), the Federal Energy
Regulatory Commission (FERC) rejected the merger partners’ proposal to
mitigate diminished competition in the Carolina’s. This article notes the
FERC’s issuing of “conditional orders” that is expected to bring the deal to a
rapid completion.
The
merger proposal
Duke
offered Progress’ shareholders 2.6125 Duke shares for
each Progress share, as well as Duke assuming $12.2b of Progress’ debt. If
successful, the merged companies would have about 56,000MW of generation and
supply about 7,100,000 electric customers in North Carolina, South Carolina,
Indiana, Kentucky, Ohio and Florida (Pipes
& Wires #100, #102,
#105,
#106
and #109).
Diminished
competition in the Carolina’s
Diminished competition resulting from
mergers is obviously a major concern to regulators, and one that Pipes &
Wires has closely examined on several previous occasions. In this instance, the
FERC is concerned that competition in the Carolina’s wholesale electricity
market would be diminished, and suggested that the following possible
concessions could be considered...
·
Sale
of generation plant to unrelated parties.
·
Placing
control of transmission lines with a Regional Transmission Operator (RTO).
·
Building
new transmission lines.
Not only could any of these possible
concessions prevent Duke and Progress’ consolidating market power, they could
potentially diminish their market power with respect to existing levels.
Understandably, equity analysts are nervous about this whole issue.
Duke and Progress responded with a single proposed
concession to limit prices to cost plus 10% for 8 years, which the FERC
rejected claiming that it “does not remedy the proposed adverse effects on
competition”. Duke and Progress subsequently offered to build $110m of new
transmission grids to improve competitor access to the Carolina’s, as well as
divesting 700MW of generation capacity.
The
FERC’s recent ruling
In mid-June 2012 the FERC issued
“conditional orders” which relate specifically to the diminished competition in
the Carolina’s. Although the orders added further conditions to the merger, it
was also taken as a signal of the FERC’s broad approval.
The conditional orders include requiring
transmission capacity to be dedicated to moving wholesale power, and expanding
the role of third-party oversight of implementing the conditions.
Additional
state regulatory approval
At the time of writing, the merger partners
still required approval from the North
Carolina Utilities Commission and the Public
Service Commission of South Carolina.
Pipes & Wires will make final comment
(hopefully next month) once the merger closes.
Germany
– E.On sells Open Grid Europe
Pipes
& Wires #107 and #109
examined E.On’s plans to divest its gas transmission business Open
Grid Europe. This article briefly describes Open Grid and notes its sale to
a consortium led by Macquarie Group
infrastructure fund.
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.
The
sale to Macquarie
The winning bid was from a consortium
comprising Macquarie, British Columbia
Investment Management, Infinity Investments (Saudi Arabia) and Munich Ergo Asset Management.
The sale price valued Open Grid’s equity at
€2.9b, or about 10x EBITDA. Including adjustments for miscellaneous assets and
pension liabilities, the final sale price was about €3.2b. It is recognised
that intense bidding from 4 consortia drove up the sale price.
The
editor comments
Two of the unsuccessful consortia included
European gas transmission utilities (GDF Suez,
and Fluxys).
That a non-utility entity was able to make a higher bid would seem contrary to
popular thought on the basis that a utility entity could bid more due to
operating synergies. Interesting thought, that...
Regulatory
decisions
Aus
– the Victorian gas distribution Access Arrangements
Introduction
This article notes the Access Arrangements
currently being compiled by the Australian
Energy Regulator (AER) for the 1st January 2013 – 31st
December 2017 period for the gas distributors Envestra, MultiNet
and SP AusNet
in Victoria.
Legal
framework
The prevailing legal framework is the National Gas Law and Part
8 of the National
Gas Rules.
Summary
of the AA
Each of the respective Proposals set out
the applicants’ proposed Reference Tariffs in Part B. These Reference Tariffs
are more complicated than the corresponding electricity Proposals, and don’t
easily lend themselves to tabular comparison. Follow these links to read in
detail....
·
MultiNet
Pipes & Wires will make some “word”
comparisons as the AER’s decisions emerge.
Industry re-shuffling
Aus – amalgamating distribution in New South
Wales
Introduction
Amalgamating
electricity distributors to capture economies of scale seems like a bit of a
holy grail for many governments, and is certainly no stranger to the pages of
Pipes & Wires. This article examines the recently announced plans to amalgamate
the 3 electricity distributors in the Australian state of New South Wales (NSW)
on 1st July 2012.
Amalgamations to date
The NSW
distributors have been amalgamated twice already....
·
In 1996 the 25 distributors were
amalgamated into 6 (noting that 80% of energy sales came from the 4 metro
distributors).
·
In 2001 these 6 distributors were
further consolidated into 3 distributors (which then sold the electricity
retail businesses in 2011).
History
records that individual distributors were also subject to ad-hoc amalgamations
eg. the formation of Sydney Electricity.
Recent announcements
Rumors
of further consolidation from 3 to 2 distributors have occasionally hit the
papers, however back in March the Minister for Resources &
Energy announced that the 3 distributors would be united under a single
State-owned corporation whilst retaining their 3 respective brands.
The
NSW transmission grid TransGrid will remain as a separate business.
The stated objectives
The
Minister’s stated objectives are...
·
To deliver more than $400m of cost and
efficiency gains over 4 years, part of which will result from cutting about 780
jobs.
·
To maintain front-line services and
front-line staff numbers.
·
To fund low-income rebates partly from
the efficiency gains.
Not
surprisingly, there has been much criticism from the Opposition parties which
will presumably add some further unstated objectives eg. the
need to ensure that the merged entities push-back power against the AER is
limited, and ensuring that rural depots remain open.
Aus – amalgamating transmission and
distribution in Tasmania
Introduction
Amalgamating
transmission and distribution (as distinct from amalgamating distributors) is
not something we encounter very often, especially not an amalgamation that
takes the industry almost right around the full circle to its original starting
point. This article examines the Tasmanian government’s plans to amalgamate its
currently separate transmission and distribution networks.
The proposed reshuffling
In
May 2012 the Minister for
Energy & Resources, Bryan Green, announced an extensive package of
reforms which has been guided by an Expert
Panel. Green considered that it was a good time to reflect on 15 years of
incremental change to both the Tasmanian electricity industry and the National
Electricity Market (NEM) and confirm whether the current structure and business
models are optimal.
Amalgamating transmission and
distribution
A seemingly
secondary priority of the reform package is the amalgamation of Aurora’s distribution business with the
Transend
transmission business, which is expected to save about $8m per year.
A
little thought would suggest that the direct cost savings probably will only be
of that order ... probably a few senior positions being disestablished, maybe
some consolidation of field services contracts, but apart from that probably
not much else. Given the extent of annual planning information that is publicly
disclosed by Transend (and by all the other grid companies in the NEM) it is
not clear that amalgamation will result in a more economically efficient grid
configuration.
Pipes
& Wires will check back on this reshuffling in a few months.
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...
·
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.
·
Fundamentals
of the NZ Electricity Industry – Wellington, 6th – 7th
November, 2012.
·
Fundamentals
of the NZ Electricity Industry – Auckland, 21st – 22nd
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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