From the editor’s
desk…
Welcome
to Pipes & Wires #114. I’ve mucked about with the format of this issue, and
rearranged it on a geographical basis which seems to make more sense. Starting
with New Zealand, we look at the imminent amended requirements for electricity
asset management plans (AMP’s). We then look at some regulatory policy issues
in Australia, and then close with a look at some asset sales in Europe and the
US.
General stuff
CPEng status
I’m pleased
to announce that I am now a Chartered Professional Engineer (CPEng), and am
availabe to undertake work for which the Commerce Commission requires an
Independent Engineer.
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.
New Zealand
NZ – the new AMP requirements
Introduction
The
requirement for electricity distribution businesses to disclose an asset
management plans (AMP’s) has been with us for 12 years now, and these
requirements have become increasingly more prescriptive on several occasions.
This article examines the latest draft requirements.
The draft requirements
Section
2.6 and Appendix A of the Draft
Commerce Act (Electricity Distribution Services Information Disclosure)
Determination 2012 sets out the requirements for the AMP’s to be disclosed
by 31st March 2013. These requirements include...
·
A slightly different format for the AMP
from previous years.
·
Additional information, especially
strengthened linkages to visions and strategic plans, and clearer statements of
assumptions and the implications of those assumptions.
·
Completion of prescriptive data
templates (Schedules 11a to 12d) along with the expectation that this data will
be embodied in the AMP narratives. Note that the Draft Determination includes
many more Schedules that do not relate specifically to the AMP.
·
Assessment and reporting of the
maturity of asset management practices and systems using the AMMAT tool in
Schedule 13.
Next steps
The
Commerce Commission has recently completed a technical consultation on the Information
Disclosure Requirements for Electricity Distribution Businesses and Gas
Pipeline Businesses and will undoubtedly finalise the requirements soon.
For
assistance with compiling your AMP, or with assessing your asset management
practices, pick here
or call Phil on (07) 854-6541.
NZ – backward integration into
electricity transmission
Introduction
Most
of us have at least some idea of what “backward integration” means, but it
often still seems a bit lofty and disconnected from the world of pipes &
wires. This brief article examines the transfer of Transpower’s 66kV substation at Papanui
and the 66kV Islington – Papanui lines to Orion
Group.
The assets
The
assets transferred from Transpower include...
·
The 66/11kV grid exit substation on
Greers’ Rd.
·
The two double-circuit 66kV steel tower
lines stretching 8.5km from Islington to Papanui.
Orion’s
2012
asset management plan identifies other spur assets that Orion is
considering purchasing.
The strategy
This
backward integration strategy will enable Orion to integrate these assets into
its own 66kV sub-transmission network. This will include specific projects such
as increasing security of supply to Hawthornden zone substation by taking
supply from one of the Islington – Papanui 66kV lines rather than creating a
new grid exit point to achieve the same objective.
The cost savings
The
assets were purchased for $4.3m, and are expected to save about $5m over the
next 10 years. It would appear that part of these savings will come from greater
flexibility to implement a more simple network architecture and increased
flexibility around asset lifecycle management.
NZ – purchasing energy from small
embedded generators
Introduction
Entry
barriers facing small embedded generators are a recurring theme ... readers may
well remember a few years ago that the line connection charges for
embedded generators were limited by regulation (now embodied in Part 6 of
the Electricity Industry Participation Code) ostensibly to reduce entry barriers.
This article examines a recent report by the Electricity
Authority’s Retail Advisory Group (RAG) which concluded that the purchase
of energy by retailers from small embedded generators faces no material
regulatory barriers.
The concerns
The
concern was that small embedded generators were somehow at a disadvantage with
respect to the markets for wholesale electricity, line connection and retail
electricity. This article will restrict its examination to the wholesale and
retail markets. A little thought would suggest that any one of a wide array of
matters such as the cost of metering, the cost of administering an energy
contract, insurance and tax could be significant enough to discourage a small
embedded generator that is only likely to export a handful of kWh (such as the
3kW solar panel quoted in the RAG
Discussion Paper).
The conclusions
Rather
pleasingly, the RAG’s
principal conclusion was that there are currently no apparent material regulatory
barriers to either investing in small embedded generators or for retailers to
purchase energy from small embedded generators.
Australia
Aus – reviewing the merits review
regime
Introduction
Most
of us have a pretty good understanding that almost all statutory body’s
decisions can be appealed to tribunals, appeal authorities or higher courts.
This article examines the Stage
One Report on the limited merits review regime that was introduced into the
National
Electricity Law (NEL) and the National
Gas Law (NGL) in 2008.
Background
The
limited merits review regime introduced into both the NEL and the NGL allows a
party affected by a regulatory decision to have that decision reviewed by the Australian Competition Tribunal
where it can be established that there is a serious issue and that there are
grounds for a review. The then Ministerial Council on Energy (MCE) agreed that
the merits review regime should be reviewed within 7 years of its commencement.
In
December 2011 the MCE’s successor, the Standing
Council on Energy & Resources (SCER), decided to bring the review
forward due to increasing concerns about the practical operation of the regime.
The review process
The review is to be
undertaken in 2 stages....
·
A preliminary review to assess the
performance of the regime.
·
A report on whether any changes are
necessary.
The
review is to be completed by September 2012 so that any changes to the NEL or
NGL can be introduced to the South Australian Parliament before the Final
Determinations of the 2nd round of revenue resets emerge in April
2014.
Findings of the Stage One Report
In
its’ Stage One Report the review panel identified a number of deficiencies,
including....
·
Not all stakeholders’ interests have
been adequately taken into account, especially the long-term interests of
consumers.
·
Consumer bodies and network user
associations feel excluded from the appeals process, with one of the reasons
being cost.
·
Trust and confidence in both the AER
and the ACT has not been established.
·
The AER does not appear to have
confidence in the regime.
The
panel has therefore broadly concluded that there is a considerable divergence
between the policy intentions that initially motivated the regime, and the
outcomes of the regime. So it would appear that the Stage Two Report is likely
to recommend some significant changes.
What other bodies are saying
A
table on pg 19 of the Stage One Report and some subsequent analysis suggests
that the full 5 year pricing impact of some previous tribunal decisions amounts
to about $3b. Industry bodies are understandably keen to emphasise that the
Report is not saying “power and gas bills are $3b higher than they should be”,
nor that the “appeals should’ve been disallowed” (as there were genuine errors
in decision making).
Next steps
Pipes
& Wires will re-examine this matter when that Report emerges.
Aus – reducing the solar feed-in
tariffs in Queensland
Introduction
Pipes
& Wires has examined the global trend of declining solar feed-in tariffs (SOFIT).
This article examines the significant reduction in the SOFIT payable under
Queensland’s Solar
Bonus Scheme.
What exactly is the Solar Bonus Scheme
?
The
Scheme originally paid eligible consumers 44c/kWh for the surplus electricity
they exported into Queensland’s electricity network from solar panels. The
objectives of the Scheme were to make solar power more affordable, encourage
energy efficiency and stimulate the solar power industry.
The significant reduction in the SOFIT
Consumers
joining the Scheme from 10th July 2012 will only be paid 8c/kWh (plus
a retailer contribution of between 6c/kWh and 8c/kWh), which is obviously a
significant reduction from the initial 44c/kWh. Several factors (common to many
other jurisdictions) have contributed to this decision...
·
The installed cost of a 1.5kW solar
panel has approximately halved from $6,000 to $3,000 since the Scheme started
in 2008.
·
The objectives of the Scheme have
largely been met.
·
The need to protect all Queensland
electricity consumers from higher power prices is recognised (because after all
the SOFIT is at least partly funded by non-generating consumers).
Although
not specifically stated for Queensland, the increasing cost of grid-supplied
electricity (which increases the value of avoided grid-supplied electricity)
may also be a factor.
The
8c/kWh SOFIT will end on 1st July 2014, but will be reviewed by 1st
July 2013 to ensure that the SOFIT remains “appropriate for Queensland”.
Aus – the South Australian electricity
transmission revenue reset
Introduction
The
electricity transmission grid operator in South Australia, ElectraNet, recently submitted its
Regulatory Proposal to the Australian
Energy Regulator (AER) for the 5 year control period starting on the 1st
July 2013. This article examines the prevailing legal framework and summarises
the key parameters of the Proposal to set some context for future analysis.
Legal framework
The prevailing
legal frameworks are...
·
The National Electricity
Law (NEL) which is given legal effect in each jurisdiction of the NEM by
individual state laws. The NEL provides for the National
Electricity Rules (NER) to be promulgated, with Chapter 6A applying
specifically to the economic regulation of transmission services.
·
The South Australian Electricity
Transmission Code.
Key parameters of the Proposal
Key
parameters of ElectraNet’s Proposal include...
|
Parameter |
Proposal |
Draft Decision |
Revised
Proposal |
Final Decision |
|
Total
OpEx ($2012/13) |
$478m |
|
|
|
|
Total
CapEx ($2012/13) |
$894m |
|
|
|
|
Opening
capital base ($nominal) |
$2,100m |
|
|
|
|
Post-tax
nominal vanilla WACC |
7.73% |
|
|
|
|
Maximum
allowable revenue ($nominal) |
$1,726m |
|
|
|
Next steps
Pipes
& Wires will re-examine this matter when the AER releases its Draft
Decision around the end of November 2012.
UK and
Europe
Bulgaria – E.On sells subsidiary
Introduction
German
utility E.On established its position as one
of the largest electric and gas companies in Europe through well disciplined
acquisitions. The last few years, however, have seen E.On divest several of its
subsidiaries. This article examines E.On’s recent sale of its Bulgarian
subsidiary E.On Bulgaria EAD
to Energo-Pro.
A bit about E.On Bulgaria
E.On
Bulgaria consists of 2 companies...
·
E.On
Bulgaria Grid AD which owns 42,000km of distribution lines supplying
1,100,000 customers.
·
E.On
Bulgaria Sales AD which annually sells about 5,500 GWh of electricity.
These
2 companies were formed by a reshuffling of the 2 vertically integrated
electricity businesses in Varna and Gorna Oryahovitsa following the unbundling
of lines and energy in late 2006. Combined revenue is about €410m, although
nett profits have declined from €17m in 2008 to about €250,000 in 2010 as the
company embarked on an extensive network investment program.
E.On
initially purchased a 67% stake in what became E.On Bulgaria in 2004 for €141m,
with the other 33% being owned by the Bulgarian government. E.On’s stake was
subsequently raised to 100%.
The sale process
The
buyer was independent Czech energy company Energo-Pro. Energo-Pro already owns
8 hydro generating stations in Bulgaria, so there may be some forward
integration possibilities. The sale price is understood to have been about
€93m, or about 30% less than the initially discussed €133m.
E.On’s divestment strategy
Long-time readers will remember the reversal of E.On’s “On
Top” strategy. E.On has now adopted a new
strategy based around “Cleaner & Better Energy” which embodies the
following principles....
·
Consolidating its core European market
positions, particularly around end-to-end supply chain positions.
·
Deliver 25% of EBITDA from outside of
Europe by expanding into areas where superior capabilities can be deployed.
·
Growing the business through skills
rather than balance sheet strength.
Repositioning
the business platform to achieve these goals includes selling about €15b of
assets by the end of 2013 to reduce debt. The emerging picture is that E.On is
selling grids and network businesses and consolidating its generation and
energy supply businesses.
Germany – EnBW looks to sell majority stake
in transmission grid
Introduction
Pipes
& Wires #104 examined Energie
Baden-Wuerttemburg AG’s (EnBW) announcement that it would be willing to
sell a minority stake in its transmission grid business EnBW Transportnetze AG (TNG). This article examines more
recent news that EnBW is considering selling a majority stake in TNG.
EnBW’s
transmission business
TNG owns and operates 3,645km of 380kV and
220kV grids across southern Germany. About 80 substations interconnect TNG with
local 110kV lines and with other grid operators such as Amprion, TenneT and SwissGrid.
The possible sale
It
appears that EnBW is now willing to sell a majority stake in TNG, and retain
only a “blocking stake” of 25% + 1 share as part of plans to raise €1.5b. Media
comment suggest TNG could be worth about €300m which is broadly in line with
Pipes & Wires estimate.
EnBW’s strategy
Something
has obviously changed to shift EnBW’s thinking that far. It appears that “that
something” is the sudden shift in Germany’s energy policy away from nuclear in
the wake of the Fukushima earthquake. That shift, in turn, is requiring
electric companies such as EnBW to fund renewable generation.
Considering
this against the wider trend of the other German utilities such as E.On
and RWE having sold their grid businesses,
this could be worth watching. Pipes & Wires will comment further as news
emerges.
North America
US – the Duke – Progress merger closes
Introduction
Last
month we examined some of the market dominance issues over-shadowing the
closing phases of the Duke – Progress merger, so its pleasing that this month
we can examine the closing of the
deal.
Basis of the deal
Duke’s
original offer to Progress’ shareholders was 2.6125 Duke shares for each
Progress share, as well as Duke assuming $12.2b of Progress’ debt. The merged
company would be the biggest electric company in the US, with about 56,000MW of
generation and about 7,100,000 electric customers in North Carolina, South
Carolina, Indiana, Kentucky, Ohio and Florida.
Closing the deal
Following
approvals from the North Carolina Utilities
Commission, the Public Service Commission
of South Carolina and the Federal Energy
Regulatory Commission (FERC), the deal finally closed in early July 2012
subject to Duke-Progress accepting the FERC’s merger conditions. Duke-Progress
announced that they intend to comply with the merger conditions.
Resolving the Carolina’s market
dominance issue
The FERC was 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.
It
appears that in the final play, there was some dispute over whether requiring
Duke-Progress to place their Carolina grids into an RTO would’ve been
acceptable to the 2 state regulators who would’ve had to cede jurisdiction to
the FERC. It appears that the FERC has stopped short of requiring the RTO
option, but instead required Duke-Progress to both commit to selling up to
700MW of capacity to 3 independent traders under most circumstances and to
building $110m of new transmission lines.
This
marks the end of Pipes & Wires examination of this deal.
US – review of recent mergers
Pipes
& Wires #101 summarised the US mergers that were topical in early 2011.
This updated table summarises where those mergers have got to...
|
Deal |
Dimensions of
merged entity |
Consideration |
Status |
|
PPL’s acquisition of LG&E and KU (from E.On US) |
20,000MW
of generation, 2,600,000 electric customers |
$5.6b
cash and $800m debt |
Completed
in November 2010. |
|
First Energy Corp
acquires Allegheny
Energy |
23,700MW
of generation, 6,000,000 electric customers, annual revenue of $16b. |
$4.4b
in stock and $3.8b debt |
Completed
in February 2011. |
|
Northeast Utilities acquisition of NStar |
3,000,000
electric and 505,000 gas customers, annual revenue of $8.4b. |
$4.17b
in stock |
Completed
in April 2012. |
|
Duke Energy’s acquisition
of Progress Energy |
56,000MW
of generation, 7,100,000 electric customers. |
$13.8b
in stock and $12.2b debt |
Completed
in July 2012. |
|
|
Annual
revenue of $19b, 970,000 electric customers. |
$3.5b
cash |
Completed
in December 2011. |
|
Exelon’s bid for Constellation |
44,000MW
of generation, 6,600,000 electric customers, annual revenue of $33b. |
$7.7b
in stock |
Completed
in March 2012. |
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. These articles also summarise lengthy documents, and
it is important that readers refer to those documents in forming opinions or
taking action.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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