From the
editor’s desk…
Welcome
to Pipes & Wires #116. This month we look at a few regulatory decisions in
New Zealand and England, and then consider some energy security and policy
interactions in England and Germany. We conclude this issue with a look at the
future of electricity network regulation in Australia and how the Solar Cities.
General stuff
What have I been doing lately ?
A
couple of interesting projects I’ve been involved with lately that might be of
interest to others include...
·
Performing customer surveys for a
couple of EDB’s, to determine customers’ views and preferences for a range of
matters including price-quality trade-offs.
·
Compiling asset management plans in
preparation for disclosure by 31st March 2013.
·
Assisting several EDB’s with their
AMMAT assessments for disclosure by 31st March 2013.
·
Analysing supply reliability against
peer EDB’s
·
Analysing EDB’s operating and capital
costs against peer EDB’s.
·
Initial discussions about how to
approach a CPP.
·
Taking the kids on a road-trip from San
Francisco to Washington DC and New York.
CPEng status
I’m pleased
to announce that I am now a Chartered
Professional Engineer (CPEng), and am available
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.
New Zealand
Introduction
Setting the weighted average cost of capital (WACC) is an essential part
of controlling the revenue or prices for an infrastructure business. This
article examines the Commerce Commission’s recent
WACC decision that will apply to Powerco’s gas distribution business for the 2013
Information Disclosure year.
Key components of the WACC
The key components of the WACC that will apply are....
Parameter |
Value |
5 Year risk free rate |
2.97% |
5 Year debt premium |
2.45% |
Equity beta |
0.79 |
Tax adjusted market risk premium |
7.0% |
Average corporate tax rate |
28% |
Average investor tax rate |
28% |
5 Year debt issuance costs |
0.35% |
Leverage |
44% |
Standard error of debt premium |
0.0015 |
Standard error of WACC |
0.012 |
5 Year cost of debt |
5.77% |
5 Year cost of equity |
7.67% |
Final WACC
The final 5 Year WACC’s that will apply for the 2013 are....
WACC |
Mid-point |
Range |
|
Lower bound |
Upper bound |
||
Vanilla |
6.83% |
6.02% |
7.64% |
Post-tax |
6.12% |
5.31% |
6.93% |
NZ – the gas Default Price Path (DPP) Draft Decision
Introduction
The Commerce Commission recently announced the Draft DPP’s that it intends to
apply inter alia to Vector and Powerco’s gas distribution businesses when the Gas Authorisations expire on 1st July 2012. This article
examines the key features of the Draft DPP and the industry’s response.
Background
The gas
distribution businesses belonging to Vector and Powerco were subject to the 2003 Gas Pipeline Enquiry, and as a result were placed under control by the Commerce (Control of Natural Gas Services) Order 2005. On 31st October 2008 that Control was
extended by the Gas Authorisations, which will expire on 1st July
2012.
Part 4 of the Commerce Act 1986 requires the Commission to set the Initial DPP’s for
certain suppliers of gas pipeline services. Those DPP’s must embody the
following elements....
·
The prices or
revenue that can be charged at the start of the DPP.
·
The annual rate of
change in prices or revenue that are allowed to occur in subsequent years of
the DPP.
·
The quality
standards that must be met.
Key features of the draft DPP
The key features of
the draft DPP are as follows....
Parameter |
Vector |
Powerco |
Allowable revenue
for first 15 months. |
$88m |
$61m |
Average
adjustment to current revenue required to earn allowable revenue for first 15
months. |
-16% |
+5% |
Estimated excess
revenue for first 15 months if revenues were not adjusted as proposed by the
Draft DPP. |
$48.4m |
-$8.7m |
Allowable rate of
change for Draft DPP period. |
CPI-0% |
Errata – the original version of PW116
distributed by email had incorrectly stated the figures in red above as Vector +5%
and Powerco -16%. This version is corrected as above.
The industry’s views
Vector levelled the
following 2 criticisms at the Draft DPP...
·
A reliance on asset
valuations that are nearly 10 years old.
·
That the investment
signals appear inconsistent with the Minister of Energy’s stated importance of
gas infrastructure.
Next steps
The Commission will
receive submissions on the Draft DPP until 7th December 2012. Pipes
& Wires will comment further as the DPP is finalised.
Introduction
The
NZ electricity transmission grid owner, Transpower, is subject to an Individual Price Quality
Path (IPP) that Pipes & Wires has previously examined. This article
examines the recently announced updates to the Maximum Allowable Revenues
(MAR’s)
Background
The Commission’s previous work has included
considering what sort of regulatory instrument Transpower should be subject to,
recommending to the Minister that Transpower should be subject to an Individual Price-Quality regulation (as described in s53ZC
of the Act), and setting out the Maximum Allowable Revenues (MAR) and
quality targets. These are examined in Pipes
& Wires #90, #97,
#98
and #105.
Key features of the initial IPP
Key
features of the IPP that will cover the regulatory control period (RCP1) from 1st
April 2011 to 31st March 2015 include...
· A
maximum allowable revenue (MAR) of $644m for the 1st April 2011 – 31st
March 2012 year (referred to as the transition year).
· A
requirement for Transpower to submit
forecast MAR’s for the remaining 3 years by 21st October 2011.
· A
requirement for the Commerce Commission
to determine forecast MAR’s for the remaining 3 years by 30th
November 2011, based on the information submitted by Transpower.
· A requirement for Transpower to certify each year that it has
complied with the forecast MAR.
· Quality targets for the year ending 30th
June 2012 of...
· A
requirement for Transpower to determine quality targets for the years ending 30th
June 2013, 2014 and 2015 by 30th November 2011.
· A
requirement to annual disclose the MAR, CapEx, Opex and Economic Value Added
(EVA).
The recent amendments
The
recent amendments to Transpower’s MAR are based inter alia on the following amendments to Pass-Through Costs...
|
YE 31st
March 2014 |
YE 31st
March 2015 |
Initially
proposed 22nd December 2010. |
$906.4m |
$958.9m |
Amended
as of 31st October 2012. |
$874.3m |
$959.7m |
UK and
Europe
UK – the declining reserve capacity
margin
Introduction
The
looming generation capacity gap in the UK has been the subject of much public
debate, and indeed various policy overhauls and market reforms to “incentivise”
new generation. This article examines a recent report
from UK energy regulator OFGEM predicting that the UK’s reserve capacity margin
could fall from the comfortable current 14% to a scary base case of 4% by
2015/16.
Key drivers of the declining capacity
The
report notes several key drivers of the declining reserve capacity margin...
·
Closure of some 12,000MW of older
coal-fired and oil-fired stations under the EU’s Large
Combustion Plant Directive, which limited such plants to 20,000 hours of
operation between 1st January 2008 and 31st December
2015. Some of these plants have been retired earlier under the LCPD’s “opt out”
arrangement.
·
Changes to the generation mix, which
would appear to be a cryptic way of saying that wind and solar are unreliable
due to their intermittent nature.
·
Possible similar reductions in reserve
capacity margins in the countries that the UK imports electricity from.
I’d also
add reduced security of gas supply from Europe as a further strategic issue, as
this limits the usefulness of any gas-fired generation that could be built
quickly.
Possible answers to restoring the
reserve capacity margin
There
are really only 2 possible answers ... either build more firm capacity, or
reduce demand. Putting aside the occasional drop in demand, the long-term
scenario is increasing demand due to heat pumps, plasma TV’s, more lap-tops and
other power-hungry gizmo’s.
So
that really does leave building more nuclear, coal-fired or gas-fired plants as
the only answer. Recent announcements would suggest that many if not all of the
UK’s proposed new nuclear stations are now non-starters due to a wide range of
issues, leaving only fossil-fired stations as the real option.
The troubling thing...
The
troubling thing is that many industry stakeholders (myself
included) have repeatedly cried for many years that current policies would lead
to such electricity shortages. These cries were ignored, dismissed as alarmist or
rejected as inconsistent with a low-carbon future.
It
would appear that on-going market reforms and policy overhauls have not
incentivised new generation as it was suggested that they would. Moreover 3 to
4 years is too short to build serious amounts of firm capacity to reverse the
declining reserve capacity margin. So the medium-term looks a bit cold and dark
for the UK, a coldness and darkness that will require some strong policy and
leadership to fix.
Germany – what future hath coal ?
Introduction
Pipes
& Wires #75, #90
and #101
examined the likely role of coal-fired generation in the US under the rather
pithy heading “what future hath coal ?” and concluded that coal had a very
uncertain future (after the 2012 election result it appears, however, that coal
has a very certain future). In Germany, however, it appears the future for coal
is very bright. This article notes the opening of the first of 20 something
(reports differ) large coal-fired stations to off-set the closure of the
nuclear stations.
Key strategic issues
Key
strategic energy issues facing Germany include...
·
A policy directive to close all nuclear
plants by 2022.
·
Uncertain gas supplies from Russia.
These
2 issues cast a shadow over close to 80% of Germany’s generation capacity.
The new coal station
RWE’s
2 new 1,100 MW lignite-fired units at Neurath are
capable of following the intermittent supply from wind and solar. The 2 units
have an efficiency of about 43%, and complement the 5 original units.
Likely future role of coal
It
appears that Neurath is the first of 20 something (reports suggest between 22
and 25) new coal or lignite-fired stations Germany intends to build to both
off-set the closure of the nuclear stations and to buffer wind and solar. So it
would appear that coal indeed does have a bright future in Germany.
UK – defining the regulatory
information requirements
Introduction
The
UK energy regulator OFGEM is developing a regulatory framework known as RIIO
that it hopes will encourage investment and innovation in energy networks.
Pipes & Wires has recently examined the Initial Proposals for both
electricity and gas transmission (RIIO-T1) and gas distribution (RIIO-GD1).
This article examines OFGEM’s recently released draft
Regulatory Instructions and Guidance paper setting out the broad structure
and content of the information that OFGEM proposes to gather during the RIIO
period.
A regulator’s requirement for
information
Most
of understand that for a regulator to fulfill its statutory duties of compiling
price controls and then monitoring compliance and comparing efficiencies, it
will require a wide range of detailed information that generally always has to
be collected from the regulated suppliers.
What are OFGEM proposing
?
Primarily
OFGEM are proposing a set of Excel templates for recording the data,
calculating the revenue elements and providing data commentaries (this would
seem very similar to the various Information Disclosure templates required in
New Zealand). OFGEM has also proposed the following principles to guide the
data gathering process...
·
That the data should directly contribute
to the RIG objectives of being necessary to administer license conditions and
Final Proposals, and informing expected annual cost and performance reports.
·
That the data gathered should be
proportionate ie. the data requirements do not exceed
what OFGEM reasonably needs to achieve the RIG objectives. OFGEM proposes 4
classifications for such data ranging from “critically important” (ie. couldn’t
fulfill its obligations without that data) to “not important”.
·
That data reporting requirements should
align with or draw from existing reporting formats so that new formats do not
have to be compiled.
Next
steps
OFGEM
will receive submissions on the draft RIG paper until 14th December
2012.
Australia
Aus – rethinking
electricity network regulation
Introduction
Australia’s Productivity Commission (PC)
has been enquiring into aspects of national electricity
regulation in Australia to provide some context for future analysis. This
article examines the findings of the PC’s recent Draft Report.
Key issues considered
The
PC has been considering inter alia the
following 2 issues...
·
The role of benchmarking as a distinct
alternative to the bottom up approach.
·
That any such 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.
Key
findings of the draft report
The key findings of the PC’s draft report
include....
·
Electricity
prices have risen by more than 50% in real terms over the last 5 years, with
transmission and distribution costs being the main contributors.
·
The
over-arching regulatory objective of the long-term interests of consumers has
been lost.
·
Resolving
interconnection issues between state transmission grids would need to be part
of a wider reform package to deliver real benefits.
·
About
25% of a retail electric bill is required to supply about 40 hours of critical
peak demand each year. Something like $11b of capacity is only used for about
100 hours per year.
·
Some
consumers are being forced to pay for more reliability than they want.
·
State-owned
electric companies have conflicting objectives, and also appear less efficient
than privatised companies.
·
The
AER needs more resourcing, expertise, accountability and accountability.
·
The
existing incentive regulation encourages regulated electric companies to build
too much.
·
Many inefficiencies that might be
blamed on the electric companies are simply responses to regulatory incentives
and structures that impede efficiency.
Next
steps
At the time of writing, the Productivity
Commission is receiving submissions on the Draft Report until 23rd
November 2012 with a view to delivering its Final Report on 9th
April 2013. Pipes & Wires will examine that Final Report when it emerges,
and compare the findings to those of the Draft Report.
Aus – the Solar Cities report
Introduction
Solar
energy is undoubtedly a great thing - as I write this about 20kW of free energy
is pouring down on the deck outside my study. Sadly, capturing
that energy, converting it to electricity, and then integrating that
electricity into conventional grid connected electricity seems to be mired in
commercial and strategic issues. This article examines the Australian
Government’s Solar Cities program to see how those issues are being managed.
The Solar Cities program
The Solar Cities program is
aimed at trialing new sustainable models for electricity supply and use in 7
separate grid connected cities – Adelaide, Alice Springs, Blacktown, Central
Victoria, Moreland, Perth and Townsville. These models include
·
Energy efficiency measures.
·
Using solar technologies.
·
Cost reflective pricing trials.
·
Community education.
The results so far
The Solar
Cities -
Catalyst For Change – Community Engagement Paper sets out a the conclusions
and observations to date. A few of these include...
·
Over 50% of households were aware of
the Solar Cities program (Adelaide).
·
723 solar hot water systems have been installed
(Alice Springs).
·
310kW of solar electricity generation
has been installed (Blacktown).
·
521 solar electricity systems have been
purchased (Central Victoria).
·
79,000 residents are reached by a
newspaper column on sustainability (Moreland).
·
Reductions of 12% in electricity
consumption and 11% in peak electricity demand, along with an 8 year deferral
of a 3rd undersea electricity cable to Magnetic Island (Townsville).
What might we make of this ?
There
are certainly some exciting demand and energy
consumption reduction initiatives occurring that are to be encouraged. From
where I look at all this, the following policy adjustments would be a useful
step forward...
·
There will need to be a stronger
recognition by policy makers that most of the electricity supply chain has high
fixed costs that are independent of energy (kWh) throughput. As energy
throughput decreases, revenues based on energy throughput will decline, so a
shift towards fixed charges based on capacity will be needed to ensure that the
electricity supply chain is sustainably funded.
·
Care will need to be taken around the
timing of peak demand reductions, especially if heavy air conditioning still
occurs. This could make asset utilisation even more peaky.
·
The need to fully disclose the costs of
connecting embedded generation if we are to be true to the objective of cost
reflective pricing.
·
Ensuring that consumers are fully
informed of the reliability trade-offs that come with weather-dependent
embedded generation, and that they willingly accept the possibilities of supply
interruptions if local networks have a reduced capacity.
Pipes
& Wires will check back on the Solar Cities in a year or so to see what
progress has been 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...
· Infrastructure, Investment &
Regulation Conference – Sydney, 30th – 31st May 2013.
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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.
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