From the editor’s
desk…
Welcome
to Pipes & Wires #117. This issue covers a wide range of energy policy and
regulatory issues from North America, South America, Africa, the UK and NZ. I’d
also like to wish you and yours a very Merry Christmas and a Happy New Year.
Errata
Pipes
& Wires #116 transposed the “average adjustment to current revenue
required to earn allowable revenue for first 15 months” that will apply to
Vector and Powerco in regard to the gas distribution Draft DPP. The correct
figures are Powerco +5% and Vector -16%, not Vector +5% and Powerco -16% as incorrectly stated in the article. Apologies to all
concerned.
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...
·
Providing an Engineer’s Report to
support a CPP Application.
·
Acting as an Expert Witness in defense
of an electric company.
·
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.
Pick
here
to discuss how Utility Consultants might assist your company with similar work.
Identifying an HVDC line
During
our recent family road trip, we (well ... just me really) took a photo of a cable-guyed
HVDC line in northern Nevada, running approximately north-south across
Interstate 80 about 1 hours’ drive east of Reno. Can
anybody tell me the name of this line ?
New format of Pipes & Wires
Pipes
& Wires has recently re-formatted to a geographical format from its
long-standing discipline format, and I’d be interested to get readers
perceptions of that. Please pick one of the following links...
·
Prefer
new geographical arrangement of articles.
·
Prefer
original discipline-based arrangement of articles.
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.
A bit of light-hearted humor
What
if price control had been around in the 1920’s and 1930’s ? A collection of
photo’s with humorous captions looks at some of the salient features of price
control. Pick here
to download.
North America
US – approving new transmission
capacity
Introduction
Electric Transmission Texas (ETT) has recently
filed a request for a Certificate of Convenience & Necessity (CNN) with the
Public Utilities Commission of Texas
(PUCT) for a new 345kV line in the Lower Rio Grande Valley.
While the engineering aspects of the line are interesting enough, this article
examines the planning and approval process.
A bit about the proposed line
Basically
the proposed line is a 345kV steel pole configuration that will stretch between
existing substations near Brownsville and near Edinburg. Thirty-two line routes
between 138 miles and 188 miles were identified, with indicative costs of
between $265m and $365m. The preferred route has been identified as 163 miles
long, with an expected cost of $300m.
Confirming the need for the line
The Electric Reliability Council of Texas (ERCOT)
has confirmed the need for additional transmission capacity in the Lower Rio
Grande Valley, and for the ERCOT system in general. This was highlighted during
February 2011 when unseasonably cold weather required extensive load shedding across
the entire Texas grid.
ERCOT
also endorsed the need to reconductor two
existing 345kV lines and upgrade substations at an additional cost of $225m.
So what
exactly does ERCOT’s endorsement mean ? Does it oblige the PUCT to approve the
line ? Well ... not quite. ERCOT’s endorsement means that the PUC will very
likely accept the need for the line, but could still allow opponents of the
line to raise objections.
Approving the line route
ETT’s application
is now with the PUCT for their approval, but what exactly are they approving ? The line route ? The investment proposal ? Recovery of costs
?
The
PUCT will be approving the need for the line (based on ERCOT’s endorsement),
approving the line route, and approving recovery of costs. Primarily the Federal Energy Regulatory Commission (FERC)
determines recovery of inter-state transmission grid costs, but due to the interpretation
of the Courts, the FERC also determines the recovery of costs of anything
connected directly or indirectly to an inter-state transmission grid. However,
in Texas determining recovery of intra-state transmission costs falls under the
jurisdiction of the PUCT.
Thanks
to Bob McDiarmid from Spiegel & McDiarmid LLP for
advising on this article.
Canada – considering more nuclear
stations for Ontario
Introduction
At a
time when Germany is closing its nuclear power stations and the UK’s plans for
more seem dead in the water, the Canadian province of Ontario is considering
building more stations. This article examines those plans and looks at some of
the concerns that are being raised.
The planned new capacity
Ontario Power Generation (OPG) began
preparing for additional nuclear capacity over 6 years ago, and in August 2012
was issued
a License to Prepare Site for the Darlington
New Nuclear Project (DNNP). The plan is for two 1,000MW units, for which proposals
have been requested from CANDU and Westinghouse.
The concerns
A
major concern being raised is the likely costs of the DNNP compared to the
likely costs of new gas-fired generation. Critics of the DNNP claim that the
kWh cost of the DNNP will be about double that of a gas-fired plant and about
4x that of what Hydro Quebec expects
to export electricity for. Supporters, on
the other hand, say that gas may not end up being that cheap over a 40 or 50
year life, even more so if carbon taxes are included.
What are some of the energy policy
issues ?
So
what the energy policy issues involved ? Let’s consider the following....
·
Pricing is certainly an issue, both
from the perspective of keeping Ontario’s industries competitive and from the
plain simple truth that electricity customers vote.
·
Nuclear safety is still an issue in
many peoples’ minds, especially after the Fukushima earthquake in Japan.
·
Security of primary energy supply.
Canada has some of the largest and highest quality Uranium reserves in the
world.
·
Ontario has 45 years of nuclear
construction and operating experience. Keeping that expertise and workforce
together is something that governments, employees and labor unions will almost
certainly advocate.
·
Low CO2 emissions. Nuclear contributes
to meeting emission reduction targets, but then again there seems to be
increasing questions over whether these targets should be pursued less
vigorously or even at all.
These
are complex issues that each of us would undoubtedly assign different
weightings to. Pipes & Wires will look at this issue again as news emerges
and get a sense of what weights officials are applying.
Africa
Nigeria – providing a reliable electricity
supply
Introduction
Most
of us have a vague awareness that Nigeria seems troubled with “electricity
shortages”. This article tries to identify exactly what those “electricity
shortages” might be, and also examines the President’s recent bold pronouncement.
Identifying the real “electricity
shortage” problem
A
bit of research suggests that although Nigeria has abundant coal and gas
reserves, the generation capacity that is available on a day-by-day basis
appears limited to about 2,700MW despite an installed capacity of about 7,800MW
(figures vary, but it seems that most generation doesn’t actually run). This
appears to be compounded by transmission capacity that is limited to about
4,000MW.
Moving
from the assets to the people side of the industry, it appears that the
state-owned electric company has a large number of ghost workers on its bloated
payroll and lists 40% of staff occupations as “drivers”.
The President’s recent bold
pronouncement
In
August 2010 Nigeria’s President Goodluck Jonathan approved the construction of a $3.5b,
700kV super grid to be completed within 4 years ie. August 2014. It is
expected that this super gird will overlay and extend the reach of the existing
330kV and 132kV grids and enable the connection of about 14,000MW of
generation.
In
late November 2012, Jonathan “assured Nigerians of a stable supply of
electricity in major cities by the end of the second quarter of next year”. In
responding to questions, Jonathan identified that a major challenge was “poor
infrastructure” that was stranding over 1,000MW of generation, and went on to
talk of “projects that are going on” that will be completed by mid-2013.
Progress on super grid
Given
that completion of the 700kV super grid was expected by August 2014, we might
expect to see significant progress by now. A cursory Google search didn’t
reveal any obvious progress on the super grid ... if there is it certainly appears
to have escaped the media’s attention, possibly in the excitement over the sale
of the electricity distribution companies.
Pipes
& Wires will check back late in 2013 in anticipation of seeing some
progress.
South Africa – improving distribution
reliability
Introduction
The
previously discussed consolidation of South Africa’s 400-and-something
electricity distributors into something like 6 very large distributors seems
pretty much dead. Pipes
& Wires #98 examined the untimely death of Regional Electricity
Distributor #1 (RED1), but also noted the intended transfer of the role of
addressing the R30b maintenance backlog to a special purpose entity. This
article looks at the recent progress on addressing that backlog.
The recent announcement
In
late November 2012, the Cabinet announced its approval of the Electricity
Distribution Asset Management Turnaround Program. The first draft of the Plan
is expected by mid-2013.
Key features of the Program
Some
of the key features of the Program include...
·
Standardising
asset maintenance and renewal practices.
·
Bulk purchasing through Eskom to ensure
better scale.
·
Overall program governance will be
through the “approved governance structure”.
·
Monitoring of progress will be
performed by the Presidential Infrastructure Coordinating Committee under the
Strategic Infrastructure Project Six.
Pipes
& Wires will check back and make further comment in mid-2013 when the Plan
is released.
South America
Argentina
– recovering from excessively low tariffs
Introduction
Treading
the fine line between protecting consumer interests and creating proper
incentives for infrastructure investment is an on-going challenge for economic
regulators. Most of us probably have a vague awareness that Argentina’s
electric companies have struggled under the freeze on tariffs over the last few
years, so a government announcement of a transition to cost-reflective pricing
was apparently welcomed by the electric companies and investors alike.
The electric companies’ difficulties
Some
might remember Argentina’s financial woes about 10 or 11 years ago, when the
move to a floating Ar$ and
a tariff freeze left many companies including the 2 big electric
companies Edenor and Edesur facing a big gap between revenues in Ar$ and debt repayments in US$. Apparently electric tariffs were
only covering about 30% of costs ... hardly a sustainable situation.
Not
surprisingly, the unions threatened strike action which prompted the government
to intervene with emergency payments so that workers could be paid (again,
hardly a sustainable situation).
The government’s announcement
In
late August 2012, the Deputy Economy Minister, Axel Kicillof, announced that he would
be heading a new government commission that would examine each electric company’s
individual cost structure and then assign each company a “reasonable profit
margin”. Apparently the new regulatory mechanism will be called “cost plus” and
signals “the end of the regulatory scheme and fixed prices of the 1990’s”.
It
is expected that the tariff increases will “enable” about Ar$1b to be invested
in Edenor and Edesur’s
distribution networks. However in what appears to be conflicting reports, Kicillof also announced that government subsidies of electricity and
gas will continue to assist the competitiveness of industrial consumers, while
more recent reports suggest that subsidies will be reduced.
The industry’s response
Initial
investor response appeared positive, with Edenor’s shares rising almost 10%. However some electric company
executives are fearful that they will become “mere managers of a system which
is planned and controlled by a regulatory committee”.
Whether
that will occur is not yet clear, but what is painfully clear is that the
Argentine government has little room for either error or experimentation as
many electric (and indeed gas) companies teeter on the edge of bankruptcy.
Pipes & Wires will re-examine this issue once Kicillof’s Commission
finds it feet, announces some tariffs and the industry responds.
New Zealand
NZ – finalising the electricity Default Price Path
Introduction
Over
the last few years the Commerce Commission
has been working on re-setting the Default
Price Path that applies to the 16 electricity distribution businesses
(EDB’s) that are subject to a DPP. This “mid-term reset” was an acknowledged
component of the DPP that applies from 1st April 2010 to 31st
March 2015. This article looks at the
features of the Final
decision that the Commission released in late November.
Legal framework
The
broad legal framework for regulating the prices and supply reliability of EDB’s
are set out in Sub-Parts 3, 6 and 9 of Part 4 of the Commerce
Act 1986.
Key features of the Final DPP
Key
features of the Final DPP include....
·
The exclusion of Orion in anticipation of Orion applying
for a Customised Price Path following the Christchurch earthquake.
·
Applying claw-back to some EDB’s to
address any over-recovery or under-recovery of revenue during the 2012/13 year.
·
Establishing an interest rate of 5.84%
for the claw-back.
·
Capping allowable price rises to
CPI+10% rather than the CPI+15% proposed in the Draft decision.
Comparing the various decisions
The
following table compares the Final Decision with the Original Mid-term Reset
and the Draft Decision...
|
EDB |
Original
mid-term reset (April 2011) |
Draft (Aug
2012) |
Final (Nov
2012) |
||||
|
MAR3 |
P3 |
X4,5 |
MAR4 |
X 4 |
MAR4 |
X4 |
|
|
$30.2m |
15% |
-5% |
$30m |
CPI + 15% |
$30.1m |
CPI+10% |
|
|
$57.7m |
4% |
0% |
$60m |
CPI - 0% |
$57.5m |
CPI-0% |
|
|
$7.9m |
13% |
-10% |
$8m |
CPI + 15% |
$8.9m |
CPI+10% |
|
|
$20.5m |
-2% |
0% |
$21m |
CPI – 0% |
$21.2m |
CPI-0% |
|
|
$29.0m |
10% |
0% |
$30m |
CPI - 0% |
$29.8m |
CPI-0% |
|
|
$12.8m |
3% |
0% |
$13m |
CPI – 0% |
$13.3m |
CPI-0% |
|
|
$19.5m |
-10% |
0% |
$21m |
CPI – 0% |
$20.9m |
CPI-0% |
|
|
$6.7m |
3% |
0% |
$7m |
CPI – 0% |
$7.2m |
CPI-0% |
|
|
$28.4m |
8% |
0% |
$29m |
CPI – 0% |
$28.9m |
CPI-0% |
|
|
$22.5m |
8% |
0% |
$24m |
CPI + 11% |
$24.8m |
CPI-0% |
|
|
$220.9m |
-9% |
0% |
$255m |
CPI – 0% |
$246.4 |
CPI-0% |
|
|
$29.9m |
14% |
-5% |
$30m |
CPI + 15% |
$30.3m |
CPI+1-% |
|
|
$29.6m |
20% |
-10% |
$28m |
CPI + 15% |
$31.9m |
CPI+10% |
|
|
$90.7m |
7% |
0% |
$95m |
CPI – 0% |
$91.6m |
CPI+8% |
|
|
$399.4m |
-9% |
0% |
$414m |
CPI – 0% |
$416.8 |
CPI-0% |
|
|
$109.1m |
-4% |
0% |
$109m |
CPI – 0% |
$109.4 |
CPI-0% |
|
This
concludes Pipes & Wires coverage of the 2010-15 DPP reset, however I guess
it won’t be long before the Commission will start compiling the 2015 – 2020
DPP.
UK and
Europe
UK – a floor on Carbon prices
Introduction
Correctly
pricing Carbon into electricity generation markets has proved to be real
head-scratcher for many, and indeed some unworthy cynics have voiced the
question “well ... what if the market sets a price that is unacceptably low for
the political masters”. This article ... well ... maybe more of an opinion
piece ... examines that very issue as
the UK considers a Carbon price floor starting on 1st April 2013.
The proposed Carbon price floor
Since
trading began in 2005, Carbon prices have firstly decreased, then peaked to
about £26/ton, then declined again to more recently vary between £10/ton and
£14/ton. The Chancellor’s
2011 Budget announced the introduction of a
Carbon price floor, with the apparent purpose being “to enable a secure
low-carbon transition in the UK power sector”. Essentially this will work by
taxing fossil-fired generation (according to the Carbon content) so that
low-Carbon generation becomes more viable.
The likely implications
Given
that about 5,000MW of coal-fired generation is already expected to close during
2013 in response to the EU Large
Combustion Plant Directive, we might wonder just how much of an impact a
Carbon price floor might really have. It would appear that it may not impact
that much on coal-fired generation, but it could well impact heavily on
gas-fired generation which in turn could gazzump the fledgling shale gas industry. I think which ever way it
goes, the recently fore-shadowed decline in reserve capacity margin seems a
very real possibility.
The wider philosophical issues
As I
see it, there are 4 wider philosophical issues (probably more, but let’s just
stick with these 4)...
·
We either have a workably competitive
market for electricity or we don’t. It would seem problematic to introduce a
price floor ... examples of perverse behavior abound, both in electricity
markets and in other markets (such as paying farmers to plough under every
third row of cotton).
·
The main-stays of the power industry
have been seeking investment certainty for years, but with little positive
response from either policy makers or regulators. Why is investment certainty
all of a sudden so important ?
·
As noted in Pipes
& Wires #116, the UK’s reserve capacity margin could well decline to a
scary 4%. Surely that is a clear warning of the need to increase levels of
secure generation ?
·
One of the founding principles of the
EU is that there should be no subsidies.
So
... much to think about !! That’s probably a good point to conclude this
article .... well .... opinion piece.
UK – and in the next breath, more
gas-fired generation
Introduction
Pipes
& Wires has run a series of articles that reflect what I believe is a
heightened anxiety and confusion with UK’s energy policy. Following on from an
article discussing the Chancellor’s plan for a bias against coal-fired
generation which will presumably also effect gas-fired generation, this article
looks at the Chancellor’s Gas
Generation Strategy.
A bit of background
About
40% of the UK’s electricity comes from gas-fired generation, with this
generation setting the market price for most of the year. Work by the Department of Energy & Climate Change suggests
that 26,000MW of new gas-fired generation could be required by 2030 both to
replace retired coal, gas and nuclear generation and to meet new demand, with
ever increasing amounts of gas-fired generation being called upon to balance
intermittent and inflexible low-carbon generation.
The Gas Generation Strategy
The
Gas Generation Strategy embodies a number of work streams...
·
Integrating the role of gas within the
commitment to the UK’s binding 2050 emission targets, acknowledging that a
low-Carbon energy sector will be intermittent.
·
Promoting investor certainty for
gas-fired generation, particularly around the clear expectation that by 2030
many of these gas-fired plants will be operating with low capacity factors.
·
Ensuring that there is sufficient gas
to fuel that generation.
Security of gas supply
The
Gas Generation Strategy clearly recognises the
importance of a secure gas supply. It notes that while the global outlook for
gas supply is good, there will also be increased global demand and declining UK
gas production which heightens the risks around availability and price of gas
imports. Key elements of the UK’s gas strategy include...
·
Developing indigenous gas resources,
and moreover encouraging that development through tax shields and allowances.
·
Anticipating a short-term tightening of
the global LNG market.
·
Encouraging new gas storage facilities.
·
Encouraging demand side initiatives.
·
Understanding how increasingly
intermittent renewable generation will place volatile and intermittent demands
on the gas system.
·
Cautiously investigate and develop
shale gas.
Meeting the emission reduction targets
The UK
has made various binding commitments to reduce its’ CO2 emissions to
20% of the 1990 levels by 2050, and this is embedded in the Gas Generation
Strategy as a clear theme. However, there is also a clear recognition that a
diverse portfolio of generation is needed to balance the risks and
uncertainties of different technology options.
Investor concerns
As
part of compiling the Gas Generation Strategy, the industry expressed concern
that the current market doesn’t provide strong enough investment signals, and
also about the uncertainty posed by the impending market reforms (of which the
Carbon price floor is one element). My guess is that the very thought of these
gas-fired plants becoming low capacity factor peaking plants would discourage
investment, so part of the government’s response is to cap the Levy Control
Framework out to 2020.
Balancing the policy outcomes
Energy
policy requires the balancing of 3 competing objectives (at best, I think we
can choose any 2)...
·
Providing a secure electricity supply.
·
Keep prices as affordable as possible.
·
Working towards a sustainable low-Carbon
future.
The
opening paragraph of the Ministerial Foreword in the Gas Generation Strategy
clearly acknowledges this three-fold energy challenge. However the Strategy
makes it very clear that the low-Carbon policy objective will get priority.
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…
·
Wonders Of World Engineering
(published 1937) – in particular editions 1 to 27.
·
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...
· Electricity
Industry Fundamentals – Auckland, 4th – 5th March
2013.
· Electricity
Industry Fundamentals – Wellington, 18th – 19th March
2013
· Infrastructure, Investment &
Regulation Conference – Sydney, 30th – 31st May 2013.
· CIGRE
International Symposium – Auckland, 16th – 17th
September 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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Consultants Ltd accepts no liability for action or inaction based on the
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