From the
editor’s desk…
Welcome
to Pipes & Wires #121. This month we start with a look at progress on South
Africa’s 2 new power stations and the Nigerian privatisation. We then look at
some energy storage and smart grid issues in the United States before examining
whether privatisation of a regional electric company in India might improve its
performance. We then look at some regulatory, privatisation and policy trends
in Europe and then consider 2 industry structural changes in Australia (note the
contrast between horizontal disaggregation in Tasmania and vertical
reintegration in Western Australia).
Topical issues for thought...
Civic
authorities have recently expressed increasing concern about how long the
electricity was off after significant natural events. As Pipes & Wires has
explored, there are many seemingly complex issues around this such as whether
smart grids would have improved restoration and what costs the regulatory
regime allowed and didn’t allow the electric companies to recover, however much
of it comes back to having a hard, resilient network. This includes features
such as stronger conductors in wind-prone areas, braced structures, lifting
underground assets above ground, better drainage in underground vaults, and
moving key assets away from flood-prone areas.
Network
hardening and resilience needs a clear strategy that recognises likely disaster
scenarios and includes engagement with regulators over the likely costs and
benefits. To discuss this in more detail, pick here
or call Phil on (07) 854-6541.
Matters for attention (NZ)
Distribution pricing review
The
Electricity Authority will be reviewing EDB’s pricing methodologies to inter
alia ensure that each EDB’s methodology aligns to the pricing principles and is
efficient. This work stream will involve an independent review of each EDB’s
methodology, after which the Authority will release its findings, probably
around August or September 2013.
The
Authority’s focus will be on whether distribution pricing is efficient and is
supporting competition. Pick here
or call Phil on (07) 854-6541 to discuss your requirements.
Gas asset management plans
The Commerce
Commission’s decisions NZCC 23 and NZCC
24 set out the requirements for gas distribution and gas transmission
businesses (collectively referred to as gas pipeline businesses, GPB’s) to
disclose an AMP that meets specified criteria. The specific disclosure
requirements for both gas distribution and gas transmission are set out as
follows...
·
Section 2.6 of each decision sets out
the various broad requirements that an AMP must meet, such as contributing to
the Part
4 Purpose Statement, and being able to be understood by someone with a
basic knowledge of infrastructural asset management.
·
Section 2.6 sets out the dates by which
each GPB must disclose its’ AMP. Care is required, as the dates are based on
several defined terms that much be well understood.
·
Section 2.6 also describes the various
forecasts (Schedules 11a to 12b that include CapEx, OpEx, asset condition and demand).
·
Attachment A sets out the specific
clause-by-clause requirements that the AMP must include.
·
The asset management maturity
assessment tool (AMMAT) in Schedule 13 must also be completed and disclosed.
These
requirements are almost identical to the disclosure requirements for
electricity AMP’s. Pick here
or call Phil on (07) 854-6541 to discuss your requirements.
Africa
South Africa – progress on the
six-packs
Introduction
For
those who can’t resist the boyish charm of big machines this article examines
progress on Eskom’s 2 latest six unit
coal-fired steam turbine stations, Medupi and
Kusile.
Background
From
the mid 1970’s to the mid-1990’s Eskom built 8 six-packs, and pretty much
commissioned a 600+ MW steam turbine unit every 8 or 9 months. That is an impressive
record of construction.
Medupi
Key
features of Medupi include...
·
Located near Lephalale, near the
Zimbabwean border.
·
Six 800 MW (basically 4,800 MW gross).
·
Dry cooling of spent steam.
·
Boilers supplied by Hitachi, turbines
supplied by Alstom.
·
Coal supply will be about 14,600,000
tons per year under a 40 year contract.
The
first unit should be commissioned anytime now.
Kusile
Key
features of Kusile include...
·
Located near Witbank, east of
Johannesburg.
·
Six 800 MW units.
·
Includes flue-gas desulfurisation.
·
Boilers supplied by Hitachi, turbines
supplied by Alstom.
·
Coal supply will be about 12,000,000
tons per year for between 40 and 50 years
The
first unit is scheduled for commissioning in 2014.
Nigeria – privatising the generators
Introduction
The
last few issues of Pipes & Wires have examined Nigeria’s electricity
reforms. This article examines the proposed sale of 80% shareholdings in each
of 10 generation companies.
The proposed sale
The
generation companies are wholly owned by the Niger Delta Power Holding
Company (NDPHC), which is in turn owned by 3 tiers of government. The
NDPHC’s key objective is to implement the National Integrated Power
Plan (NIPP), which is fast track policy developed
in 2004 as a public funding initiative to build up Nigeria’s electricity
infrastructure.
The generation companies
The
10 generation companies
have a total installed capacity of about 5,100 MW. Most of the plants are
open-cycle gas turbines, with a few plants having been designed for possible conversion
to combined-cycle.
Likely bidders
The
Nigerian electricity sector would seem to embody a range of risks that most
mainstream investors would not be comfortable with. Presumably those risks will
be reflected in the likely sale prices. Pipes & Wires will make further
comment once the sale process has progressed.
North America
US – energy storage & electric cars
converge
Introduction
Grid
energy storage seems to be the emerging way of the future (refer to “Emerging
grid storage technologies” in Pipes
& Wires #120). This article examines the possible role of electric cars
providing that energy storage.
Grid energy storage
Put
really simply, grid energy storage stores off-peak energy and then releases
that energy back into the grid at peak times. Specific technologies include
storing the electricity in huge batteries, but also storing primary energy by
such means as pumped
storage or compressed
air, and indeed exploiting time zone differences.
Grid
energy storage firstly reduces the need for peak generation (generally always
CO2 emitting) by releasing stored energy, but also reduces the need
for associated grid capacity by injecting that stored energy close to loads.
Note
that huge batteries can also provide back-up power, and represent a viable
alternative to building additional lines (refer to “Big batteries for the Lone
Star State”, Pipes
& Wires #86).
A possible role for electric cars
Talk
emerged a few years ago of using electric cars to inject into the grid at peak times .... a thoroughly brilliant idea
!!! However it seems some (certainly not all) policy and regulatory thinking is
a long way behind, and is still mired in some very fundamental issues like
understanding why recharging electric cars at peak time is a dumb idea, and how
(or indeed whether) electric companies should be allowed to recover the true
costs of recharging.
The
other aspect to this is that electric cars (presumably) come with a whole bunch
of fancy electronics that lends itself to inverting and injecting back into the
grid. And of course we have the metering technology that can deal with 2 way
time-of-use power flows.
A couple of issues
It
appears that a couple of issues need to be overcome....
·
Grid storage is primarily an electric
company issue that requires close coordination of the amount and timing of
injected energy. Use of batteries owned by a third party will undoubtedly
complicate this.
·
Convenience of the car owner. The
emerging picture is that electric car owners tend to be wealthy, and by
implication lead busy lives with presumably little time to think about trivial
off-the-wall stuff like when their local electric grid peaks. At a stretch we
could maybe chop some of the late afternoon air con peak before those people
head home from work, but then that would require at least some recharging of
the cars during the day after they have discharged on the way to work.
·
The policy-regulatory disconnect, in
which policy makers advocate seemingly sound ideas but then regulators prohibit
the recovery of the costs (refer to the articles on Baltimore Gas &
Electric in Pipes
& Wires #93 and #94).
An extension of this issue is the policy expectation that investor-owned
electric companies will be used as instruments of policy without compensation.
Once
these issues get resolved, this idea could prove to be real winner. A key
element will be allowing electric companies to set terms and conditions of
recharging and grid injection that reflect their true economic costs.
US – are smart grids coming unstuck ?
Introduction
If
you’re anything like me you’re probably getting a sense that the whole smart
grid thing seems to be coming unstuck. This article takes a wider look at some
smart grid issues, which I appreciate may not sit easily with some.
Phil’s position on smart grids
Its’
probably time I clarified my position on smart grids (and indeed renewables). I will state categorically that I am not against
either, but what I am against is the single-minded pursuit of both smart
grids and renewables that embodies the following...
·
Dismissal of 130 years of power
engineering wisdom by people with very limited understanding of how an electric
grid actually works.
·
A view that modern day policy makers
are coming up with new ideas, when actually power engineers have been having
those ideas for years eg. demand side management,
non-network solutions, efficient long-term investment etc.
·
Refusal to discuss associated issues
such as increasing costs, declining security of supply and public safety.
·
Ignoring inconvenient facts like the
huge carbon footprint of all those extra transmission lines, and worn out
electric car batteries that suppliers won’t take back.
·
The expectation that investor-owned
electric companies will implement government and city policy without any
compensation.
Some emerging smart grid issues
Some
of the issues that seem to be emerging with smart grids include...
·
An appearance of “a scratch looking for
an itch”. Much of the smart grid space seems dominated by equipment suppliers (some
of whom are now lobbying state governments to make smart grid rebuilds
mandatory) and government agencies touting “new jobs”.
·
Lack of understanding of how a power
grid actually works. Sure, smart grids are doing some pretty cool things with
improving supply restoration times, but there needs to be an underpinning
meshed network that is in good condition ... single radial feeders in poor
condition have little if any scope for improving reliability.
·
A possible lack of real benefits. If
smart grids have real benefits, surely Big Electric would adopt them as they
would adopt any other cash flow positive opportunity ?
It appears that many electric companies are adopting smart grids primarily
because of either government subsidies or (what we thought was) pretty much
guaranteed recovery of costs.
·
The need for underlying network
strength, hardening and resilience. As the recent hurricanes on the east coast
of the United States demonstrated, smart grids proved to be of little value
when the underlying network was bashed, thumped and drowned.
·
The whole issue of worker and public
safety. A key selling point of smart grids is rapid restoration of supply,
which presumably dispenses with the faultman actually inspecting assets before re-livening. High energy assets
such as zone substations are inspected for very good reasons, and many of us
have some real concerns around this.
·
Uncertainty around cost recovery. Recovering
the costs of smart grid initiatives appears increasingly uncertain. Readers might
remember the policy-regulatory disconnect that Baltimore Gas & Electric got
hit with a few years ago (refer to Pipes
& Wires #93 and #94)
that prohibited them from recovering the costs of their smart meter roll-out,
and more recently Xcel Energy not being allowed to recover the full costs of
the SmartGridCity rollout in
Boulder, Colorado. It is, of course, possible that the claimed costs may have been
inefficient but none-the-less the possibility of that smart grid costs may not
be fully recoverable will undoubtedly spook electric companies.
Seems
like there will be some interesting times ahead, so Pipes & wires will
watch this issue closely and make further comment as trends emerge.
Asia
India – will privatising electricity improve
performance ?
Introduction
India’s
Kerala State Government has recently
decided not to privatise the Kerala State
Electricity Board (KSEB), but issues around improving cash position and
operational performance remain. This article cum rambling monolog examines some
of the KSEB’s woes and considers whether privatisation might’ve improved the
KSEB’s performance.
A bit about the KSEB
The
KSEB is a state government owned, vertically
integrated electric company that operates 2,445MW of generation, 10,400km of
400kV and 220kV transmission lines and 272,480km of distribution lines at 33kV
and lower. The KSEB has about 10,000,000 customers, so it is very large even on
a global scale.
The KSEB’s woes
The
KSEB’s woes include...
·
Transmission losses of 17% (down from
31%).
·
Bleeding cash, like US$37m per month.
The wider background
The
wider background to the Kerala government’s decision not to privatise was the
policy direction of the central government encouraging state governments to “explore
options for improving performance” of their electric companies. Kerala has
argued that it has considered and rejected privatisation in the belief that it
can make performance improvements whilst maintaining ownership.
Would privatising necessarily solve the
KSEB’s woes ?
Arguably
a simple transfer of ownership from the public to the private sector would not
ostensibly fix the KSEB’s woes ... it obviously goes a lot deeper than that.
Some issues to consider include...
·
Private sector ownership is likely to
sharpen the commercial focus, better allocate resources toward financial goals
like reducing losses, and give reduced attention to wider competing and
conflicting social and political objectives. It’s probably also fair to say
that a private electric company would be less likely to u-turn on sensitive
major initiatives than a state electricity board.
·
Depending on the regulatory framework,
particularly around tariffs, private sector ownership may not be able to
improve profitability if revenues are simply unsustainably low.
·
Depending on what labor agreements are
in place, private sector ownership may not be able to reduce head-count,
re-deploy or re-train people.
·
Depending on government economic
development policies, tariffs to certain customer classes may have been kept
deliberately low to subsidise industry. This will require a conscious decision
by government to abandon or ramp down those subsidies.
So in
terms of addressing the first identified woe, privatisation might result in
reduced transmission losses but possibly no better than internal
restructurings. In terms of the second woe, well it is far from clear that a
simple transfer of ownership in the absence of wider economic reforms will
improve financial performance.
UK and
Europe
France – amending the electricity
transmission tariff methodology
Introduction
Key
policy elements of most electric and gas tariff decisions is striking the
balance between efficient recovery of high fixed costs on the one hand and
sending real time demand signals to customers on the other hand, and
incentivising new investment. This article examines a recent deliberation
by the French energy regulator Commission de
Regulation de l’Energie (CRE) to introduce some new components to the 4th
high voltage electricity transmission revenue determination TURPE 4 HTB which
commences on 1st August 2013.
Incentivising new investment
TURPE
4 HTB will include incentives for investment in interconnections. Grid
interconnections are considered an important aspect of efficient energy market operation, hence it seems a wise move to incentivise such
investments. Readers might recall that the CRE has previously allowed gas
company GRT-gaz to recover a higher WACC
for investing in gas transmission hubs that improve market liquidity.
Peak time pricing
TURPE
4 HTB will also allow booked transmission grid capacity to be priced on a time
of day and season of the year basis to encourage reduced consumption during
peak periods. This would seem to be a noble public policy gesture, but it will
be interesting to see how much revenue risk results and how the CRE might
address that.
Ireland – privatising Bord Gais Energy
Introduction
News
emerged recently that Ireland’s gas company Bord Gais will sell its’ energy retail business. This article
examines the proposed privatisation.
A bit about Bord Gais Energy
Bord
Gais Energy (BGE) supplies 468,000 gas customers and 407,000 electric customers
throughout Eire, as well as 44,000 gas customers in Northern Ireland through
its energy and distribution subsidiary Firmus
Energy. BGE also owns and operates 680MW of generation capacity.
BGE
operates as a subsidiary of Bord Gais, which also owns 13,000km of gas
pipelines. Bord Gais itself is predominantly a state-owned company.
The proposed sale process
The
sale process includes only the BGE customer base, the BGE generation and the
Firmus Energy customer base and distribution network. Barclays Capital is
advising the Treasury on the sale process, whilst the Royal Bank of Canada
Capital Markets is advising BGE.
The expected price
BGE
is expected to sell for between €1b and €1.5b. Comparing this to other deals
around the world is obviously a bit complicated because of the mix of assets
involved in this deal.
Possible bidders
It is understood that UK gas company Centrica
is interested in BGE. My guess (and I could always be wrong) is that the
traditionally acquisitive European energy companies like E.On, RWE, Electricité
de France, Iberdrola and Vattenfall will sit this one out ... they seem to have
substantially revised their strategies to focus on assets sales to reduce debt,
asset trading to comply with the EU Third Package and consolidating their home
markets.
The
sale is scheduled to take most of the 2013 year, so Pipes & Wires will make
further comment as details emerge.
Germany – cancelling the climate change
programs
Introduction
Pipes
& Wires has previously examined Germany’s alternating policy positions on
nuclear energy. It now seems that their position on climate change initiatives
is also alternating. This article examines those changes
Germany’s energy policy position
Germany’s
plans to “transform the country into a model of alternative energy” included a
target (set by the EU in 1997) of 12% of electricity from renewable sources by
2010. The German government then upped this to 35% by 2020, 50% by 2030, 65% by
2040 and 80% by 2050 ... basically 15% per decade.
Recent moves
A
number of issues have led to the cancellation of several subsidy programs,
including promoting electric cars, research funds for energy storage
technologies and protection of forest lands to absorb CO2. Further
cuts are planned over the coming months.
A
key driver of the cancellations appears to be the languishing carbon prices,
which have dropped from €30 per ton to a mere €4 per ton, and well below the
€17 per ton that the German government was budgeting on to fund many of its
programs.
The politics of it all
Mainstream
parties are understandably divided along the lines of those consider the costs
(ie. Treasury), and those who don’t. What is rather
surprising is the divide emerging amongst the Green politicians as traditional
ecologists rebel against the mounting environmental impact of renewable energy
that the “renewables at any cost” persuasion seems to be pursuing.
Presumably
the current Government has counted the cost ? These
moves are unlikely to win the green vote, but they are likely to capture the
minds of many Germans already struggling with reduced incomes and facing the
loss of traditional smoke-stack jobs.
This
policy shift is likely to significantly delay, or even possibly totally stall,
Germany’s transition to a low carbon economy. The curious irony is that
Germany’s nuclear stations represented a big chunk of low carbon energy, but
alas no more. Pipes & Wires will make further comment as this issue
unfolds.
Australia
Aus – introducing retail competition
into Tasmania
Introduction
Most
jurisdictions have introduced retail competition to their electricity markets
in a staged fashion, starting with large customers. This article examines the
Tasmanian government’s recent announcement that the final tier of customers
(using less than 50,000kWh per year) will be able to choose their electricity
retailer. This article examines that move.
Progressive contestability of customers
Tasmania
has allowed contestability of retail customers for almost 7 years, starting
with customers consuming more than 20,000,000kWh per year on 1st
July 2006 and most recently with customers consuming between 50,000kWh and
150,000kWh per year on 1st July 2011.
Contestability for small retail
customers
Tasmania
will enter Full Retail Contestability (FRC) on 1st January 2014. A
key mechanism for this will be the sale of Aurora Energy’s existing retail
customers to at least 2 private sector retailers, which is expected to occur
during the 2nd half of 2013. After the 1st January 2014,
additional retailers will be able to enter the Tasmanian market and compete for
customers.
All
retailers will be required to offer a “standard retail contract” which includes
(energy) tariffs set by the Tasmanian
Economic Regulator (OTTER). A retailer cannot set tariffs higher than those
set by OTTER. Retailers can also offer “market retail contracts” which must
still meet minimum standards determined under the National
Electricity Retail Law.
Next steps
FRC
will involve the following steps...
·
Introducing and passing legislation.
·
Selling down 2 or more tranches of
retail customers.
·
Customers choosing their energy
supplies post 1st January 2014.
Aus – vertical reintegration in the
West
Introduction
Most
of us can remember the vertical disaggregation of the former State Energy
Commission of Western Australia into separate generation and retail companies,
and the threatened vertical reintegration (Pipes & Wires
#86 and #91).
Earlier this month, Premier Colin Barnett confirmed the first step towards
reintegrating Verve and Synergy ostensibly to slow rapidly increasing
electricity prices. This article examines this move and considers whether it
might actually achieve Barnett’s goal of slowing price increases.
A bit about the key players
The
2 electricity players are...
·
Verve
Energy, which owns and operates the states’ 4 major power stations at Kwinana,
Cockburn, Pinjar and Muja. Verve also owns the Collie power station which is
operated by a private company.
·
Synergy, which supplies
900,000 electric customers in the South West Interconnected System.
Vertical reintegration
A
good starting point for discussion would be Barnett’s premise that vertically
reintegrating Verve and Synergy will slow electricity price increases. Comments
that spring to mind include...
·
The likely cost savings from vertical
reintegration would need to exceed the costs of that reintegration.
·
We need to have a clearer understanding
of what exactly is causing the price rises before simply assuming that vertically
reintegrating will stem those price rises. A little thought would suggest that
many internal cost drivers such as wage increases, renewing aging plant,
upgrading ICT, and funding future new plant won’t magically disappear just
because Verve and Synergy are reintegrated. And indeed, external cost increases
such as coal and gas prices won’t disappear either.
·
Barnett has commented that a common
board would provide a more coherent policy. It may well, but how much influence
a more coherent policy might apply to increasing costs remains to be seen.
·
As most of us know, a key principle of
energy market reform is the insertion of a commercial interface with its
associated risk-reward profile between generation and retail to promote
competition. Such commercial interfaces also tend to expose loss-making
activities, so odds are reintegration could allow some losses to get buried
(which apparently was part of Verve’s problem, but which only became exposed
when Verve was established as a stand-alone company).
·
The government’s own Strategic Energy
Initiative said that increased competition would help drive down prices, so
it’s not clear how abolishing a key competition mechanism will contribute to
lower prices.
·
A couple of years ago, the Western
Australian Energy Market Study concluded that regulated retail tariffs
below the cost of supply were damaging some market participants. Now it appears
that tariffs are too high.
So
... some interesting issues !!! What is clear is that
this issue is certainly not unique to Western Australia’s energy market reform
... other jurisdictions have gone round the same cycle of firstly electric
tariffs are too low to attract new investment, and then when prices increase
voter anger emerges. Pipes & Wires will comment further as Barnett’s plans
unfold.
General stuff
Consulting services that may be of
interest to clients
Utility
Consultants wide expertise extends well beyond the above projects ... if you
need energy network advice chances are Utility Consultants has done work in
that area. Here’s a sample of work done for clients over the last few years
that demonstrate the breadth of skills, insight and experience that is
available....
·
Advised an electricity business on the
regulatory implications of bringing externally contracted field services back
in-house.
·
Identified economic and regulatory
arguments to support inclusion of transmission interconnection charge risk into
network tariffs.
·
Advised lines businesses on a
regulator’s proposed treatment of CapEx and OpEx.
·
Advised an international investor on
gas distribution policy and regulatory trends.
·
Identified national energy policy
implications for lines businesses.
·
Assisted a lines business to identify
the burden of proof implied by regulatory determinations.
·
Suggested amendments to a gas
transmission AMP to strengthen the economic arguments.
·
Identified electricity network
investment characteristics as part of an acquisition study.
·
Developed an AM framework for a gas
distribution business to link AM to regulatory requirements.
·
Identified OpEx – CapEx tradeoffs for an electricity lines
business.
·
Performed various substation growth and
reinforcement assessments.
·
Performed network physical and business
risk studies.
·
Compiled disaster recovery and business
continuity plans.
Pick
here
to download a profile of recent projects, or here
to contact Phil.
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.
Conferences & training courses
The following
conferences and training courses are planned...
· Electric
utility basics – Sacramento, 6th – 7th May 2013.
· Depreciation
fundamentals for utilities & energy companies – Denver, 6th
– 7th May 2013.
· Internal auditing
for utilities – Houston, 20th – 21st May 2013.
· Infrastructure, Investment &
Regulation Conference – Sydney, 30th – 31st May 2013.
· Derivatives
accounting for power & energy companies – Chicago, 12th – 13th
June 2013.
· ACCC / AER
Regulatory Conference – Brisbane, 25th – 26th July
2013.
· Fundamentals
of the NZ electricity industry – Auckland, 2nd – 3rd
September 2013.
· Fundamentals
of the NZ electricity industry – Wellington, 16th – 17th
September 2013.
· CIGRE
International Symposium – Auckland, 16th – 17th
September 2013.
Utility
Consultants takes no responsibility for the content of individual courses or
conferences, nor for any administrative or travel arrangements.
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.
·
Distribution Of Electricity (WT Henley,
the cable manufacturer)
·
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.
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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
contents of Pipes & Wires including any loss, damage or exposure to
offensive material from linking to any websites contained herein, or from any
republishing by a third-party whether authorised or not, nor
from any comments posted on Linked In, Face Book or similar by other parties.