From the
editor’s desk…
Welcome
to Pipes & Wires #137. First up we examine an unprecedented swing to the
political right in New Zealand, as what that means for energy policy. We then
examine 3 regulatory determinations, 2 in New Zealand and 1 in Ireland. We then
look at possible policy reform in Germany and the Australian NEM, the changing
generation fuel mix in Western Australia, and the on-going saga of muni’ising
the electric network in Boulder. This issue ends with a look at a policy shift
in California.
Recent client projects
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 from Utility
Consultants....
· Advising a major global investment bank
on the revenue and capital cost characteristics of the New Zealand generation
industry.
· Assessing the investment
characteristics of proposed CapEx increases to an investor-owned electric
network.
· Assessing two EDB’s asset management
practices against ISO 55000:2014.
· Assessing an EDB’s compliance with the
lines – generation separation requirements of the Electricity Industry Act
2010.
· Assessing an EDB’s compliance with the
Electricity Industry Participation Code.
· Compiling safe operating procedures for
a wide range of distribution switches.
· Advising an investor on the investment
characteristics and regulatory constraints of small hydro development and grid
connection.
· Reviewing the engineering aspects of an
EDB’s lines pricing methodology.
· Advising a major global consultancy on
specific features of emerging electricity transmission and distribution
regulatory regimes, including period length, potential for re-opening
determinations, caps & collars, total expenditure levels and incentive
mechanisms.
· Examining the economic efficiencies of
an EDB’s pricing methodologies.
· Advised on the wider philosophical and
potential tax issues of the way consumer discounts are paid by EDB’s.
· Prepared an independent engineer’s
report to justify proposed alternative asset lives.
· 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.
Matters for attention in NZ
Readers’
attention is drawn to the following matters…
· Revised standard NZS7901:2014 for
Safety Management Systems.
· Likely increased obligations for worker
safety.
· The Electricity Authority’s intention
to “improve distribution efficiency”.
Cool video clips
Symmetrical components made a whole
load easier
For
those who struggled to understand symmetrical components (and like me, still
do), this 1 minute video clip is well worth watching. In particular, observe how the
negative sequence voltages increase as the pointer swings the various phases
around (which effectively models the effect of swapping 2 phases) and shows why
large currents can flow if a connected load has a low negative sequence
impedance.
New Zealand
NZ – post-election energy policy
Introduction
Saturday
20th September saw a National-led government returned for a third term with sufficient numbers to govern
alone, and moreover with a very disillusioned and fragmented opposition that
appears unable to agree on key policy issues. This article examines where the
new government is likely to go with energy. And for those who are (still) puzzled
by the Mixed Member Proportional system, watch this cool video clip.
The NZ Power proposal
The Labour – Greens NZ Power proposal to establish a central
electricity buying agency that would have presumably bought all electricity at
a regulated price is dead in the water. When it seemed that Labour and the
Greens had about a 50:50 chance of winning the 2014 Election the markets
discounted the price of the listed generators, however those prices seemed to
bounce back as Labour and the Green stumbled in the pre-election polls and then
rose between 4% and 10% on the first post-election trading day.
Carbon tax
The
Greens proposed emissions levy and carbon pricing signals won’t be going ahead, but rather the
current policy of encouraging renewables as part of a balanced energy
mix will continue.
Freshwater reform
This
one seems a bit uncertain, which is concerning for a nation that generates
about 65% to 70% of its electricity from inland waterways. The National Policy Statement says that everyone has a right to
participate in resource management planning, which does represent a
continuation of the last 25 years shift away from the Crown monopoly that our
hydro generation is based on (the Electrical Motive-power Act 1896). A possible worst case scenario is
that resource consents might only be granted for short periods of time, in
which case who would build a long-lived asset like a hydro power station ??
The editor comments
A
great result for the energy sector, notwithstanding the uncertainties around
the freshwater. For further advice, pick here.
NZ – defining Transpower’s performance
measures for RCP2
Introduction
The
Commerce Commission recently released the decision and reasons paper for its’ Final Decision for
Transpower’s individual price-quality path (IPP) for 2015-2020 (also known as
RCP2). This article follows on from the examination of the Draft Decision that
was discussed in Pipes & Wires #134 by examining the decisions and reasons.
Regulatory framework
The
regulatory framework is set out in Subpart 7 of Part 4 of the Commerce Act 1986. This provides for the Commission to inter alia set an Individual
Price-Quality Path (IPP) for a supplier using any process and in any way it
thinks fit as long as the relevant Input Methodologies are used.
The performance measures
The
performance measures are as follows…
· 17 grid performance measures for which
about $10m of revenue will be at risk each year, including inter alia availability of circuits, number and duration of
unplanned interruptions.
· 6 asset health measures for which about
$2.9m of revenue will be at risk each year, including inter alia the number of towers painted per year, number of circuit
breakers commissioned, and the number of outdoor to indoor conversions
commissioned.
· 3 asset health measures for which there
is no associated revenue at risk, based around the change in average remaining
life of key asset categories.
Determination of costs to date
The
determination of costs to date include…
|
Parameter |
Proposal |
Draft
Decision |
Final
Decision |
|
OpEx |
$1,309.3m |
$1,237.5m |
$1,289.3m |
|
Base
CapEx |
$1,188.6m |
$1,055.3m |
$1,132.2m |
|
HVDC
availability |
98.5% |
98.5% |
98.5% |
|
HVAC
availability |
99.6% |
99.6% |
98.6% |
Next steps
At
the time of writing this article, the Commission is working on the revenue
component of the RCP2 Final Determination, and expects to publish that Final
Determination by 28th November 2014.
NZ – amending the Transpower Input
Methodologies (IM’s)
Introduction
The
Commerce Commission recently released the Transpower Input Methodologies Amendments Determination 2014, which amends two previous IM’s. This
article notes those amendments.
Regulatory framework
The
regulatory framework is Subpart 3 of Part 4 of the Commerce Act 1986. In particular, s52X requires that an amendment to an IM
requires a material change, the process set out in s52V applies.
The IM’s that have been amended
The
following 2 IM’s have been amended…
· Transpower Input Methodologies
Determination 2012 (NZCC 17).
· Transpower Capital Expenditure Input
Methodology Determination 2012 (NZCC 2).
The
detail of the amendments is complex, so those that really need to know should
download the whole Determination.
UK & Europe
Ireland – setting the allowed gas
transmission revenues
Introduction
The Commission
for Energy Regulation (CER) recently set the allowed revenue that will apply to Bord Gais Networks
(BGN) transmission pipelines for the gas 2014/15 year (ending on 30th
September 2015). This article examines that decision.
BGN’s gas transmission business
BGN’s
gas transmission business comprises 2,467km of high pressure
pipelines throughout Eire. These pipelines are supplied with gas by 2 pipelines
from Scotland, and also interconnect with Northern Ireland.
Regulatory framework
Key
features of the regulatory framework are…
· The overall regulatory framework is set
by Part 14 of the Gas
(Interim)(Regulation) Act, 2002 which provides inter alia for the CER to promulgate regulations for the
transmission of gas including terms, conditions and price.
· The context for this article is set by
the CER’s decision 12/196 of November 2012 which set BGN’s
transmission revenue at €998.5m for the PC3 period from 1st October
2012 to 30th September 2017.
Key features of the allowed revenue
decision
Key
features of the allowed revenue decision for 2014/15
gas year include…
· A mix of variations in pass-through
costs totaling €750,000, ranging from high council rates in Ireland and higher
EU Network Code compliance costs, but lower CO2 costs.
· An additional €1m for the migration of
various systems to Gaslink as the Transmission System Operator.
· A technical training and competency
allowance of €882,000 that was not finalised as part of the original PC3
decision.
· Return of €2.2m that was over-recovered
during previous years (mainly due to higher volume throughput in colder than
expected winters).
The
overall result will be a 5.5% reduction in the average transmission tariff.
Germany – further energy policy reforms
Introduction
Pipes & Wires #129 suggested that Germany’s “Energiewende” (the politically supervised shift
from nuclear and fossil to renewable) would be slowed to a more modest pace as
the steeply increasing cost of electricity became more apparent. This article
examines some recent amendments that took effect on 1st
August 2014.
Legal framework
The legal framework is the Erneuerbare Energien Gesetz (the
Renewable Energy Sources Act) which was originally enacted in 2000, but was
pre-dated by the Stromeinspeisungsgesetz (the Grid Feed-In Law) of 1991. The
Strom in turn was used as a model for the feed-in tariffs developed in many
other countries.
Key features of the EEG 2014
Key
features of the EEG include…
· Guaranteed fixed feed-in tariffs (FiT),
ostensibly to promote investment in renewables, will continue. The difference
between the FiT and the spot price will be funded by a surcharge on domestic
and non-exempt industrial customers. The FiT’s for 2014 have declined slightly
from the 2012 solar FiT’s, but are similar for wind, hydro and biomass.
· In order to comply with amended EU
guidelines on state aid, support for renewable generation will be tendered from
2017 onwards. Preliminary work is based on 600MW of solar being tendered in 2
or 3 blocks from 2015.
· Exemptions for energy-intensive industries
are likely to reduce, to ensure that those industries are not receiving state
aid that would be inconsistent with the EU principles of free movement of trade
and capital.
· Electricity for “own consumption” will
have to pay a surcharge, albeit at a reduced level.
So …
it will be interesting to see whether the movement to market mechanisms for
funding renewables will dampen investor enthusiasm.
Australia
Aus – proposed new rules for
distribution pricing
Introduction
Most
distribution network pricing methodologies contain anomalous features such as
recovery of fixed costs through variable prices, and time-averaging over
periods of peak and off-peak demand. This article examines a recent draft rule
change proposed by the Australian Energy Markets Commission that will set out significant changes
to the way distribution companies can structure their prices.
Regulatory framework for the rule
changes
The
regulatory framework includes…
· The National Electricity (South Australia) Act 1996, which is given effect in each
participating state in the NEM by application statutes. Part 1 defines the
National Electricity Objective, whilst Part 4 provides for the making of
regulations and rules.
· The National Electricity (South Australia) Regulations.
· The National Electricity Rules.
The
most significant feature of the regulatory framework is that that the AEMC can
only propose a rule change if it will satisfy the Objective of promoting
efficient investment in, and operation of, the electricity services for the
long term interests of customers.
The proposed rule changes
The
draft National Electricity Amendment (Distribution
Network Pricing Arrangements) Rule 2014 will impose a new pricing objective on
distribution companies requiring prices to reflect the business’ efficient
costs of providing services to each customer. One of the specific features of
the draft rule change is that it will require prices to individual customers to
more accurately reflect the costs those customers create.
The
draft rule change is very clear that it does not alter the overall allowable
revenue, only the method by which that revenue is gathered.
Reasons for the rule change
The
AEMC is concerned that changes in customer lifestyles and energy use
technologies mean that load profiles can be very different from the load
profiles assumed by legacy pricing methodologies (and of course, smart metering
means that we don’t actually need to assume anymore anyway). The draft rule
change quotes a couple of really interesting examples…
· A customer in Victoria with a 5kW air
conditioner creates about $1,000 per year of costs for the distribution company
but only pays about $300 per year in additional electricity costs. That
customer is therefore subsidised about $700 per year by those customers without
air conditioners.
· A north-facing 2.5kW solar panel in
South Australia reduces the distribution network costs by about $80 per year
but pays about $200 less per year (due to avoided kWh consumption) and is
therefore subsidised about $120 per year by customers without solar. If the
same solar panel was faced to the west so it generated during peak periods, the
distribution network costs would reduce by about $200 hence the subsidy would
reduce to about nil.
Current pricing
methodologies do not contain any incentives for using air conditioners more
thoughtfully or facing solar panels to the west.
Next steps
The AEMC will receive
submissions on the draft until 16th October 2014 and hopes to
release its final determination in late November 2014.
The editor comments
Economically
efficient tariffs are all fine, and indeed many electricity regulatory bodies
strive for that. My observation is that these tariffs are often overtaken by
other matters such as the practical requirement to limit the number of tariffs,
or political expediencies such as low fixed charge tariffs.
Aus – changing the generation mix in
the West
Introduction
Western
Australia has recently signaled a significant shift in generation fuel mix,
from coal to gas and diesel, which is also occurring against a shifting degree
of vertical integration. This article examines those trends.
Merging Verve and Synergy
Way
back in 2005 Pipes & Wires #42 and #45 examined the vertical disaggregation of
the old State Electricity Commission of Western Australia. Then in 2009 Pipes & Wires #86 examined the planned re-integration of
generation and retail which became a reality in 2013 when Verve and Synergy were amalgamated (Pipes & Wires #121).
The
merged entity is known as Synergy, which owned about 3,000 MW of
generation and supplied about 10,000 GWh per year (about 55% of WA’s
electricity).
The proposed plant closures and
openings
The
following plant closures and openings are noted…
· Synergy is closing the remaining
coal-fired unit at Kwinana both to reduce costs and also to limit
Synergy’s (formerly Verve’s) market share limit which corresponded to 3,000 MW.
· Horizon Power, in partnership with Contract Power
Australia, will build and operate 1 gas-fired and 5 diesel-powered
generators.
Changing the mix
In a
world focused on reducing CO2 emissions and separating lines and energy,
the substitution of diesel generation operated by a lines business for
coal-fired generation owned by a generator seems odd. It would appear that
there a couple of issues at work there…
· Synergy needed to reduce its share of
the market.
· Embedded (diesel) generation may avoid
transmission losses and network constraints.
· Diesel generation may provide more
start and load-following flexibility than coal.
North America
US – the continuing saga of muni’ising
Boulder
Introduction
Pipes & Wires #126 and #128 examined the City Of Boulder’s
(Colorado) plans to purchase
Xcel Energy’s distribution assets and run those
assets as a Muni. This article examines recent events.
Key events to date
Key
events to date include…
· In 2004 Boulder commissioned a report
which concluded that the City could feasibly purchase Xcel’s distribution assets and keep tariffs
comparable to Xcel’s.
· These plans were shelved in 2008 when
Xcel selected Boulder for its SmartGridCity program
· The shelved plans were dusted off in
2011 when negotiations to develop a wind farm broke down.
· The City planned a vote on the issue in
April 2012, with the expectation that the vote would be in favor of purchasing Xcel’s distribution business and running it
as a Muni.
· Boulder then planned a vote for April
2013 which would authorise the City to form a Muni and issue bonds to fund the
purchase of Xcel’s distribution assets providing that the Muni’s tariffs would
be no greater than Xcel’s at the time the Muni starts.
· In August 2013 the City voted 6 to 3 in
favor of forming a Muni, and additionally gave voters the opportunity to set an
upper limit on key costs of $214m and gave the City the power to file a
condemnation lawsuit if negotiations breakdown.
· In late October 2013 voters were asked to consider
the following 2 ballot questions (the “Yes on 310” question, backed by Xcel
Energy which aimed to limit the debt that the City could take on to form the
Muni, and the “2E” question, backed by the City). The final election results
revealed 66.5% support for “2E” but only 31.1 support for “Yes on 310”, which
supporters of the Muni claim as a double victory and evidence of increased
support since 2011.
Recent events
Not
surprisingly the issues being raised by both Boulder and Xcel are regulatory
rather than technical, and include…
· Various philosophical views on the interests
of democracy versus the rights of private corporations.
· What exactly the “fair price” for the
sale of the Xcel assets to Boulder might be, and whether it is agreed or imposed.
· The previously approved limit of $214m
that Boulder can spend.
· Disputes over jurisdiction amidst
claims that the Colorado Public Utilities Commission (PUC) has primary jurisdiction, and
unless the issues become legal rather than factual the Colorado Supreme Court
does not have any obvious jurisdiction.
· Because assets within the Boulder
municipal area also supply electric customers outside of Boulder, the impact of
muni’ising on those customers must also be considered. The PUC has asserted its
power as the jurisdictional authority over who may provide electric supply to
those non-Boulder customers.
· The proposal approved by voters
requires the muni to be fully operational by the end of 2016 otherwise Boulder
must seek further approval form voters. Advocates of muni’ising claim that Xcel
is trying to delay the process knowing that only a finite time period is
available.
So …
there are obviously some very complex legal issues to be worked through before a
muni can even be established. Pipes & Wires will comment further as
progress emerges.
US – assessing the value of embedded
generation
Introduction
Inclusion
of embedded generation into distribution planning models can be a thorny issue.
This article examines recent moves by the California
Public Utilities Commission that requires the use of marginal costs to assess the likely
effectiveness of embedded generation.
Legal framework of s769
The
legal framework for the PUC’s requirements is s769 of the Public Utilities Code. This s769 was added to the Code by Assembly Bill 327.
Key requirements of s769
The
requirements of s769 are inter alia…
· Each electric company must submit a
Distribution Resource Plan (DRP) to the PUC by 1st July 2015 that
identifies the optimal location for embedded generation.
· The DRP must evaluate localised costs
and benefits, including cost avoidance, safety and reliability.
· The DRP must set out tariff or contract
mechanisms by which embedded generation can be deployed.
· The DRP must include methods and
approaches that minimise the incremental costs of embedded generation.
· The PUC shall review the DRP’s, and may
amend a DRP to minimise overall distribution system costs and maximize customer
benefits. Recovery of spending necessary to implement the DRP is not a given,
but rather must be considered as part of the next price reset (rate case).
So,
all in all, electric companies will have to assess embedded generation on the
basis of marginal costs and benefits (which is probably what they are doing
anyway). What remains to be seen is whether the practical implementation of s769
will allow recovery of full economic costs.
General stuff
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. It looks really cool printed in color
as an A2 or A1 size.
Recently released book “Small
Hydroelectric Engineering Practice”
Well-known
hydroelectric engineer Bryan Leyland has recently published a book entitled
“Small Hydroelectric Engineering Practice”. This is a comprehensive reference
book covering all aspects of identifying, building and operating hydroelectric
schemes between 500kW and 50MW. Pick here for more details.
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...
· Fundamentals of the NZ
Electricity Industry – Auckland, 7th – 8th
October 2014.
· Africa Oil & Gas Expo –
Johannesburg, 9th – 10th October, 2014.
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…
· Distribution Of Electricity (WT Henley,
the cable manufacturer)
· 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,
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