From the
editor’s desk…
Welcome
to Pipes & Wires #138. This issue covers the following matters…
· Energy storage in the United States.
· A couple of regulatory decisions in New
Zealand.
· Generation policy and planning in
Germany.
· Gas market consolidation in France.
· Proposed electricity privatisation in
Australia.
So …
until next month, happy reading…
Matters for attention in NZ
Readers’
attention is drawn to the following matters…
· Revised standard NZS7901:2014 for
Safety Management Systems.
· Increased obligations for worker
safety.
· The Electricity Authority’s intention
to “improve distribution efficiency”.
Cool video clips
This
6 minute video clip shows the remote controlled gas turbine generator built by the South-Western Electricity
Board (now part of Western Power Distribution) in England in 1959. The technology is
fascinating.
North America
US – storing wind energy
Introduction
The
intermittent nature of wind energy is becoming an increasing problem in many
countries. This article examines the planned Pathfinder
Wind Energy project which includes a compressed air energy storage
(CAES) project to store wind-generated electricity until it is needed.
Key features of the project
The
key features of the overall project include…
· A 2,100MW wind farm spread over 600km2
of Platte County, Wyoming.
· The Zephyr Power Transmission Project, A 500kV HVDC line stretching about
1,370km from Chugwater, Wyoming to the Eldorado Valley, Nevada, from where
existing lines can transmit the electricity to Los Angeles and then to the
remainder of California.
· A 1,200MW compressed air energy storage facility part way along the Zephyr
HVDC line to store the energy until it is needed by California. The CAES would
be based on 4 underground vertical salt caverns near Delta, Utah each about
400m high and 90m in diameter and capable of storing a total of 60,000 MWh of
electricity.
The partners to the project
The
partners to the project include…
· Duke American Transmission, a joint
venture between Duke Energy and American
Transmission Co.
· Pathfinder, which includes Magnum
Energy and Dresser-Rand.
The costs and benefits of Pathfinder
All
this doesn’t come cheap … the final cost is expected to be about $8b. So what
about the benefits ? They include…
· Capturing low cost wind energy that
could save California electricity customers about $600m per year.
· Exploiting the negative correlation of
wind speeds between California and Wyoming.
Sounds
like an awesome project … the engineering alone seems fascinating !!!
US – mandating regionally coordinated
transmission grid planning
Introduction
Regionally
coordinated transmission grid planning sounds like a good idea … the whole idea
of minimsing total economic cost of building new transmission lines has a good
sound to it. This brief article examines the Federal Energy Regulatory
Commission’s (FERC) recently released Order 1000.
Regulatory framework
The
background regulatory framework is the Federal Power Act of 1935 which broadly gives the federal
government jurisdictional authority over “interstate electricity transmission
and wholesale power sales”.
Key features of Order 1000
The
FERC introduced Order 1000 in July 2011 which broadly requires public utility transmission providers (but excludes FERC-approved ISO’s or
RTO’s) to…
· Enroll in a regional transmission
planning process.
· Include a regional cost allocation
method for projects in the resulting regional transmission plan.
Enrolment
for non-public utility transmission providers is optional, however if they do
enroll they are subject to the regional cost allocation method.
Order
1000 was clarified and affirmed by Orders 1000-A and 1000-B, and then further affirmed in August 2014 by the
US Court of Appeals for Washington DC.
Implications for public utility
transmission providers
So
it appears that any electric company with interstate transmission lines that is
not already part of a FERC-approved ISO or RTO will need enroll in a regional
transmission planning process (which might end up looking like the former
Australian VENCorp or ESIPC agencies).
The
2nd step of constructing a regional cost allocation method is likely
to prove challenging, as there are always winners and losers amongst connected
grid users.
US – challenging feed-in tariffs in a
competitive supply arrangement
Introduction
The
saga of nett metering and feed-in tariffs continues. This article examines a
challenge to the nett metering law in the US state of Ohio.
The key issue
The
key issue is that whilst electric customers can choose their energy suppliers
(and in Ohio, it appears that 30% pf domestic customers and 80% of industrial
customers have), the feed-in tariff must be paid by the incumbent electric
company. Moreover, the cost of that feed-in tariff often cannot be adequately
recovered by the incumbent through its regulated tariffs.
The legal challenge
Challenges
to the Ohio statute have been bought by both AEP
Ohio and First Energy Corporation, who claim that the competitive
suppliers should have to pay the feed-in tariffs, not the incumbent ie. the
competitive supplier can capture the benefits but not the costs. To be clear,
AEP Ohio and First Energy have clearly stated that they do not oppose nett
metering.
For
its part, the Public Utilities Commission of Ohio (PUC) is arguing that the matter does
not fall into the Ohio Supreme Court’s jurisdiction. So … it will be interesting
to see where this goes, and whether the authorities will recognise that new
entrants must pick up their share of the costs.
New Zealand
NZ – the draft electricity default
price-quality path
Introduction
On
20th October 2014 the Commerce Commission released a draft default price-quality path (DPP) that is intended to apply to all
non-exempt electricity distribution businesses (EDB’s) for the regulatory
period 1st April 2015 to 31st March 2020.
Regulatory framework
The
regulatory framework is Part 4 of the Commerce Act 1986, in particular the following …
· Section 52D – meaning and application
of claw-back.
· Subpart 3 – input methodologies.
· Subpart 6 – default / customised
price-quality regulation.
· Subpart 9 – electricity line services.
Key features of the draft DPP
Key
features of the draft DPP include…
· Specifying the time windows during a
customised price-path (CPP) proposal can be submitted.
· Specifying the maximum allowable
revenue (MAR) for each EDB.
· Specifying the annual rate of change in
MAR.
· Specifying how the notional revenue is
to be calculated.
· Specifying how pass-through costs must be
calculated.
· Specifying how any changes in pricing
methodology or amalgamation of customer groups must be treated.
· Requiring the Commission to be notified
of a Major Transaction.
· Specifying the contents of an annual
compliance statement
The
Commission expects to release the final DPP by the end of November 2014.
NZ – setting the WACC for electricity
distribution
Introduction
The
Commerce Commission has recently determined the cost of capital that will apply to any customised
price path (CPP) application made by an electricity distribution businesses after
30th September 2014. This article examines the key features of that
determination.
Legal frameworks
This
WACC has been compiled pursuant to Clauses 5.3.22 to 5.3.29 of the Electricity Distribution Services Input Methodologies Determination 2012, which is made pursuant to Part 4 of the Commerce Act 1986.
Key features of the determination
The
Commission has determined the following WACC parameters…
|
Parameter |
3
year estimate |
4
year estimate |
5
year estimate |
|
Risk-free
rate |
3.91% |
4.00% |
4.09% |
|
Debt
premium |
1.45% |
1.55% |
1.65% |
|
Equity
beta |
0.61 |
0.61 |
0.61 |
|
Debt
issuance costs |
0.58% |
0.44% |
0.35% |
|
Leverage |
44% |
44% |
44% |
|
Cost
of debt |
5.94% |
5.99% |
6.09% |
|
Cost
of equity |
7.09% |
7.15% |
7.21% |
|
Midpoint
vanilla WACC |
6.58% |
6.64% |
6.72% |
Previous WACC decisions
Some
of the Commissions’ previous WACC decisions are as follows.
|
WACC
decision applies to |
Approx
date |
Mid-point
WACC |
75th
percentile WACC |
|
All
electricity CPP applications after 30/9/14 |
September
2014 |
Vanilla
6.58%, 6.64%, 6.72% |
|
|
Auckland,
Christchurch Airports for 2015 disclosure year |
July
2014 |
Vanilla
7.64% |
Vanilla
8.63% |
|
Vector,
GasNet for 2015 disclosure year |
July
2014 |
Vanilla
7.54% |
Vanilla
8.35% |
|
Transpower
for 2015 disclosure year |
July
2014 |
Vanilla
6.83% |
Vanilla
7.55% |
|
Wellington
Airport for 2015 disclosure year |
April
2014 |
Vanilla
7.70% |
|
|
EDB’s
for 2015 disclosure year |
April
2014 |
Vanilla
6.89% |
|
|
Powerco
gas CPP applications before 3/15 |
March
2014 |
Vanilla
5-year 7.54% |
Vanilla
5-year 8.35% |
|
Maui
pipeline (gas transmission) |
January
2014 |
Vanilla
7.64%, post-tax 6.85% |
|
|
Vector,
GasNet CPP applications before 12/14 |
December
2013 |
Vanilla
7.56% |
|
|
All
CPP applications before 30/9/14 |
September
2013 |
Vanilla
from 6.26% to 6.69% |
Vanilla
from 6.97% to 7.41% |
|
Transpower |
July
2013 |
|
Vanilla
6.85% , post-tax 6.17% |
|
Vector
gas distribution, GasNet |
July
2013 |
|
Vanilla
7.65%, post-tax 6.97% |
|
Auckland
& Christchurch airports |
July
2013 |
|
Vanilla
8.00%, post-tax 7.75% |
|
All
electricity distribution |
April
2013 |
|
Vanilla
6.83%, post-tax 6.14% |
|
Maui
pipeline (gas transmission) |
February
2013 |
|
Vanilla
7.46%, post-tax 6.80% |
|
All
gas distribution and gas transmission DPP’s |
December
2012 |
|
Vanilla
6.63% |
|
Vector,
GasNet CPP’s |
December
2012 |
Vanilla
6.39% (5 years) |
|
|
Powerco
gas distribution |
October
2012 |
Vanilla
6.83%, post-tax 6.12% |
|
NZ – amending the electricity
distribution services Input Methodology
Introduction
Pipes
& Wires #135 examined the Commerce Commission’s consultation paper on proposed
amendments to the Input Methodologies (IM) for electricity distribution services. This article examines the
Commission’s Determination Amendment that was published in late September
2014.
Legal framework for the IM
The
legal framework for the IM’s is Subpart 3 of Part 4 of the Commerce Act 1986. This subpart inter alia sets out the purpose of the IM’s, what issues they must
address, and the process for establishing and amending IM’s.
Principal amendment to the IM
The
principal amendment is the insertion of a new clause 4.4.10 which amends the
reference to “6 months” in clauses 4.4.1(1)(c), 4.4.3(c), 4.4.4(2)(b),
4.4.5(1)(a), 4.4.6(a) and 4.4.7(1)(b) to “5 months”.
NZ – amending the Transpower Input
Methodology
Introduction
Pipes
& Wires #134 examined the Commerce Commissions’ consultation paper proposing amendments to two of the Input Methodologies (IM’s) that apply
to Transpower. This article examines the Commission’s Determination Amendment that was published in late September
2014
Legal framework
Transpower’s
regulatory framework is established by Part 4 of the Commerce Act 1986, viz…
· Subpart 3, which defines inter alia the purpose of IM’s, the matters that must be addressed
by the IM’s, and the process that the Commission must follow in determining the
IM’s.
· Subpart 7, which provides for an Individual
Price-Quality Path to be applied as the Commission sees fit subject to
correctly applying all applicable IM’s.
· Subpart 9, which inter alia subjects all electricity distribution businesses to
information disclosure.
The IM’s that the Commission proposes
to amend
The
Commission proposes to amend the following two IM’s…
· Transpower Input Methodologies Determination 2012 (NZCC 17).
· Transpower Capital Expenditure Input Methodology Determination 2012 (NZCC 2).
Principal amendment to IM (NZCC #17)
Similar
to the principal amendment to the Electricity Distribution Services IM, the
principal amendment to NZCC #17 is the insertion of a new clause 3.5.11 which
amends the reference to “6 months” in clauses 3.5.1(1)(c), 3.5.3(c),
3.5.4(2)(b), 3.5.5(1)(a), 3.5.6(a) and 3.5.7(1)(b) to “5 months”.
UK & Europe
Germany – closing generation capacity
Introduction
We’ve
seen clearly how Germany’s Erneuerbare Energien Gesetz
(Renewable Energy Sources Act) is prioritising renewable generation, with the
unsurprising consequence of fossil and nuclear generation being increasingly
relegated to peaking plant that struggles to earn its keep in a market that
pays for generated kWh. This article examines the requirement for generation
plant closures to be approved by the Bundesnetzagentur (the Federal
Energy Regulator).
Regulatory
framework
The regulatory framework for seeking approval to
close generation capacity is set out in s13a of
the Gesetz uber die
Elektrizitats und Gasversorgung (Law
on Electricity & Gas Supply). This requires generation owners to seek the approval
of the Bund to close generation capacity.
Generation closures
Over
the last few years Germany has been closing coal and nuclear generation, so
let’s try to wrap some numbers around this to gain a sense of how pressing this
issue might really be. Germany has about 170,000MW of installed generation
capacity … that’s a convenient enough baseline figure to keep in mind.
The
figure that probably grabs the most exposure is the planned shutdown of the
nuclear stations by 2022, which amounts to about 12,000MW. As of September 2014
the Bund has applications for closure for about 7,740MW of capacity. So that is
somewhere around about 18,000MW of generation to be closed over the next 8
years or so. If we now consider that Germany has about 70,000MW of wind and
solar and then apply a capacity factor of say 0.5 we could conclude that only
about 35,000MW of that wind and solar capacity is firm (maybe I’m being
generous here).
Working
downwards from the baseline of 170,000MW, we end up with something like
120,000MW of firm capacity by 2022, which seems a bit scary.
The Bund can refuse closure
The
Bund can refuse to allow closure if generation is deemed critical to grid
stability, and indeed 7 units (all in southern Germany) have been deemed
critical. Hence the owners will be refused approval to close them, and will be
paid compensation to keep them running.
Possible implications
The
number of grid stability emergencies in Germany has increased significantly
over the last few years due to both the increasing presence of renewables and
the Erneuerbare Energien Gesetz requirement
to prioritise the dispatch of those renewables. Moreover, the big 4 generators
(E.On, RWE, Vattenfall and EnBW) seem reluctant to continue to maintain
coal-fired generation that is being increasingly shut out of the market.
So it would seem that Germany’s electricity
supply system is going to face continued doubtful security, and possibly a
further layer of costs to keep thermal plant on stand-by.
France – consolidating the gas markets
Introduction
Over
the years Pipes & Wires has briefly examined both the consolidation of
France’s high pressure gas transmission markets and the features of the ATRT5
tariff. This article examines the Commission
de Régulation de l’Énergie’s (CRE) recent deliberation to establish a
single market place.
The key issues
The
3 high pressure gas balancing zones that were introduced on 1st
January 2009 led to the following difficulties…
· Access to the south of France remains
difficult, with no access for the Fos-sur-Mer LNG terminal.
· The desire to interconnect with the
Spanish gas transmission system.
· The need to strengthen gas import
capacity from North Africa.
The Gascogne-Midi project
The
Gascogne-Midi project will comprise €171m of investment as follows…
· TGIF will build a new compressor
station at Barbaira, and a new segment of pipeline.
· GRTgaz will modify the Cruzy gas
station, and change the direction of gas flow at Saint Martin de Crau.
The
key benefits will be improved transmission capacity from Spain to France, which
will be important if Europe increases it LNG importation.
Tariff amendments
At
the time of writing, the CRE is expecting to allow the 3% WACC premium embodied
in the ATRT5 tariff framework to incentivise this investment.
Australia
Queensland – privatising the
electricity networks
Introduction
Privatising
electricity assets seems to be always close at hand as Australia’s state
governments come under increasing pressure to both improve efficiency and
release funding for health and transport. This article examines the Queensland
government’s recent proposal to offer long-term leases of the transmission grid
and the 2 distribution networks.
The assets involved
The
3 following electricity assets are involved…
· Electricity transmission grid owner PowerLink.
· Electricity distribution network owner Energex (south-east Queensland).
· Electricity distribution network owner Ergon Energy (remainder of the state).
The proposed lease arrangements
The
state governments’ plan is to offer long-term leases of the 3 assets, possibly
for either 50 years with an option for a further 49 years, or simply for 99
years (some might recall that this seems similar to the 200 year lease
arrangement that SA Power
Networks operates under).
There
are 2 main reasons why a lease arrangement might be considered…
· Outright sale is simply too hard
politically, noting that Queensland has a very vigorous trade union movement.
· Sometimes legislation prohibits the
outright sale of the assets (as it does in South Australia).
The opposition
Not
surprisingly, opposition has come from the trade unions, who have raised the
following concerns…
· Jobs will be lost.
· Supply reliability and public safety
will inevitably suffer.
· Electricity prices will rise,
especially in rural areas.
In
regard to the last 2 items, the experience in Victoria at least is quite the
opposite … supply reliability has been maintained and electric lines charges
have declined.
Next steps
The
state elections must be held by 20th June 2015, and it is expected
that the election will be a referendum on leasing state assets. The Liberal-National Party has already unanimously supported the
lease plan, and hence a win at the polls for the LNP will mean that the leasing
process will proceed.
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.
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...
· 21st Africa Oil Week, Cape Town, 3rd – 7th November 2014.
· Fundamentals of the NZ electricity industry, Wellington, 16th – 17th March 2015.
· Fundamentals of the NZ electricity industry, Auckland, 20th – 21st April 2015.
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
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