From the
editor’s desk…
Welcome
to Pipes & Wires #146. This issue includes wider industry sector and
geographical coverage, and starts with a couple of regulatory decisions from Australia
and New Zealand. We then examine the use of batteries to substitute for
temporary diesel generators, and the structural separation of a large electric
company in the US. We then look at a couple of climate change policy issues and
their possible impact on the electricity sector, and then look at possible
nuclear stations in South Africa. This issue then concludes with a quick note
on a merger appeal.
Matters for attention in NZ
Readers’
attention is drawn to the following matters…
· The Health
and Safety Reform Bill has now passed into law as the Health
and Safety at Work Act and will come into effect on 4th April 2016.
· Changes to the requirements for connecting embedded generation to distribution.
· Increasing interest in ISO 55000:2014 in regard to asset management practices and systems, and
the associated withdrawal of BSI PAS 55:2008.
· Revised standard NZS 7901:2014 for Safety Management
Systems.
Regulatory decisions
Aus – gas under pressure
Introduction
APT Pipelines (NT) Pty Ltd recently submitted its proposed Access Arrangement for the Amadeus Gas Pipeline to the Australian Energy
Regulator (AER) for the regulatory period 1st July 2016 to
30th June 2021. This article examines the proposed Arrangement to
set some context for examining the AER’s draft and final decisions.
A bit about the Amadeus Gas Pipeline (AGP)
The
AGP is a 1,629 km pipeline (including laterals) that supplies gas from the
offshore Blacktip gas field southwards to Darwin and then on to Alice Springs.
The pipeline varies in diameter from 350mm down to 100mm, and was completed in
1987.
The regulatory framework
The
broad regulatory framework is the National Gas Law, which provides for the National Gas Rules to be promulgated. In particular Part 8 sets out the requirements for the pipeline owners proposed
Access Arrangement, along with how the AER must evaluate that Arrangement.
Key features of the Access Arrangement
The
following key features of the Access Arrangement are noted for comparison as
the AER’s evaluation progresses…
|
Parameter |
Proposal |
Draft
determination |
Revised
proposal |
Final
determination |
|
CapEx |
$29.9m |
|
|
|
|
Opening
RAB |
$120.6m |
|
|
|
|
OpEx |
$62.7m |
|
|
|
|
Nominal
vanilla WACC |
8.3% |
|
|
|
|
Revenue |
$110.4m |
|
|
|
Pipes
& Wires will comment further as the AER decisions emerge.
NZ – determining the electricity distribution WACC
Introduction
The
Commerce Commission recently released its WACC determination that will apply to all electricity distribution
customised price-path (CPP) applications made on or after the 30th
September 2015. This article examines the key features of that
determination.
Regulatory framework
The
regulatory framework for setting the WACC is set out in clause 5.3.28 of the Commerce Act (Electricity Distribution Services Input Methodologies)
Determination 2010.
Key features of the WACC determination
Key
features of the determination include…
|
Pre-tax
vanilla WACC |
3
years |
4
years |
5
years |
|
Mid-point |
5.47% |
5.49% |
5.57% |
|
67th
percentile |
5.94% |
5.96% |
6.04% |
NZ - previous WACC decisions
Some
of the Commissions’ previous WACC decisions are as follows.
|
WACC
decision applies to |
Approx
date |
Mid-point
WACC |
75th
(or 67th) percentile WACC |
|
All
electricity CPP’s after 30th September 2015. |
September
2015 |
Post-tax
vanilla 5.47% to 5.57% |
Post-tax
vanilla 5.94% to 6.04%. |
|
Vector
and Powerco gas pipelines for year ending 30th June 2016. |
July
2015 |
Vanilla
6.65%. |
Vanilla
75th percentile 7.46%. |
|
Transpower
for year ending 30th June 2016 |
July
2015 |
Vanilla
5.95%. |
Vanilla
67th percentile 6.41%. |
|
Maui
CPP application before June 2016 |
June
2015 |
Vanilla
6.63% to 6.71%. |
Vanilla
67th percentile 7.16% to 7.23%. |
|
All
electricity distribution for year starting on 1st April 2015. |
April
2015 |
Vanilla
6.02%, post-tax 5.37%. |
Vanilla
6.49%, post-tax 5.84%. |
|
Wellington
Airport for year starting on 1st April 2015. |
April
2015 |
Vanilla
6.93%, post-tax 6.71%. |
Vanilla
7.91%, post-tax 7.69%. |
|
Powerco
gas CPP application before April 2016. |
March
2015 |
Vanilla
6.70% to 6.72%. |
Vanilla
7.23% to 7.25%. |
|
Maui
Developments for 2016 disclosure year |
January
2015 |
Vanilla
7.08%. |
Vanilla
7.89%. |
|
Vector,
GasNet CPP application before December 2015. |
December
2014 |
Vanilla
7.11%, 7.14%, 7.22%. |
|
|
All
electricity CPP applications after 30th September 2014. |
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 March 2015. |
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 December 2014. |
December
2013 |
Vanilla
7.56%. |
|
|
All
CPP applications before 30th September 2014 |
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%. |
|
Aus – appealing the NSW and ACT revenue determinations
Introduction
Pipes & Wires #143 examined the final electricity distribution revenue
determinations for the Australian state of NSW and for the Australian Capital Territory
(ACT) that were handed down in April 2015. This article notes the appeal of
those determinations to the Australian
Competition Tribunal (Tribunal) to set some context for the Tribunal’s final
decisions.
The revenue determinations
All
four determinations resulted in significant revenue reductions from those
proposed…
|
Company |
Proposed
revenue |
Final
determination |
Final
as a percentage of proposal |
|
ActewAGL |
$892m |
$591m |
68% |
|
$12,189m |
$6,576m |
67% |
|
|
$5,256m |
$3,183m |
72% |
|
|
$6,824m |
$3,826m |
69% |
The appeals to the Tribunal
On 30th
June 2015 the 4 electricity distributors applied to the Tribunal for a review
of the AER’s determinations, which was granted on 17th July 2015.
The basis of the appeals is that the AER made material errors in determining
key components of the determinations.
Legal framework for the appeals
The
legal framework for the appeals is set out in s71B of the National Electricity Law.
Next steps
Pipes
& Wires will comment further once the Tribunal publishes its decisions.
Cool video clip…
This quaint video from the Cleveland Electric Illuminating Company in 1956 serves as a reminder of how electricity used to be. Apart from the
obvious absence of ICT and PPE things seem pretty much the same today.
Solar, batteries & nett metering
US – substituting batteries for diesel generators
Introduction
We’re all familiar
with how the increasing capacity and declining costs of battery technologies is
expanding the range of uses for batteries, typically in permanent situations.
This short article examines Consolidated Edison’s (ConEd) substitution of 500kW Lithium Ion batteries for temporary
diesel generators.
What ConEd are doing
Like many other
electric companies, ConEd has previously used diesel generators to continue
supply during outages, provide peak kW’s, or defer network investment. As part
of a pilot project in conjunction with the New York State
Energy Research & Development Authority, ConEd has been developing a battery roll-out program to replace the
use of diesel generators. Field trials will commence soon, and ConEd expects to
obtain the results of those trials around April 2016.
The specific technologies
The Transportable Energy Storage System is based on a 500kW Lithium-Ion (Li-On) battery with a capacity of
800kWh, and is being developed in conjunction with Canadian battery
manufacturer Electrovaya. The battery characteristics have been designed to emulate a diesel
generators’ characteristics.
Key advantages of batteries over diesel
Diesel generators
are heavy, noisy and .… let’s face it …. smelly, whilst batteries are quiet and
don’t smell. That makes for less public impact and disruption for temporary,
street-side supplies. Brilliant…
Industry structural changes
US – separating renewable and fossil generation
Introduction
NRG Energy recently announced that it would separate its renewable
generation activities into a separate business as part of the NRG Reset
program. This article examines the key features of that program.
A bit about NRG Energy
NRG is
one of the giant electric companies in the United States, supplying 3,000,000
customers across all 50 states and Washington DC. NRG owns and operates about 50,000 MW of gas, coal, oil, nuclear, wind and solar generation
across the US. Annual revenues are about $15.8b, and EBITDA is about $2.9b.
The planned business separation
NRG
will separate its renewable and electric vehicle charging businesses into a business to be called “GreenCo” whilst the legacy
generation, wholesale and retail businesses will remain in a business called
NRG Yield. The separation is expected to be completed by 1st January
2016.
What NRG hopes to achieve by separating
Most
of us would appreciate that renewable and fossil generation businesses have
different investment characteristics and are also at very different phases of
their life cycles ie. renewables are consuming cash, whilst fossil generation
tends to be generating cash. In addition to this issue, NRG hopes to achieve
the following…
· Separation of high growth activities from low-growth (yield)
activities.
· Better separation of the differing strategic drivers for
each business.
· Making the renewable business more nimble and lower cost.
· Separation of activities that have differing costs of
capital.
· Responding to societal expectations of “clean, green
energy”.
The editor comments
Most
of us appreciate that investors will have definite preferences for yield and
growth stocks. It appears that those preferences might increasingly be based on
investor preferences for renewable energy.
Climate change
US – adopting an aggressive approach to CO2
emission reductions
Introduction
A bill
aimed at aggressively reducing CO2 emissions by at least 34% by 2025
was recently introduced to the US Senate by the Senate Democrat wing of the Energy &
Natural Resources Committee. This article examines the American Energy Innovation Act 2015.
The current emission reduction target
The
current administration’s emission reduction target is to reduce emissions to
around 72% of the 2005 emissions by 2030. The target proposed in the Act is
about 66% of 2005 emissions by 2025.
Key features of the bill
The
bill is very broad, and certainly covers a lot more than just emissions
reduction. Key features include…
· Promote customer access to billing and consumption data.
· Requiring the Federal Trade Commission to investigate whether network interconnection practices
are impeding the roll-out of embedded generation.
· Providing for emergency cybersecurity regulations, and
allowing electric companies to recover the cost of compliance.
· Requiring a study of capacity market outcomes in regional
markets.
· Providing for a more coordinated federal response to
possible coal supply shortages.
· Providing for more extensive information to be gathered on
oil and gas reserves.
· Requires RTO’s to report on barriers to embedded generation.
The political context
Political
comment suggests that the Act doesn’t have a dog’s show of passing through the
Republican-controlled Congress, so it appears that the Act is more of an
awareness gathering tool ahead of the 2016 presidential election. The Act’s
announcement was apparently also timed to coincide with Pope Francis’ (who has become well known for broadening the papal
pronouncements to include climate change) visit to the United States.
The likely impact on the electricity sector
At
first read, it would seem that there will be more minuses than pluses for the
electricity sector. Sure there will be provision for cost recovery around additional
cyber security, but on the whole the industry would be scrutinised and examined
by many government agencies ostensibly to find out why there isn’t more
embedded generation.
Aus – aligning energy policy to climate change policy
Introduction
For
those who actually noticed, Australia had a change in Prime Minister in mid-September. This short article examines inter alia the replacement of Ian Macfarlane as Minister of Resources & Energy by Josh Frydenberg, and whether we might expect any significant changes in
thinking.
Frydenberg’s political career to date
It is
noted that Frydenberg was previously the PM’s Parliamentary Secretary with
special responsibility for the government’s deregulation agenda.
Where might Australia’s energy policy go ??
It’s
obviously early days, so the top-tier issues like ministerial re-assignments
are dominating the media at the moment. However the following points are of
interest…
· Although Turnbull has pledged to stick with the Direct Action climate plan, Abbott’s proposed abolition of 2 renewable energy agencies
will be abandoned.
· Various clean energy agencies appear to be set for
consolidation, and will report to the Minister for the Environment.
· Frydenberg was an open and keen supporter of nuclear power,
and also supports shale gas.
· Several former ministers (Macfarlane, Baldwin and Hockey) who didn’t think much of wind, solar or climate science
are gone.
The obvious signs of policy shifts begin to emerge
Two
weeks after the change in Prime Minister, it appears that the Clean Energy Finance Corporation (CEFC) will have its mandate widened to invest in
large-scale wind farms. Readers will remember that Tony Abbott wanted to
abolish both the CEFC and the Australian
Renewable Energy Agency, whilst his ministers instructeded the CEFC to direct
investment away from wind and rooftop solar.
We
might therefore conclude that Turnbull’s government is likely to significantly
align energy policy to a man-made climate change view.
Energy policy & markets
South Africa – building the next nuclear station
Introduction
Back
in late 2011, Pipes & Wires #107 examined the South Africa’s decision to approve 9,600 MW of
nuclear generation. This article examines recent movements on that issue.
Where the policy got to
In late 2011, South African Energy Minister Dipuo
Peters signed off a
proposal for 9,600MW of nuclear capacity as part of an anticipated 42,000 MW of
new capacity to be built by 2030. Commissioning of the nuclear plants was
forecast for 2024 or 2025.
Recent moves
Talk
of nuclear power has erupted into the media, and not surprisingly various
competing voices are clamoring to have their say. Those voices range from the
anti-nuclear brigade saying “no way”, to Japanese officials who were present at
Fukushima expressing caution, to other factions saying that South Africa needs
reliable generation that is not coal-fired. So the pressing issue is to make
sense of those concerns and achieve a workable balance.
So where might South Africa go with its nuclear program ??
The
emerging picture of nuclear power contains some very obvious themes…
· It tends to be very expensive, with final costs often double
or triple the initial estimates.
· Some form of guaranteed minimum price is required by the developers.
These have proved to be politically sensitive in the UK and in Europe, and
there is nothing to suggest it wouldn’t be in South Africa.
· Public safety always remains a concern, despite the 3 most
memorable nuclear power station accidents arguably resulting from poor risk
management.
· Politicians will always nit-pick.
Like
it or not, the major unresolved issues around nuclear power are political and
economic (and are certainly not technical). The South African government and its
society at large will need to do some hard thinking and reach a consensus on those
political and economic issues to come close to achieving a 2025 commissioning
date (which already looks like 2030).
Aus – increasing investment certainty for renewables
Introduction
We all
appreciate the importance of investment certainty. This rant and rave from me
notes recent moves in South Australia to improve investor confidence in the
renewable energy industry, and contrasts this with the declining investment
certainty offered to the legacy electricity supply chain with a view to
encouraging policy makers to level the playing field.
South Australia’s recent moves
A key
feature of the new regulations will allow a wind farm developer to apply for a
25 year license to build a wind farm on crown land, with an option for a
further 25 year renewal. A couple of wider points include…
· There is a similar trend with setting long-term feed-in
tariffs for rooftop solar to “provide investor confidence”.
· Given the uncertainty of market prices going forward,
providing certain returns (ie. sale prices) to one segment of generation will
inevitably require a subsidy from other segments and ultimately from electric
customers through their monthly bill.
· There is the possibility of reduced renewal periods for
hydro consents.
· There is an increasingly uncertain policy environment that
makes it difficult to predict grid and network costs for even 5 years.
The importance of investment certainty
Efficient
investment in any sector requires the investor to have confidence that they
will earn a long-term return that exceeds their cost of capital … what other
motivation would there be for investing ??
The disconnect between renewables and the legacy supply
chain
What I
really want to tackle in this article is the disconnect between increased
certainty for renewables on the one hand, and declining certainty for the
legacy supply chain on the other hand. I’d really encourage policy makers and
regulators to remember where most of our electricity comes from, and ensure that
the key elements of the legacy supply chain such as thermal and hydro
generation, transmission and distribution get equivalent recognition of the
need for investment certainty.
Mergers & acquisitions
US – Exelon and Pepco plan to appeal Washington DC PSC’s
rejection
Introduction
Pipes & Wires #145 noted that Exelon and Pepco obtained regulatory approval from 5 of the 6 state
regulators for their planned merger, whilst the Washington DC
Public Service Commission (PSC) rejected the merger. This article briefly notes
Exelon and Pepco’s plans to appeal that rejection.
The plan to appeal
In
late September a joint statement was issued that Exelon and Pepco believe their
merger plan is in the public interest, and they will continue working to
complete the merger. Exelon has filed a request for a re-hearing with the
Washington DC PSC, and a result could be expected within a month or 2.
Pipes
& Wires will comment as the re-hearing process progresses.
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....
· Facilitating a board workshop on the likely impact of solar
on distribution.
· 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 three 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.
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...
· No events scheduled.
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…
· Economic Operation Of Power Systems (Kirchmayer).
· 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.
Cool stuff
Newly published book – “Keeping The Lights On”
Well-known
electricity historian and author Helen Reilly has recently published her latest
book “Keeping The Lights On – The History Of System Operations In New Zealand
1939 – 2013”. Pick here to order your copy for only $46.50 from Grid Heritage. It’s
a thoroughly good read, and complements Helen’s previous book “Connecting The
Country”.
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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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