From the
editor’s desk…
Welcome
to Pipes & Wires #148. This issue begins with the successful conclusion of
a couple of significant asset sales, and then looks at the defeat of some
embedded generation legislation in New Zealand. We then look at 2 regulatory
determinations in Australia, and conclude this issue with a look at a wide
range of energy policy and market issues in New Zealand, the UK and the United
States.
I’d
also like to wish you and yours a Merry Christmas and a Happy New Year. Pipes
& Wires will hopefully return in February 2016.
Mergers & acquisitions
NZ – Vector sells its gas pipeline businesses
Introduction
Auckland-based
pipes & wires company Vector recently announced the sale of parts of its gas pipeline
business to First State Funds. This article examines that asset sale.
The assets involved
There
were two key assets involved…
· The gas transmission business, comprising 3,400km of
high-pressure pipelines.
· The non-Auckland gas distribution business, comprising
7,000km of distribution pipelines supplying 163,000 connected customers in over
30 North Island towns.
These
have been packaged up as Vector Gas Ltd.
The final deal
The
final deal will see all the shares in Vector Gas Ltd sold to First State Funds
for $952.5m, which will result in a gain of $167m. Vector expects to complete
the deal by 31st March 2016 subject to approval by both shareholders
and the Overseas Investment Office.
Vector’s strategy
What
do we make of Vector’s strategy ?? This is the second major transaction (the
first being the sale of the Wellington electricity distribution business in
2008) from which we might imply their strategy. Key features of that strategy
include…
· Migrating capital towards less regulated businesses.
· Concentrating on the high-growth Auckland electricity and
gas markets.
· Exiting businesses with high capital expenditure forecasts.
· Obtaining access to further energy investment and operation
opportunities.
Aus – a winner for TransGrid emerges
Introduction
Pipes & Wires #144 examined the NSW Government’s process of leasing its
electricity transmission business, TransGrid, for 99 years. This article notes the winning bid for the
lease by a consortium led by Hastings Funds
Management.
A bit about TransGrid
TransGrid owns and
operates the electricity transmission grid throughout the state of NSW, and was
100% owned by the NSW government. TransGrid operates 12,900km of lines and 99
substations and switching stations at 132kV, 220kV, 330kV and 500kV.
The successful bidder
The
successful bidder for the 99 year lease was a consortium led by Hastings Funds Management in association with Spark
Infrastructure, the Abu Dhabi Investment Authority, Canada’s Caisse de Depot et Placement Quebec, and Wren House Infrastructure with a bid of $10.258b.
The
other short-listed bidders included…
· State Grid
Corporation of China in association with Macquarie Bank.
· The Australian Super Fund in association with the Canadian Pension Plan Investment Board.
The bidding process
Pipes
& Wires #144 noted that bidders were expected to offer between 1.2x and 1.5x TransGrid’s regulatory asset base (RAB) of $6b ie. between
about $7.2b and $9b. The bidding appears to have been
intense, with other parties thought to have bid around $9.5b to $10b.
Pipes
& Wires will comment further as the NSW electricity distribution business
lease process progresses.
NZ – Maui owners look to sell Maui Pipeline
Introduction
Following
intense interest in Vector’s gas transmission and non-Auckland gas distribution
businesses, it was really not surprising that the owners of the Maui Pipeline
have also considered selling. This article examines a possible sale.
The pipeline asset
The
Maui Pipeline runs 307km from Oaonui (near New Plymouth) to the Huntly Power Station, and is of welded steel construction between 850mm and
750mm diameter. About 55% of the gas transported goes to 3 major industrial
users (the 2 Methanex plants, and Huntly Power Station).
The pipeline owners
The
Maui Pipeline is jointly owned by Shell, OMV New Zealand Ltd and Todd Petroleum
Mining Ltd which operates through the joint venture company Maui
Development Ltd. Maui Development contracts out the three key functions of
Commercial Operator (performed by Transact), System Operator (Vector Gas) and
Technical Operator (also Vector Gas).
First State Funds as a possible buyer
Following
on from First State Funds successful purchase of Vector Gas, it would seem likely that they would also be interested in
the Maui Pipeline to extract vertical and horizontal integration synergies. It
would seem unlikely that the other rumored bidders would be able to extract
similar synergies, hence they may simply be seeking a more favorable investment
destination.
Regulatory implications of a common owner of both
transmission pipelines
Given
that both the Maui Pipeline and the (soon to be) First State Funds gas
transmission pipeline are both revenue regulated common ownership may not be
quite the issue it appears to be. What may be an issue is the possibility of
anti-competitive behavior around access to other connected users.
Blast from the past…
This time-lapse video of the Hoover Dam being built is worth a look at, which appears to cover the period from
June 1933 to May 1935. To give some perspective of the size of the dam, each 18
ton bucket of concrete raised the height only 1 inch.
Emerging technologies
NZ – solar energy bill defeated at the First Reading
Introduction
Pipes & Wires #145 examined the introduction of the Electricity Industry (Small-Scale Renewable Distributed Generation)
Amendment Bill. This article notes the Bill’s voting down in Parliament on
11th November 2015.
Purpose of the Bill
The
Bill was designed to overcome perceived entry barriers to small-scale
distributed generation by amending various clauses of the Electricity Industry Act 2010 and in particular regulate the price paid by a retailer for
exported electricity.
Progress on the Bill
As
noted in Pipes & Wires #147, the Bill got its First Reading in October 2015. That First Reading was concluded on 11th
November 2015 and resulted in the Bill being voted down by 61 to 60.
Although the close
vote would suggest a high level of support for the Bill, it is understood that
at least some Member’s only voted for the Bill in order for it to proceed to
the Committee stage where expert advice could be called for. Issues raised as
part of the Bill’s progress include…
· That the Bill would provide subsidies for small-scale
renewables (Dunne – United Future).
· A concession that rooftop solar will not be economic for
many customers (Nash – Labour).
· The steady increase in rooftop solar suggests that entry
barriers are not as high as claimed (Hudson – National).
Regulatory decisions
Victoria – progress on the 2016-2020 revenue determinations
Introduction
Pipes & Wires #145 examined the electricity distribution Regulatory Proposals (rate
cases) submitted to the Australian Energy Regulator (AER) for the 5 year regulatory period starting on 1st
January 2016, and noted the Initial Proposals. This article examines AER’s
Preliminary Decisions.
The regulatory framework
The
regulatory framework has its basis in s7 of the National Electricity Law, which states the National Electricity Objective which is inter alia to promote efficient
investment in electricity services for the long-term benefit of consumers. Chapter 6 of the National Electricity Rules sets out the details for economic regulation of distribution
services.
Key features of the process to date (AusNet Services)
Key
features of the process to date include…
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
Total
OpEx |
$1,356m |
$1,191m |
|
|
Total
CapEx |
$1,964m |
$1,471m |
|
|
Opening
RAB |
$3,547m |
$3,423m |
|
|
Regulatory
depreciation |
$478m |
$369m |
|
|
Unsmoothed
revenue |
$3,567m |
$2,887m |
|
|
P0 |
-6.3% |
0% |
|
|
X |
0% |
8.12% |
|
|
Key features of the process to date (CitiPower)
Key
features of the process to date include…
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
Total
OpEx |
$502m |
$446m |
|
|
Total
CapEx |
$995m |
$659m |
|
|
Opening
RAB |
$1,804m |
$1,795m |
|
|
Regulatory
depreciation |
$297m |
$305m |
|
|
Unsmoothed
revenue |
$1,718m |
$1,418m |
|
|
P0 |
0.12% |
6.75% |
|
|
X |
-3.5% |
6.75%, -0.45% |
|
|
Key features of the process to date (Jemena)
Key
features of the process to date include…
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
Total
OpEx |
$556m |
$421m |
|
|
Total
CapEx |
$856m |
$671m |
|
|
Opening
RAB |
$1,311m |
$1,187m |
|
|
Regulatory
depreciation |
$287m |
$238m |
|
|
Unsmoothed
revenue |
$1,465m |
$1,167m |
|
|
P0 |
-13% |
9.18% |
|
|
X |
About -1% |
Varies |
|
|
Key features of the process to date (Powercor)
Key
features of the process to date include…
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
Total
OpEx |
$1,334m |
$1,266m |
|
|
Total
CapEx |
$2,331m |
$1,610m |
|
|
Opening
RAB |
$3,363m |
$3,344m |
|
|
Regulatory
depreciation |
$124m |
$503m |
|
|
Unsmoothed
revenue |
$3,662m |
$3,098m |
|
|
P0 |
3.6% |
7.96% |
|
|
X |
-3% |
7.96%, -0.75% |
|
|
Key features of the process to date (United Energy)
Key
features of the process to date include…
Parameter |
Initial
Proposal ($
nominal) |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
Total
OpEx |
$800m |
$711m |
|
|
Total
CapEx |
$1,195m |
$815m |
|
|
Opening
RAB |
$2,189m |
$2,052m |
|
|
Regulatory
depreciation |
$640m |
$315m |
|
|
Unsmoothed
revenue |
$2,150m |
$1,841m |
|
|
P0 |
-7.19% |
8.72% |
|
|
X |
0% |
8.72%, 0% |
|
|
Pipes
& Wires will comment further as the Revised Proposals are submitted.
Aus – SA Power Networks challenges revenue determination
Introduction
This
article examining SA Power Networks challenge to the recent AER electricity distribution
revenue determination follows on from Pipes & Wires #146’s coverage of the challenges to the NSW and ACT revenue
determinations.
The revenue determinations
The
revenue determination resulted in a significant revenue reduction from that
proposed…
Company |
Proposed
revenue |
Final
determination |
Final
as a percentage of proposal |
SA
Power Networks |
$4,535m |
$3,838m |
85% |
The appeals to the Tribunal
On 19th
November 2015 SA Power Networks applied to the Tribunal for a review of the
AER’s determination. The basis of the appeal is that the AER made material
errors in determining the following key components of the determination….
· The value of imputation credits.
· The allowable rate of return.
· Forecasts of inflation.
· Forecasts of the capital expenditure required for bushfire
safety.
· Forecasts of the operating expenditure required for
increasing asset inspections in bushfire risk areas.
· Forecasts of operating expenditure for no access pole
inspections.
· Forecasts of labor cost escalations.
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 decision.
Energy policy, markets & tariffs
NZ – maybe Huntly will remain in service
Introduction
Back
in August 2015 Genesis Energy announced that it would close two of the 250MW coal and
gas-fired units at Huntly by the end of 2018, which resulted in some wide-spread
concern around the industry. This article picks up that story again in light of
the possibility that Genesis is expected to reverse the 2018 closure decision.
Re-capping the closure decisions
The
following thermal plant closure decisions were noted…
Effective
date |
Closure |
MW
withdrawn |
Cumulative
MW withdrawn |
October
2014 |
Huntly
#3. |
250 |
250 |
June
2015 |
Huntly
#4. |
250 |
500 |
September
2015 |
Otahuhu
B. |
400 |
900 |
Late
2015 |
Southdown. |
140 |
1,040 |
Late
2018 |
Huntly
#1 and #2. |
500 |
1,540 |
The possibility of reversing the closure decision
A recent
analyst’s report forecasts a shortfall of about 350MW of mid-winter North
Island generation capacity after 2018, based on demand growth and other thermal
plant closures.
Genesis
had previously indicated that it doesn’t make commercial sense to keep the two
units available, but that it would reconsider the closure decision if the
market was prepared to pay a suitable price (presumably the standing costs of
keeping those two units available). The analysts’ report goes on to note that
keeping the two Huntly units available for coal-firing would be a much cheaper and
less riskier option than quickly building replacement gas-fired peaking plant
only to find it stranded if the Tiwai smelter does close.
So as
we edge towards the critical date of mid-2018 it will be interesting to see
whether Genesis does reverse the closure decisions.
Global – update on the WEC trilemma ratings
Introduction
The
World Energy Council recently released its 2015 Energy Trilemma Index. This article examines the underlying principle of the
Trilemma and notes the top performers.
The trilemma rating
The
trilemma is basically a triangle model that depicts how well a country is balancing the
trade-offs between the three important dimensions of…
· Security of energy supply.
· Accessibility and affordability of energy.
· Environmental sustainability, including both supply and
demand side efficiencies and uptake of renewables.
Key features of the Index report
The
WEC’s website has a cool interactive graphic which is worth having a muck about with to see which
countries are ranked best in each of the indices. Picking the country names
jumps to a screen detailing that country’s energy supply arrangements and also
(perhaps equally important) that country’s political, societal and economic
performance. Not surprisingly the top performers have a long history of stable
and consistent energy policy that has encouraged investment in security of
supply, and perhaps also has historically priced energy at a sustainable level that
doesn’t require steep price increases to recover the full cost of energy and
energy supply.
The top performers
The
top performers for 2015 are…
Index
rank |
Country |
Score |
Rank
- security |
Rank
- equity |
Rank
- sustainability |
1. |
AAA |
10th |
5th |
1st |
|
2. |
AAA |
16th |
17th |
9th |
|
3. |
AAB |
33rd |
18th |
6th |
|
4. |
AAB |
4th |
30th |
21st |
|
5. |
AAB |
44th |
9th |
11th |
What are the top performers of each dimension doing ??
Let’s
consider what the Trilemma report has to say about the top performer in each
dimension…
Dimension |
Country |
Score |
What
that country is doing well |
Security |
AAC |
· Nett energy exporter (mainly fossil
fuels). · Diverse electricity generation
portfolio. · Low economic dependency on fuel
exports. |
|
Equity |
AAC |
· Offers some of the most affordable
energy in the world. |
|
Sustainability |
AAA |
· Generating only about 1% of its
electricity from fossil fuels, which as noted weakens its security of
electricity supply. |
It is
noted that “environmental sustainability” concerns are not confined to the
Sustainability dimension but spill over into the Security dimension in that
Canada’s Security rating includes consideration of diversifying away from
fossil fuels (which many of us would think might weaken its security of
electricity supply).
US – falling prices undermine the unregulated sector
Introduction
Falling
electricity prices are generally welcomed as good news, especially by policy
makers and regulators seeking validation of their actions. The downside is that
it makes capitally-intensive assets less bankable. This article considers that
very issue as wholesale electricity prices take a bit of a dive in the United
States.
The dividing line between sectors
Electric
company owners generally divide assets between regulated and unregulated
assets, viz…
· Regulated assets such as poles, wires, pipes and
substations. Revenue tends to be strongly influenced by the prevailing regulatory
regime, which typically provides a reasonably certain revenue stream once the
regulatory decision is finalised, albeit one in which the upside gains are
limited (in theory … but not always in practice … in return for also limiting
the downside losses).
· Unregulated assets, typically generation plant. Revenue
tends to be strongly influenced by the ability to understand and capture
high-margin opportunities in various market segments. The underlying philosophy
is that because generation is typically always competitive, there is no need
for regulation.
The
last few years have seen very conscious decisions by some electric companies to
migrate their capital away from grids and into generation and retail.
What’s happening in the unregulated sectors ??
Falling
gas prices are in turn forcing down wholesale electricity prices, which is
especially tough for coal and nuclear plants whose costs are largely fixed and
who are finding themselves squeezed out of the market by lower cost gas-fired
plants whose operating costs are dominated by fuel. Declining sales volumes due
to increasing energy efficiency and sluggish industrial demand limits their
ability to “make it up on volume”.
It is
noted that the PJM will introduce capacity payments next year (2016) however
those capacity payments are not expected to fully offset the revenue losses for
the coal and nuclear plants.
The implications for funding capital assets
Squeezing
the earning of key segments of the electricity supply chain is not going to be
helpful, with one rating agency (Moody’s) already altering its outlook for the
unregulated sector for 2016 to Negative. This declining confidence in the
segment could lead to higher interest costs and higher internal hurdle rates
for allocating funds to coal and nuclear plants, which in turn may starve the
segment of capital.
Interestingly
enough, Moody’s have retained their Stable outlook for the regulated segment of
the electricity supply chain, suggesting that the apparently simple decision to
migrate capital from regulated to unregulated assets is not without its risks.
UK – concerns about the reserve capacity margin
Introduction
Concerns
about the UK’s declining reserve capacity margin has featured in previous
editions of Pipes & Wires. This article examines some recent “grid
incidents” in the UK that have required unusual and rather inefficient
interventions.
The downward trend in reserve capacity margin
The
following concerns have been noted about the UK’s declining reserve capacity
margin…
· PW #116 (November 2012) examined a report by Ofgem that forecast a
base case of 4% reserve capacity margin by 2015/16 (that’s this coming winter
!!!).
· PW #143 (May 2015) noted that 2,400 MW of combined-cycle gas
turbine (CCGT) plants were marked for closure, whilst the 3 CCGT’s that were
expected to remain in the market were running to increasingly high capacity
factors. That article poignantly noted that there was not much wriggle room for
contingencies like prolonged cloud cover, no wind, plant breakdowns, gas
outages or import curtailments.
· Recent articles in the UK media have indicated that the reserve
capacity margin would’ve fallen to a piddling 1.2% had the new demand
curtailment program not been invoked to keep the reserve capacity margin at a
breathtakingly low 5.1%.
Recent events in the UK
In
early November 2015 National Grid (in its role as System Operator) invoked a new scheme of
paying large industrial and commercial customers to be willing to curtail
demand between 4pm and 8pm … the official term is a Notification of
Insufficient System Margin (NISM). The NISM arose because of extended maintenance shutdowns at some coal-fired
plants, and a significant reduction in wind power to about 400 MW during the peak.
The rise of back-up diesel generators
Earlier
in 2015 National Grid began a scheme of subsidising grid-controlled diesel
generators to help maintain the reserve capacity margin. Not surprisingly many
entrepreneurial sorts are installing diesel generators (in some cases, the very
same entrepreneurial sorts who also installed wind farms), which are expected
to amount to about 1,500 MW.
The editor comments
Well …
what can be said ?? It is ironic that the UK’s low carbon electricity policies are
more than likely going to create more CO2 emissions than ever whilst
also diminishing industrial production.
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 an executive workshop on the future trends and
issues for the distribution industry.
· 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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