From the
editor’s desk…
Welcome
to Pipes & Wires #155. This issue has a strong focus on several regulatory
determinations and appeals in Australia.
In
amongst that we examine the role of marginal thermal generation, and what that
role might be in South Australia. We also look at the termination of a merger
plan in the United States, and conclude with a look at some nuclear issues in
South Africa and France. So … until next
month, happy reading…
Recent client projects
Facilitate strategy
workshop
· Client – electricity distribution.
· Location – New Zealand.
· Project – this project involved preparing a set of
PowerPoint slides and facilitating a strategy workshop for an electricity
distributor. Content included analysis of the distributor’s wider economic and
demographic context, specific strengths and weaknesses, and the impact of
emerging technologies.
Critique asset
management plan as part of regulatory reset
· Client – electricity distribution.
· Location – Pacific Islands.
· Project – this project involved critiquing an asset
management plan as part of an electricity distributors’ regulatory reset. This
involved highlighting aspects of the plan that the regulator might consider
deficient, and recommending improvements.
Review engineering
aspects of a distribution pricing methodology
· Client – electricity distributor.
· Location – New Zealand.
· Project – this project involved confirming that an
electricity distributors’ load group prices accurately reflected the underlying
costs and the underlying attributes of electricity lines services. This
included considerations of peak demand, time of use, seasonal variations and
power factor.
Pick
to here to download a profile of recent projects, or here to contact Phil.
System operations & security
Global - re-thinking the role of marginal thermal generation
Introduction
Increased
gas-fired generation seems to be featuring in the news a lot lately … headlines
have come from New Zealand, Tasmania and South Australia in particular. This
article examines why we are seeing this increase, and tries to unpack the issue
a bit more.
Key features of the news articles
Below
the immediate headline of “increased gas-fired generation”, a few common themes
emerge…
· Low hydro storage, often compounded by low hydro inflows or
snow melt.
· Low wind speeds.
· Days on end without any sunshine.
· Limited interconnection capacity.
In
many places, all four of these themes are converging and in a roundabout way
the life-saving role of marginal thermal generation gets emphasised.
The role of thermal generation
The
emerging picture is that marginal thermal generation is still important, and in
a world that is increasingly dominated by insecure renewable generation it is
arguably more important than ever. A key premise is that a secure electricity
supply requires a secure supply of primary energy (or a really huge battery),
and it is becoming clear that renewables are not providing that security of
supply. After all this is why hydro firming generation such as Meremere and dry
year generation such as Marsden A and Bell Bay were built over 50 years ago.
The marginalization of thermal generation
There
are a number of reasons why so much thermal generation has become marginalized…
· Electricity markets generally pay for generated MWh, not for
standby MW.
· Policy and legislation has allowed renewables to squeeze
thermal out of the market. We’ve seen this with the Renewable Energy Sources Act in Germany (refer to Pipes & Wires #137).
· Regulators and policy makers are baulking at the idea of
paying standby fees to marginal thermal generation. We’ve seen this in Germany
(refer to Pipes & Wires #119).
· Climate change initiatives are encouraging (or even
demanding) the closure of thermal generation. We’ve seen this in the UK as many
of the legacy coal-fired stations like Ferrybridge C have been closed to comply with the EU Directive 2001/80/EC on Large Combustion Plant.
Some reflections on the wider matter
Some
reflections on this whole increase in thermal generation…
· Much of the marginal thermal generation that has been running
lately has only very recently been ear marked for closure (and in many cases we
are fortunate that it hasn’t been dismantled). In a few cases clear thinking
has prevailed and that generation has been retained to provide dry year
generation.
· Intermittent operation of thermal generation to buffer
renewables tends to increase the CO2 emissions, offsetting any
reduction from the renewables.
· Closing black coal-fired generation has required either
diesel-fired or brown coal-fired generation to step into the gap, which
produces even more CO2 emissions.
Pipes
& Wires will continue to discuss this theme as it inevitably unfolds over
time.
Solar, wind, batteries & micro grids
Aus – supporting renewable generation
Introduction
Further
evidence is mounting that the intermittent nature of solar and wind generation
is requiring back-up plant, which in most cases is either coal-fired or
gas-fired. This article considers recent events in South Australia and
considers what policy options might be available to achieve a reliable
electricity supply.
Recent events in South Australia
Over
the last 9 months or so, electricity prices in South Australia have risen
sharply above the prices in NSW, Victoria and Queensland, often reaching $1,000
per MWh and on 1 occasion reaching $14,000 per MWh. One possible reason for
this is the high penetration of wind power. This has squeezed legacy thermal
generation out of the South Australian market so that it now relies on imported
electricity from the eastern states.
Whilst
it’s great that South Australia is able to export clean, renewable energy when
the wind is blowing the reality is that the wind also stops blowing, so that during
the 2013/14 year South Australia imported 2010 GWh but exported only 338 GWh. It’s
those periods when the wind stops blowing that back-up plant is required. In
South Australia that would’ve been thermal stations like Port Augusta and Pelican Point that have been mothballed for reasons that include high gas
prices and “lack of market opportunities” ie. being
squeezed out.
Parallel events in Germany
Readers
might remember that thermal generation has been squeezed out of the market in
Germany by renewables, and that thermal generation owners suggested they be
paid a standby fee of €1,500 per kW per year (refer to Pipes & Wires #119 and #123).
Applying the trilemma model
Applying
the trilemma model to South Australia’s current market indicates that the
pursuit of lower CO2 emissions has raised prices and reduced
security of supply. What is perhaps not quite so obvious is that the electricity
coming through the interconnectors from Victoria is almost certain to have been
generated from brown coal, which is pretty high on emissions.
Possible policy options
On the
assumption that South Australia wants a secure and reasonably priced electricity
supply, a few policy settings emerge…
· Firstly, consideration should be given to capping the
penetration of wind generation in South Australia (and it is acknowledged that
this will not sit easily with some).
· Secondly, consider paying a realistic standby fee to South
Australia’s gas-fired generators so they stay available. This would have the
advantage of displacing brown coal-fired generation from Victoria.
· Thirdly, consider long-term options for securing supply. Pumped
storage and grid-scale batteries are 2 options, but it needs to be remembered
that these technologies still require the electricity to be generated in the
first place. If the 2013/14 import and export GWh represent the trend going
forward, South Australia will still require additional generation.
Mergers & acquisitions
US – NextEra Energy and Hawaiian Electric terminate merger
plans
Introduction
NextEra Energy and Hawaiian Electric recently terminated their merger plans after the Hawaii Public
Utilities Commission rejected the plan. This article looks briefly at the
planned merger, but then looks more deeply into the PUC’s apparent reasons for
rejected the merger.
Some wider context to Hawaiian Electric
Historically
about 75% of Hawaii’s electricity has been generated by oil-fired plant, with a
further 15% generated by coal-fired plant and the remaining 10% from
renewables. Those oil and coal imports have understandably resulted in high
electricity prices, in fact Hawaii has the highest average electricity price in
the United States at about 45% higher than the next most expensive (Alaska).
The
governor of Hawaii recently signed House Bill 623 into law which requires a ramping up of the renewable
energy sold by each electric company (refer to Pipes & Wires #151).
A bit about the planned merger
NextEra
Energy announced its plans to acquire Hawaiian Electric Industries back in
December 2014. Key features of the deal included…
· Plans for Hawaiian Electric to divest its banking
subsidiary, leaving an enterprise value of about $4.3b.
· An offer of 0.2413 NextEra shares for each Hawaiian Electric
share.
· Assumption of $1.7b of debt by NextEra.
This
valued Hawaiian Electric at about $33.50 per share, or about an 18% premium to
recent prices. The market’s response to the merger termination announcement was
as follows…
· NextEra’s stock rose slightly less than 1% following the
announcement, suggesting that NextEra investors were somewhat neutral about the
merger.
· Hawaiian Electric’s stock closed almost 7% down, suggesting
that its investors saw the merger as good idea.
The PUC’s decision
The
PUC voted 2 – 0 to reject the merger. A quick read of Order # 33795 reveals the following…
· The PUC saw the merger proposal as being important to the
State of Hawaii, and not just to Hawaiian Electric’s customers.
· The PUC recognises that emerging technologies have made
managing an electric company more complicated.
· The PUC notes that it is not sufficient to decide a merger
application on the basis of commonly understood statutory standards of
financial strength and management capability.
· That several other state agencies opposed the merger
proposal.
· The PUC’s view that the proposed merger conditions do not
provide sufficient benefits, nor do they adequately address legitimate
concerns.
· In particular, the PUC broadly concluded that NextEra would
not be able to contribute to Hawaii’s renewable energy goals.
The central issue of renewable energy and possible
approaches to mergers in a renewable-centric world
A bit
of reflection on some recent mergers reveals that regulators seem to be giving
additional weight to an acquirer’s ability to implement renewable energy
targets. This suggests a couple of merger tactics (nothing as fancy as Pac-Man or Poison Pill defenses)…
· Electric companies wishing to repel unwanted merger
proposals could set ambitious renewable energy targets that an acquiror would
be unlikely to be able to keep, or at least be perceived as being unlikely to
keep.
· An acquiror might strengthen its proposal for delivering on
renewable energy targets.
Regulatory decisions
Aus – resetting the Queensland electricity transmission
revenue
Introduction
Queensland’s
electricity transmission operator, Powerlink, has submitted its regulatory proposal (rate case) to the Australian Energy
Regulator (AER) for the 5 year regulatory period beginning on 1st
July 2017. This article examines the key features of that proposal to provide
some context for future analysis of the AER’s decisions.
A bit about Powerlink
Powerlink
is a limited company owned by the Queensland State Government. It operates
14,310km of lines at 110kV, 132kV, 275kv and 330kV between Cairns and the NSW
border. Annual revenue is about $1b.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which are made pursuant to the National Electricity Law.
Key features of the process
Key
features of the process to date include…
|
Parameter |
Initial
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
CapEx |
$957m |
|
|
|
|
OpEx |
$977m |
|
|
|
|
Opening
RAB |
$7,238m |
|
|
|
|
WACC |
7.3% |
|
|
|
|
Depreciation |
$623m |
|
|
|
|
Smoothed
revenue |
$4,017m |
|
|
|
Next steps
The
next step is for the AER to release its Draft Decision, which is expected in
September 2016.
NZ – setting the WACC
Introduction
The Commerce
Commission recently released its cost of capital decision that will apply to the following regulated infrastructure for the
disclosure year ending 30th June 2017…
·
Transpower.
·
Gas pipeline
businesses with a 30th June year end (Vector and GasNet).
·
Airports with a 30th
June year end (Auckland and Christchurch).
This article
examines the key features of that determination.
Regulatory frameworks
The applicable regulatory
frameworks are…
·
Clauses 2.4.1 to
2.4.7 of the Transpower Input Methodologies Determination 2012.
·
Clauses 2.4.1 to
2.4.7 of the Gas Distribution Services Input Methodologies Determination 2012.
·
Clauses 2.4.1 to
2.4.7 of the Gas Transmission Services Input Methodologies Determination 2012.
·
Clauses 5.1 to 5.7
of the Commerce Act (Specified Airport Services Input Methodologies)
Determination 2010.
Each of the
determinations is made pursuant to Part 4 of the Commerce Act 1986.
Key features of the WACC’s
Key features of
the Vanilla WACC’s include…
|
Supplier |
25th
percentile |
Mid-point |
67th
percentile |
75th
percentile |
|
Transpower |
4.40% |
5.11% |
5.58% |
5.83% |
|
Gas pipelines |
5.01% |
5.82% |
- |
6.63% |
|
Airports |
5.14% |
6.12% |
- |
7.10% |
Key features of
the Post-tax WACC’s include…
|
Supplier |
25th
percentile |
Mid-point |
67th
percentile |
75th
percentile |
|
Transpower |
3.88% |
4.60% |
5.06% |
5.31% |
|
Gas pipelines |
4.49% |
5.30% |
- |
6.11% |
|
Airports |
4.96% |
5.94% |
- |
6.92% |
Aus – appealing the electricity revenue determinations
Introduction
The Australian Energy
Regulator recently released its revenue determinations for the 5
electricity distributors in the Australian state of Victoria for the 5 year
regulatory period starting on 1st January 2016 (Pipes & Wires #153). This article examines the appeal of those determinations
to the Australian Competition Tribunal.
Re-capping the recent revenue determinations
The
unsmoothed revenue for each of the 5 distributors is as follows…
|
Distributor |
Initial
Proposal |
Preliminary
Determination |
Revised
Proposal |
Final
Determination |
Final
Determination as a percent of Initial Proposal |
|
Jemena |
$1,308m |
$1,082m |
$1,430m |
$1,302m |
99% |
|
United
Energy |
$2,150m |
$1,841m |
$2,367m |
$2,101m |
98% |
|
AusNet
Services |
$3,567m |
$2,878m |
$3,812m |
$3,132m |
88% |
|
CitiPower |
$1,718m |
$1,414m |
$1,572m |
$1,503m |
87% |
|
Powercor |
$3,662m |
$3,086m |
$3,303m |
$3,186m |
87% |
The applications to the Tribunal
The 5
distributors applied for leave and for review of the Final Determinations on 16th June
pursuant to s71B of the National Electricity Law. Key aspects of the Final Determination that the distributors
are appealing include…
· Value of γ (gamma) adopted for calculating income tax.
· Value of forecast inflation.
· Estimated return on debt.
· Cost of self-insuring.
· Growth in labor costs.
Media
estimates of the additional revenue being sought through the appeals process
are about $355m.
Other recent appeals
Revenue
determinations have been appealed on the following previous occasions…
· December 2005, in which 4 of the 5 Victorian distributors
appealed the Essential Services Commission’s determinations (Pipes & Wires #47).
· October 2010, in which all 5 of the Victorian distributors
appealed the Australian Energy Regulator’s determinations (Pipes & Wires #110).
· June 2015, in which the 3 NSW distributors along with
ActewAGL appealed the Australian Energy Regulator’s determinations (Pipes & Wires #146).
· June 2015, in which Jemena Gas Networks appealed the
Australian Energy Regulator’s decisions (Pipes & Wires #150).
· November 2015, in which SA Power Networks appealed the
Australian Energy Regulator’s determinations (Pipes & Wires #148).
Next steps
Pipes
& Wires will comment further as the Tribunal’s decisions emerge.
Aus – resetting the Victorian electricity transmission
revenue
Introduction
The Australian Energy
Regulator has recently released its Draft Decision for the electricity transmission revenue for Victoria’s
electricity transmission operator, AusNet Services for the 5 year regulatory period beginning on 1st
April 2017. This article examines the key features of that Draft Decision to
provide some context for future analysis of the AER’s determinations.
A bit about AusNet Services electricity transmission
business
AusNet
Services is a limited company that is part publically owned and also part owned
by a consortium including State Grid
Corporation and Singapore Power. Its electricity transmission business operates 6,570km of
lines at 132kV, 220kV and 500kV. Annual revenue is about $620m.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which are made pursuant to the National Electricity Law.
Key features of the process
Key
features of the process to date include…
|
Parameter |
Initial
Proposal |
Draft
Determination |
Revised
Proposal |
Final
Determination |
|
CapEx |
$746m |
$573m |
|
|
|
OpEx |
$1,102m |
$1,110m |
|
|
|
Opening
RAB |
$3,130m |
$3,195m |
|
|
|
WACC |
7.22% |
6.16% |
|
|
|
Depreciation |
$561m |
$521m |
|
|
|
Smoothed
revenue |
$3,161m |
$2,695m |
|
|
Next steps
The
next step is for AusNet Services to submit its Revised Proposal.
Aus – appealing the gas distribution determination
Introduction
Pipes & Wires #153 examined the Australian Energy Regulator’s Final Decision
for the gas distribution networks owned by ActewAGL for the 5 year control period starting on 1st
July 2016. This article notes the appeal of that Final Decision to the Australian
Competition Tribunal.
Re-capping the revenue decision
The
revenue component of the decision was as follows…
|
Access
Arrangement |
Draft
Decision |
Revised
AA |
Final
Decision |
Final
Decision as a percent of Access Arrangement |
|
$358m |
$279m |
$453m |
$301m |
84% |
The appeal to the Tribunal
ActewAGL
applied for leave and for a review of the Final Decision on 16th June pursuant to s245
of the National Gas Law. The basis for the review includes…
· Value of γ (gamma) adopted for calculating income tax.
· Value of forecast inflation.
· Estimated return on debt.
Next steps
Pipes
& Wires will comment further as the Tribunal’s decisions emerge.
Nuclear
South Africa – the need for additional nuclear
Introduction
Nuclear
seems to be the uneasy bedfellow at the moment … some countries such as the US
and Germany are closing their nuclear stations, whilst others like Britain and
France are trying to build more. This article examines a recent statement from
South Africa that it needs more nuclear stations.
Recent statements from Eskom
A key
statement from Eskom is that solar and wind cannot be guaranteed to contribute
to the 35,000MW needed for the winter evening peak, hence an increase in
nuclear (and coal-fired) baseload generation is required. The wider context to
this is that Eskom recently decided not to accept any additional power purchase
agreements.
The wider picture of nuclear energy
Nuclear
energy seems to have had a troubled time over the last few decades since its
boom days of the 1970’s that seemed to turn south with Three Mile Island in 1979 and then Chernobyl in 1986. The full economic costs of new nuclear generation
seem to have increased exponentially, and now a green divide seems to have
emerged with some claiming that nuclear is environmentally devastating and
others claiming that nuclear provides a useful low-carbon transition away from
coal (but only until we can get to 100% renewables mind you).
Where might South Africa go with nuclear ?
Pipes
& Wires has examined South Africa’s increasing interest in new nuclear over
the past few years (Pipes & Wires #107, #110, #146 and #151). A couple of months ago the National Nuclear Regulator
received 2 site license applications from Eskom for sites at Thyspunt and at
Duynefontein. Eskom expressed confidence that it could fund, build and operate a new nuclear station
whilst other agencies were more cautious in their outlook.
France – the Flamanville difficulty spreads
Introduction
As
part of Pipes & Wires #151 examination of the construction difficulties being
experienced at Flamanville #3, it was noted that certain components of the reactor
contained high carbon concentrations that could lead to lower than expected
mechanical strength. This article notes that difficulty in a bit more detail,
and also notes that the difficulty might be more widely spread than just
Flamanville #3.
The difficulties at Flamanville
As
noted in Pipes & Wires #151, tests performed in 2014 revealed that some zones of the steam generator channel
heads included significant concentrations of carbon. Those concentrations of
carbon reduce the resilience of the steel and reduce its ability to resist
crack propagation.
The
supplier of the reactor, AREVA, proposed a test method that the French Nuclear
Regulator (ASN) broadly accepted and called for submissions on. Following
that, the ASN approved an AREVA laboratory in Germany to test the components. A
final decision from the ASN is expected in late 2016.
The difficulty may be more widely spread
Back
in 2015 the ASN asked EDF to identify any in-service reactors that may have similar
high concentrations of carbon to Flamanville #3. Analysis carried out by EDF
revealed that 18 reactors at 9 stations could have similar difficulties, and
furthermore that the high carbon concentrations may not be limited to the
channel heads.
This
has resulted in the ASN suspending the test certificate issued for the #2
reactor at Fessenheim, requiring that reactor to be shut down. It is noted that
there has been intense pressure from the German government to close Fessenheim
anyway because of its proximity to the German border and also because of its
age, hence it is not clear whether the ASN’s concerns will result in other
reactor shut downs.
The ASN’s final report
Pipes
& Wires will comment further once the ASN releases its final report on the
Flamanville #3 component tests.
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.
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.
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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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