From the
editor’s desk…
Welcome
to Pipes & Wires #158. This issue starts with 2 global issues … a look at
the WEC energy trilemma, and some thoughts about whether retirement of thermal
generation is reaching a crisis level. We then look at the final report on
energy competitiveness in the UK.
The
rest of the issue examines regulatory decisions in Australia and New Zealand. So
… until next month, happy reading…
Emerging themes & trends
Some
of the industry themes and trends that are emerging include…
· Government officials seem a bit nervous about regulated
electric companies diversifying into other sources of revenue, and more so when
natural disasters interrupt electricity supply. Those officials anxiously seek assurance
that supply interruptions weren’t because electric companies hadn’t taken their
focus off the core electricity business (the Auditor General in New Zealand
recently commented that “investments in core business should not be compromised”).
Personally I’m not seeing core asset management being compromised by
diversification to the extent of wide spread supply interruptions.
· Canadian electric companies are migrating their capital to
the United States. Key reasons include expected localised demand growth and
sustainable regulatory determinations in some states. This could be the next
wave of capital migration, and appears to be a continuation of the off-shore
infrastructure investments being made by some of Canada’s pension funds.
· What appears to be some confusion amongst regulators about
to how to regulate emerging technologies such as batteries and solar. Given
that these technologies seem to be giving customers increased choice about
where they obtain their electricity from, perhaps the question should be
whether to regulate.
· Concern over foreign ownership of critical infrastructure.
This issue seems to have escalated from one of energy security to one of
national security.
· Diverging views of the green lobby on nuclear energy. Some
environmental groups remain steadfastly opposed to nuclear energy, whilst other
groups are now supporting nuclear as a useful transition from coal to
renewables.
· An increasing recognition that improved asset condition
information is the next frontier for improved asset management decisions, and
from there to strengthened regulatory proposals (rates cases).
· A rapidly increasing awareness of the importance of thermal
generation for renewable buffering, both in the context of moment-by-moment
fluctuations in wind and solar, but also in the traditionally understood sense
of dry hydro years.
· A sense that some governments may be losing patience with
the slow pace of the transition to renewables, and the heightened possibility
that those governments may move from encouraging through incentives to
mandating through sanctions.
Energy policy
Global – the 2016 energy index
Introduction
The
World Energy Council recently released its 2016 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 7 performers for 2016 that all achieved an AAA score are (New Zealand was
ranked 9th)…
|
2016 |
2015 |
|||||
|
Index
rank |
Country |
Security
rank |
Equity
rank |
Sustainability
rank |
Index
rank |
Balance
score |
|
1st |
Denmark |
1st |
10th |
6th |
1st |
AAA |
|
2nd |
Switzerland |
12th |
2nd |
3rd |
2nd |
AAA |
|
3rd |
Sweden |
10th |
27th |
8th |
4th |
AAA |
|
4th |
Netherlands |
9th |
3rd |
42nd |
8th |
AAB |
|
5th |
Germany |
7th |
15th |
31st |
5th |
AAB |
|
6th |
France |
16th |
9th |
11th |
9th |
AAA |
|
7th |
Norway |
29th |
29th |
4th |
6th |
BAA |
The
key changes from the 2015 rankings include…
· The Netherlands’ security ranking improved from 20th
to 9th.
· France’s security ranking improved from 21st to
16th, its equity ranking from 12th to 9th, and
its sustainability from 13th to 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 |
Index
rank |
What
the Trilemma report says |
|
Security |
Denmark |
AAA |
1st |
· Balancing the 3 issues well. · Observable progress towards renewable
targets. · Key challenge will be grid stability. |
|
Equity |
Luxembourg |
DAD |
55th |
· Low diesel prices, resulting in low
transport costs. · Small land area reduces security and
sustainability. · Extreme dependence on imported
energy. |
|
Sustainability |
Philippines |
BCA |
61st |
· Excellent environmental
sustainability · Very unreliable supply arising from
systemic issues. · Strong need for future investment. |
Electricity markets & competition
Global – is thermal generation retirement reaching a crisis
point ?
Introduction
Retirement
of thermal generation is now a well-established trend. This article cuts across
several themes to examine whether those retirements are reaching crisis point
in some jurisdictions.
Why do we need thermal generation ?
The
short answer is to ensure continued electricity supply when weather-dependent
generation runs out of weather (melted snow, rain, wind or sunlight).
When
weather dependent generation meant “hydro”, the notice period for running out
of weather was typically weeks or months, so the gap could be filled with
steam-turbine generation like Meremere or Bell Bay or medium-term demand reduction (ie. industrial stoppages).
Increasing penetration of wind and solar is reducing that notice period to
minutes, so the gap now needs to be filled with quick-start generation (gas
turbines or diesel engines) or
immediate-term demand reduction.
So in
addition to the legacy risk of dry hydro years, there is now also an overlay of
intermittency.
What is driving thermal plant retirement ?
Thermal
plant retirement is being driven by several factors…
· Wholesale prices in many electricity markets are being
driven lower and lower by increasing penetration of wind power (this is a
global issue).
· Wholesale prices in some United States electricity markets
are being driven lower by cheap natural gas.
· Increasing local air quality (mainly SOx and NOx)
requirements are loading costs on to legacy coal-fired generation, prompting
many owners to retire those plants.
· The EU Directive on Large Combustion Plant limits the remaining hours that individual coal-fired
generation can operate. This is hitting the UK hard
· Increasing transmission grid interconnection is allowing the
import of cheap coal-fired electricity from jurisdictions that have imposed
fewer costs on coal-fired generation, forcing higher-cost coal-fired generation
out of the market
How is this being reflected in electricity markets, and what
can be done about it ?
The
principle reflection of this in electricity markets is depressed wholesale
prices, which are squeezing coal-fired generation out of the market to the
point where owners are closing those stations because the generated MWh doesn’t
cover the fixed costs. We have seen this over the last year or two in Europe
and Australia.
Capacity
markets (such as that in the UK) in which generators offer dispatchable
generation capacity appear to be a workable solution, although it may be a few
years before we actually see how well it works in practice.
So is thermal generation retirement reaching crisis point ?
If we
use the amount of officials’ time and attention as a measure of whether there
is a crisis or not, I think the answer would tend towards yes. As many jurisdictions
rediscover how useful thermal generation is, the time is right to consider
firstly the less visible benefits of thermal generation (such as dry year
reserve and renewable buffering) and then secondly a realistic means of
capturing those benefits.
UK – final report on the competitiveness of energy supply
Introduction
Pipes & Wires #153 examined the provisional findings of the Competition &
Markets Authority’s investigation into how competitive the UK’s retail energy
markets are. This article recaps the key features of the investigation and
summarises the Authority’s final report in the form of a comparison with its provisional findings.
Recapping the Authority’s investigation
In
March 2014 Ofgem concluded that competition in the UK’s retail energy
markets wasn’t working as well as it should, and referred the matter to the Competition & Markets Authority to investigate. Key focus areas of the investigation
included whether…
· Opaque prices or low levels of liquidity in wholesale
markets were creating entry barriers.
· Vertically integrated energy companies harming the
competitive position of non-integrated energy companies.
· Market power leading to higher prices.
· Weak incentives for energy companies to compete on either
price or non-price factors.
Comparing the provisional and final findings
The
provision and final findings are as follows…
|
Industry
feature |
Provisional
finding |
Final
finding |
|
Dispatch
of generation plan |
Generation
plant appears to be dispatched in accordance with the merit order. |
Confirmed
provisional findings that current self-dispatch arrangement is adequate, and
that other approaches including centralised dispatch are unlikely to provide
any advantages. |
|
Generation
profitability |
Based
on an analysis of profitability, the Big Six energy firms did not appear to
have made excessive profits from their generation businesses. |
Confirmed
the provisional finding, and noted that returns were generally in line with
or below the cost of capital. |
|
Wholesale
prices |
Based
on an analysis of profitability, the wholesale market price does not appear
to be above competitive levels. |
Confirmed
the provisional finding that wholesale market prices are not above competitive
levels, and that no individual generator is incentivised to significantly
increase the wholesale price in a significant number of half-hour periods. |
|
Transmission
location loss charges |
An
absence of strong transmission location loss charges. |
Confirmed
this absence, and noted both the short-run costs of potentially inefficient
dispatch and the long-run cost of inefficient generation investment and
closure decisions. |
Privatisation & restructuring
Aus – leasing a 50.4% stake in Ausgrid
Introduction
Following
on from the 99 year lease of its electricity transmission grid Transgrid for $10.3b (Pipes & Wires #148), the NSW Government recently announced the lease of a
50.4% stake in electricity distributor Ausgrid. This article examines that lease deal.
Details of the final lease
Details
of the final lease include…
· The successful bidders were IFM Investors and AustralianSuper.
· The lease price was $16.1b.
· After paying down about $10b in debt, the lease will nett
about $6b for the NSW Government.
· The Government will continue to own a 49.6% stake.
Going round the loop again
Readers
will recall that in August 2016 the Commonwealth Government decided that a bid
from a consortium led by State Grid Corporation was unacceptable on national security and national interest
grounds, and refused to approve the lease via the Foreign Investment
Review Board. Media reports suggest that the bid from IFM Investors and
AustralianSuper is worth about $5b less to the NSW Government than the State
Grid consortium bid.
Expected use of the sale proceeds
The
NSW Government expects to use the Ausgrid lease proceeds to fund a range of
infrastructure projects, including the 2 following projects…
· The $16b WestConnex motorway project linking the inner Sydney area with the
west, the south-west and the Airport.
· The $12b Metro rail line project, which will link the Sydney CBD with the
north-west (via a tunnel under the harbor), and the south-west.
Next steps
It is
expected that the Government will soon commence a similar leasing process for Endeavour Energy. Pipes & Wires will comment further as that sale
progresses.
Regulatory decisions
Aus – the draft Queensland electricity transmission determination
Introduction
The Australian Energy
Regulator (AER) has recently released its Draft Determination that will apply to Queensland’s electricity transmission
operator, Powerlink, for the 5 year regulatory period beginning on 1st
July 2017. This article examines the key features of that Draft Determination
to provide some context for analysis of the AER’s final Determination.
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 is 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 |
$775m |
|
|
|
OpEx |
$977m |
$1,051m |
|
|
|
Opening
RAB |
$7,238m |
$7,165m |
|
|
|
WACC |
7.3% |
6.5% |
|
|
|
Depreciation |
$623m |
$606m |
|
|
|
Smoothed
revenue |
$4,017m |
$3,721m |
|
|
Next steps
The
next step is for Powerlink to submit its Revised Revenue Proposal by early
December 2016.
NZ – the Final Decision on Orion’s return to the DPP
Introduction
Orion
(the electricity distribution network owner in Canterbury) is currently
regulated by a Customised Price-Quality Path (CPP) following on from the February 2011 earthquake. This
article examines the Commerce Commission’s recent Final Decision on how Orion will transition from its CPP to the Default
Price Path (DPP) on 1st April 2019.
A quick background to Orion’s CPP
Orion
was initially subject to the DPP that applied from 1st April 2010 to 31st March
2015 that all other non-exempt electricity distribution
businesses (EDB’s) were also subject to. The cost of repairing the earthquake
damage was beyond what Orion could fund under that DPP, hence it applied for
and was granted a CPP for the 5 year period ending 31st March 2019.
More
details on the background and the regulatory framework are in a previous
article on this topic in Pipes & Wires #154.
The Final Decision
Key
features of the Final Decision are…
· That Orion’s starting price for the final year of the DPP (1st
April 2019 to 31st March 2020) will be the same as the finishing
price for the CPP.
· Claw back will be excluded.
· A CPI adjustment will be allowed for.
This
is unchanged from the Draft Decision.
Aus – the revised Victorian electricity transmission
proposal
Introduction
Victoria’s
electricity transmission operator, AusNet Services, recently submitted its Revised Revenue Proposal (rate
case) for the 5 year regulatory period beginning on 1st April 2017.
This article examines the key features of that Revised Proposal to provide some
context for future analysis of the AER’s Final 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 |
$751m |
|
|
OpEx |
$1,102m |
$1,032m |
$1,058m |
|
|
Opening
RAB |
$3,130m |
$3,195m |
$3,181m |
|
|
WACC |
7.22% |
6.16% |
7.41% |
|
|
Depreciation |
$603m |
$521m |
$624m |
|
|
Smoothed
revenue |
$3,161m |
$2,695m |
$2,835m |
|
Next steps
The
next step is for the AER to release its Final Determination.
Aus – the final Amadeus Gas Pipeline decision
Introduction
Most readers will be familiar with the
requirements for covered gas transmission pipelines to have their allowable
revenue reset every 5 years. This article examines the AER’s Final
Decision for the Amadeus
Gas Pipeline in Australia’s
Northern Territory for the 5 year regulatory period from 1st July
2016 to 30th June 2021.
A bit about the Amadeus Gas Pipeline
The
AGP stretches 1,629km from Darwin to Mereenie, Palm Valley and Alice Springs,
and has a capacity of about 100TJ per day. The major connected user of the AGP
is the Power & Water Corporation, for the supply of its gas-fired generation.
The legal framework
The
AER’s powers and duties, including with respect to regulating the AGP, are set
out in the National Gas Law (NGL) and the National Gas Rules (NGR). The NGL requires the AER to perform its functions in
a manner likely to contribute to the National Gas Objective “to promote
investment in, and efficient operation of, natural gas services for the long
term interests of consumers of natural gas with respect to price, quality,
safety, reliability and security of supply of natural gas”.
The
determination process to date
The
following table sets out the decision process to date…
|
Component |
Proposed
access arrangement |
Draft
decision |
Revised
access arrangement |
Final
decision |
|
Total
revenue requirement |
$140.3m |
$110.7m |
$134.8m |
$112.8m |
|
Gearing |
60% |
60% |
60% |
60% |
|
Nominal
vanilla WACC |
8.3% |
6.0% |
8.6% |
6.2% |
|
Opening
capital base |
$120.6m |
$112.2m |
$119.5m |
$115.8m |
|
CapEx |
$29.9m |
$26.5m |
$29.7m |
$16.8m |
|
OpEx |
$62.8m |
$62.8m |
$63.1m |
$67.7m |
This concludes Pipes & Wires coverage of
the Amadeus Pipeline for another 4 or so years.
Regulatory policy
Aus – progress on the new regulatory model for water price
control
Introduction
Pipes & Wires #153 examined the Essential Services Commission’s plans to
develop a new water pricing model for the Australian state of Victoria that
focuses on customer outcomes rather than detailed inputs. This article examines
a suite of documents intended to guide the ESC’s thinking.
Key features of the PREMO model
The
model now has a name … PREMO … standing for Performance, Risk, Engagement,
Management accountability, and Outcomes.
The
overarching feature of the PREMO model is an emphasis on demonstrating how the
water companies have engaged with their customers, and how the results of that
engagement translates into water business outcomes. Readers might recognise
that this feature (along with many of the other more detailed features) is
similar to those adopted by Ofgem and Ofwat in the UK, including the RIIO and IQI mechanisms.
The PREMO framework
The PREMO framework essentially requires water businesses to strongly link Risk
and costs between customer Engagement and customer Outcomes, as
opposed to simply building a cost model to set its prices. The key incentive
will be adjustments (either upwards or downwards) from a base price based on
how well the water business performs in the four REMO aspects.
The PREMO self-assessment
A self-assessment tool has been developed from which water businesses can assess
the status of each REMO element against 4 levels…
· Expectations of a Standard submission.
· Additional requirements for an Ambitious rating.
· Additional requirements for a Leading rating.
· Risk of downgrade to a Basic rating.
Next steps
The
ESC hopes to conclude this process by the end of 2016. Pipes & Wires will
comment further in early 2017.
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.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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