Pipes & Wires


Issue 158 – November 2016


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




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)…




Index rank


Security rank

Equity rank

Sustainability rank

Index rank

Balance score



















































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…





Index rank

What the Trilemma report says





·      Balancing the 3 issues well.

·      Observable progress towards renewable targets.

·      Key challenge will be grid stability.





·      Low diesel prices, resulting in low transport costs.

·      Small land area reduces security and sustainability.

·      Extreme dependence on imported energy.





·      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 ?




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




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




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




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…



Initial Proposal

Draft Decision

Revised Proposal

Final Decision











Opening RAB















Smoothed revenue






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




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




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…



Initial Proposal

Draft Determination

Revised Proposal

Final Determination











Opening RAB















Smoothed revenue






Next steps


The next step is for the AER to release its Final Determination.


Aus – the final Amadeus Gas Pipeline decision




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…



Proposed access arrangement

Draft decision

Revised access arrangement

Final decision

Total revenue requirement










Nominal vanilla WACC





Opening capital base
















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




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.


House-keeping stuff


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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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