From the editor’s desk…
Welcome to Pipes & Wires #159. This issue begins with 3 articles on grid security and energy mix, a theme that is becoming increasingly important. We then look briefly at the likely changes to US post-election energy policy to set some context for future analysis.
We then look at a couple of regulatory decisions in NZ and Australia, and follow that up with some industry restructurings. This issue concludes with an examination of the proposed introduction of solar tariffs in the US state of Utah.
I’d take this opportunity to wish you and yours a Merry Christmas and a Happy New Year, and we’ll be back in February…
Emerging themes & trends
Some of the industry themes and trends that are emerging include…
· Further increases in the 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.
· 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 had taken their focus of 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 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.
System security & energy mix
Aus – closing Hazelwood and the future of coal-fired generation
It has been confirmed that Hazelwood power station in Australia will close at the end of March 2017. This article follows on from a related article in Pipes & Wires #157 and continues Pipes & Wires discussion of thermal generation closures.
Details of the closure
Hazelwood’s owners ENGIE have examined options including conversion to bio-mass, re-powering with gas turbines and keeping the most efficient units operating, but the wholesale electricity is to too low to justify these options leaving closure as the only option.
About 250 employees will be retained over the next 7 years to rehabilitate the station site.
The implications for electricity prices
Hazelwood generates about 25% of Victoria’s electricity, and its’ closure will remove about 1,600MW from the National Electricity Market’s (NEM) supply curve. This will require higher cost generation to run more often, pushing up electricity prices. Estimates of how much prices will rise range from nothing in 2017 followed by 8% in 2018, to an immediate 4% increase per year in 2017, to a possible 25% increase in 2017.
The implications for dry year security
There is concern over the apparent lack of a coherent national strategy for closing coal-fired generation, and much uncertainty over exactly what generation will replace Hazelwood.
So whilst it’s pleasing to see the Senate Standing Committees on Environment and Communications being asked to inquiry into and report on the retirement of coal-fired power stations, and also pleasing to see that items (c)(iii) and (c)(iv) of the inquiry will have regard to the increasing amount of electricity generated by renewables and inter alia the security of supply, it must be noted with concern that the inquiry is about “how to close coal-fired power stations” rather than “whether to close them”.
Key recommendations of the Committee’s interim report include…
· Development of a comprehensive energy transition plan, including reform of the National Electricity Market rules.
· Develop a mechanism for the orderly retirement of coal-fired stations for consideration by the COAG Energy Council.
· Insertion of a pollution reduction objective into the National Electricity Objectives.
· Establishment of an energy transition authority.
The interim report noted the importance of energy security as a number one priority however it is not clear how that is reflected in the above recommendations. Pipes & Wires will re-visit this issue in early 2017 after the Committee releases its final report.
NZ – mandating stability during grid faults
The stability of AC transmission grids during and immediately after faults is becoming more critical as the penetration of wind and solar generation increases. This article examines recent changes in New Zealand requiring grid-connected generators to meet specified fault ride through standards.
The issue of fault ride through
The rotating inertia of large generators is critical to grid stability during and immediately after faults. The increasing penetration of wind and solar reduces the available rotating inertia, meaning that less energy is available to keep the grid frequency close to 50Hz or 60Hz. That requires other methods of restoring and maintaining the energy balance, such as spinning reserve or interruptible load which obviously come at a cost to industry participants and ultimately to customers.
The specific engineering principle involved here is that non-faulted generators (ie. those that haven’t tripped due to an internal fault) need to stay connected to assist frequency restoration rather than tripping due to voltage excursions.
The issue of who pays for providing grid stability
Under a scenario of increasing wind and solar penetration that don’t contribute to grid stability, the cost of providing grid stability gets shifted to other participants, such as hydro generators that can provide spinning reserve, or industrial customers that agree to interrupt their demand. That requires mechanisms to allow those participants to recover their costs, so an alternative is to require all generators to provide a minimum specified level of grid stability.
The Electricity Authority’s decision
Key components of the Electricity Authority’s decision include….
· Requiring grid-connected generators can remain stable and connected within defined under-voltage and over-voltage limits during and immediately after AC faults.
· Requiring grid-connected generators can remain stable and connected within defined under-voltage and over-voltage limits during and immediately after faults on the HVDC.
· Ensuring that generators can generate sufficient reactive current to oppose voltage changes during and immediately after AC faults.
The Authority has concluded its decisions and the consequent Code amendments will reduce the risk of supply interruptions caused by non-faulted generators tripping, and improve grid efficiency by reducing the amount of instantaneous reserve required.
Changes to the Electricity Industry Participation Code
Part 8 of the Code will be amended by the Electricity Industry Participation Code Amendment (Generation fault Ride Through) 2016. The amendment includes several charts showing depicting the voltage limits within which grid-connected connected generation must remain connected and stable for North Island faults, for South Island faults, and for the HVDC.
Canada – phasing out traditional coal-fired generation
The Canadian government recently announced amendments to its existing coal-fired generation policy that will see traditional coal-fired generation phased out by 2030. This article examines those policy amendments and looks at its implications.
The existing policy
The Reduction of Carbon Dioxide Emissions from Coal-fired Generation of Electricity Regulations (SOR/2012-167) were made pursuant to the Canadian Environmental Protection Act 1999. Key features of the Regulations include…
· CO2 emissions are limited to 420 tons per GWh, as measured on an annual average basis.
· Emissions that are captured in accordance with the laws of either Canada or any province are not included in the 420 tons per GWh.
· A requirement to register all coal-fired generation, and the requirement to annually report on compliance with limit.
· Limits on the effective life of coal-fired generation of 50 years along with some specified dates based on commissioning year.
· Restrictions on substituting a coal-fired generating unit for a withdrawn unit.
· Provision to apply to the Minister for an exemption from the shutdown requirements for a specific generating unit if an emergency circumstance arises that either disrupts electricity supply or poses a significant risk of supply disruption and the unit will end, decrease the risk of or mitigate the consequences of the disruption.
A quick bit of research suggests that the 420 tons per GWh in the Regulations is much lower than Canada’s recent emissions of 800 to 900 tons per GWh, and indeed is lower than what most of Canada’s gas-fired generation could achieve (about 450 tons per GWh).
The policy amendments
Key aspects of the policy amendments include…
· Requiring all traditional coal-fired units to achieve an emission level of 420 tons per GWh no later than 2030 (regardless of commissioning date).
· Introducing a range of emission levels for gas-fired generation and for coal-fired generation converted to gas firing.
These amendments will provide a big incentive to either build very efficient new gas-fired generation, or convert coal-fired boilers to gas.
The likely impact on Canada’s energy mix
It is expected that these policy changes will increase Canada’s percentage of renewable electricity generation from about 80% to about 90%, or about an additional 62,000 GWh per year.
The likely impact on Canada’s energy trilemma
Will this policy, which is ostensibly aimed at reducing CO2 emissions, actually work ? Let’s examine this using the energy trilemma model and insert some emerging evidence from other jurisdictions to see how well Canada’s policy might work. Canada scored 22nd on the World Energy Council index, with a score of AAC. Impacts on the trilemma might be…
· Energy security (scored an A in 2016). A decline in electricity supply security is possible, as intermittent renewable generation displaces coal-fired generation. This has been pointed out, along with the suggestion that renewables need to be balanced with gas-fired generation.
· Energy equity (scored an A in 2016). The emerging picture from Europe is that increasing renewable generation results in higher electricity prices, so a decline in equity is possible.
· Environmental sustainability (scored a C in 2016). The emerging picture, again from Europe but also from Australia, is that increasing renewable generation is not leading to the expected reduction in CO2 emissions. It is noted that electricity generation fuel mix is only part of this index, and that Canada’s strategy of exporting fossil fuels is likely to mask small improvements from the electricity sector.
So it would appear that the expected policy outcomes might be hard to achieve in practice.
US – post-election energy policy
A high-level observation is that the Republican’s recent election victories are almost certain to reverse or at least slow the de-carbonisation of the US energy sector. This article examines Trump’s previously stated energy policies to provide some context for further analysis once he’s taken office.
Trump’s previously stated energy policies
Trump’s previously stated energy policies are along the following lines…
· An expected use of coal and shale gas to benefit American families and to support American jobs.
· Strong support for the coal industry.
· Strong support for nuclear energy.
· Support for natural gas.
· Support for renewable energy, but not to the exclusion of other forms of energy that are working much better.
· A rejection of the principles of green energy, including the view that man-made CO2 emissions are causing global warming.
· To strengthen America’s energy independence as a key strategic and foreign policy goal.
It doesn’t require much thought to see that these policy positions are completely opposite to those of both President Obama and candidate Clinton, so the changes in policy settings and the consequent shift in investment patterns are likely to be monumental.
The likely practical implications of these policies
The likely practical implications of these policies are…
· A change in high-level paradigm away from the view that global warming is caused by man-made CO2 emissions.
· Government subsidies for renewable energy (and presumably the associated transmission interconnects) are likely to be curtailed (this was a fairly immediate action when Tony Abbott was elected in Australia), although a few days after the election a Trump insider announced renewable credits would remain in place.
· Barriers to fossil fuels are likely to be removed, including clean air legislation and environmental assessments that obstruct pipelines, transmission lines and generation plant.
· Legislation promoting extreme renewable energy targets and favoring renewable energy is less likely to be passed (noting that Missouri, New Hampshire and Vermont now have Republican governors) with the added possibility that existing legislation may be repealed.
Pipes & Wires will re-visit this issue after the Trump administration gets its feet under the desk.
NZ – cost of capital for gas distribution
The Commerce Commission recently released its cost of capital decision that will apply to Powerco’s gas distribution business for the disclosure year ending 30th September 2017. This article examines the key features of that determination.
The applicable regulatory framework is clauses 2.4.1 to 2.4.7 of the Gas Distribution Services Input Methodologies Determination 2012. This determination is made pursuant to Part 4 of the Commerce Act 1986.
Key features of the WACC’s
Key features of the WACC’s include…
Aus – appealing the electricity revenue determinations for SA
Pipes & Wires #148 examined SA Power Networks’ appeal of the Australian Energy Regulator’s electricity distribution revenue determination to the Australian Competition Tribunal. This article notes the Tribunal’s determination for that appeal.
The revenue determination
The revenue determination resulted in a significant revenue reduction from that proposed…
Final as a percentage of proposal
Basis of the appeal
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 several key components of the determination.
Legal framework for the appeals
The legal framework for the appeals is set out in s71B of the National Electricity Law.
The Tribunal’s determination
The Tribunal’s determination in regard to each aspect of the appeal is as follows…
Aspect of appeal
The value of imputation credits.
That the AER did not inter alia err in forming the judgment it did regarding the weight to give to different forms of evidence.
Return on debt transition.
That the AER has committed no error of fact or has been unreasonable in reaching its conclusions inter alia in regard to the approach to calculating the efficient cost of funding.
Forecasts of inflation.
That the post-tax revenue model (PTRM) is binding upon SA Power Networks, and that AER cannot consider inflation outside of that approach as proposed by SA Power Networks.
Forecasts of the expenditure required for bushfire safety.
That the AER did not make the errors of fact pleaded by SA Power Networks, nor did it exercise its discretion incorrectly or make a decision that was unreasonable.
Forecasts of labor cost escalations.
That the AER did not make any material errors of fact, nor did it exercise its discretion incorrectly or make a decision that was unreasonable.
The practical effect of the Tribunal’s determination
The practical effect of the Tribunal’s determination is that the AER’s Final Decision remains.
Privatisation & restructuring
Aus – the possible sale of Western Power
The politics of privatisation in the West
Not surprisingly, privatisation is unpopular in states dominated by the Labor party. However it seems that the possible privatisation of Western Power might be driven more by the State’s ailing finances than by strict ideology.
Latest political announcements
Announcements over the last few weeks include…
· A reassurance from Premier Colin Barnett that Western Power would continue to operate as a regulated monopoly (presumably to assuage the popular misconception that a private owner would be free to increase prices).
· That a sale would free up funds for social infrastructure for a growing population.
· An opposing view from Labor leader Mark McGowan that privatisation will bring a reduction in service. His statement emphasised the loss of the annual income from Western Power (whilst overlooking the sale proceeds) and overlooked the simple fact that Western Power’s prices will continue to be regulated (analysis obtained by ABC revealed that there is no consistent link between privatisation and either higher or lower prices).
· The starting of a petition by the Labor party.
Possible next steps
It seems that the possible sale could end up being a key issue for the 2017 state elections. As this is a significant issue for the Australian electricity sector, Pipes & Wires will pick up this story again as the election comes closer.
US – the muni’ising Boulder saga continues
Pipes & Wires has been following the efforts of the City Of Boulder, Colorado to purchase Xcel Energy’s distribution assets and run those assets as a Muni (Pipes & Wires #126, #128, #137, #141 and #154). This article examines recent progress and some recent claims of the likely benefits,
Recent progress on muni’ising Xcel’s Boulder distribution system
The District Court ruled the following…
· That the breakup of Xcel’s distribution system could affect supply reliability and prices to customers outside of the City’s area.
· This violated the principles of monopoly operation.
· That the Colorado Public Utilities Commission (PUC) should therefore have input to this matter. The PUC went on to rule inter alia that the City could not acquire Xcel distribution assets that supplied customers outside of the City, nor could it force Xcel to share its assets.
Accordingly the City filed a Supplemental Application that omitted acquiring the 9 major substations and the 115kV ring around the City. The City went to acknowledge that the supplemental filing is a dramatic change.
Recent claims of benefits
The City of Boulder has released new analysis based on two measures…
· The customers savings based on the City setting tariffs lower than Xcel presumably would. The City’s analysis indicates that this could be as much as $100m over 10 years.
· Cash flow to the City. This is expected to be positive from Year 1, and is estimated to amount to $200m after 10 years.
Likely next steps
Pipes & Wires will comment further once the PUC releases its decision on the Supplemental Application.
Solar, batteries & nett metering
US – another electric company proposes solar tariffs
Pipes & Wires has been closely watching the increasing number of electric companies that are introducing solar tariffs … tariffs aimed at recovering the true economic cost of supplying a customer that takes a significantly reduced kWh volume and indeed expect to be paid for the kWh they export into the grid. This article examines Rocky Mountain Power’s proposed solar tariffs that could make Utah the next solar tariff battle ground.
The key issue
The key issue is that most electric companies recover very high fixed costs through a mix of fixed and variable tariffs …. historically those tariffs assumed an annual kWh volume (8,000kWh per year in New Zealand). The introduction of roof top solar panels behind the meter means that inter alia solar customers are no longer consuming that assumed volume, and indeed are often exporting kWh into the grid. This has the following implications…
· The electric company will be under-recovering the fixed costs. In the specific context of this article, Rocky Mountain Power estimates that this under-recovery will be about $6.5m per year.
· The electric company will be paying for the kWh exported by the customers. Due to legacy feed-in tariffs, this may be at much higher prices than what the electric company could sell that same kWh to the customer for.
· Export of solar power may increase the distribution system peaks but not at the times when it usefully offsets demand.
A bit about Rocky Mountain Power
Along with Pacific Power, Rocky Mountain Power is a subsidiary of Pacificorp. Rocky Mountain has its headquarters in Salt Lake City, and supplies 1,071,600 electric customers across parts of Utah, Wyoming and Idaho.
Rocky Mountain Power’s proposed tariffs
Rocky Mountain is proposing the following tariffs….
· A $60 application fee for a nett metering installation, to cover the cost of processing the application.
· A $15 per month fixed charge.
· A demand charge of $9.02 per kW for peak period demand.
· An energy charge of $0.0381 per kWh for energy consumed from the grid
Rocky Mountain also notes that roof top solar customers effectively save $0.105 for every kWh they generate, whilst Rocky Mountain could purchase that same energy from grid-scale renewables for about 1/3 of that cost.
Pipes & Wires will pick up this story as Rocky Mountain implements its tariffs.
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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