From the
editor’s desk…
Welcome
to Pipes & Wires #161. This issue starts with a look at the curly question
of investing in renewed infrastructure in the face of emerging technologies.
We
then note several inquiries in the security of electricity supply in Australia,
and then examine a couple of gas pipeline regulatory decisions. We then
conclude this issue with a look at energy policy in Australia, the US and in
Scotland. So … until next month, happy reading…
Emerging themes & trends
Some of
the industry themes and trends that are emerging include…
· Establishment of committees and task forces to inquire into security
of electricity supply.
· Regulators using merger approval processes to force electric
companies to implement wider objectives such as public policy goals.
· Development of national strategies for various things (like
closing thermal power stations) that a few years ago would’ve been
“market-led”.
· 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 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.
Emerging
technologies
Global – renewing infrastructure in the face of emerging
technologies
Introduction
Infrastructure
renewals are expected to cost trillions of $$$ over the next 15 to 20 years.
Whether that investment happens is likely to depend heavily on whether
infrastructure owners can recover that investment. This article unpicks two key
aspects of the challenge.
The core of the challenge
As
infrastructure gets older its condition declines through complex physical and
chemical processes until it reaches a point where it fails to perform to a
required standard. Depending on the precise lifecycle strategy, intervention is
required either before or immediately after that failure.
A
major intervention is renewal or replacement. This goes by the widely used
title of Renewal CapEx, and as noted in the Introduction above the amount and
timing of that Renewal CapEx depends heavily on the infrastructure owners’
ability to recover that cost.
Regulatory incentives to invest in replacement assets
On the
face of it, many regulatory regimes appear to have risen to the challenge of
aging infrastructure by including high-level purpose statements in legislation.
A couple of examples include…
· New Zealand – s52A(1)(a) of the Commerce Act 1986 defines one of the purposes of Part 4 of the Act as
providing incentives to … invest in … replacement assets.
· Australia – the National Electricity Objective (set out in
s7 of the National Electricity Law) is to promote efficient investment in … the reliability,
safety and security of the national electricity system.
· Indiana – the Senate Bill 560 would allow electric (and gas)
companies to pass through up to 80% of the approved capital expenditure without
filing a rate case
Unfortunately
the practical application of the detail underneath these noble objectives seems
to be making infrastructure owners hesitant and even unwilling to renew assets.
Emerging technologies undermining certainty of investment
Most
regulatory regimes allow the recovery of costs over specified periods
(depreciation). In the bygone days of monopoly line services, that cost
recovery was a given once the costs were added to the asset base. Emerging
technologies such as rooftop solar and batteries are eroding that certainty of
cost recovery, suggesting electric companies will be even less likely to invest
in replacement infrastructure.
Meeting the challenge
If we
step back from the detail of this, the real issue is recovering the cost of
renewal over a much shorter period of time. Observation suggests that this
period might need to be about 5 to 10 years, but certainly much shorter than
the accelerated depreciation that some regulators are proposing.
So the
real challenge for electric companies will be to shift from multi-decade cost
recovery in a regulated environment to single-decade cost recovery in a
competitive environment. Utility Consultants and the UMS Group have been
advising a number of American electric companies on this and other future
trends as part of the Electric Utility Of The Future initiative … for more
information contact Phil or Jeff.
System security & energy mix
Aus – inquiring into security of electricity supply
Introduction
Recent
extreme weather events in the eastern states of Australia have prompted formal
investigations into the security of electricity supply. This article briefly
looks at those events, and also at the investigations into the wider issue of
security of supply.
Recent extreme weather events
Recent
extreme weather events in the eastern states include the following…
Date |
Area |
Nature
of event |
Result |
Early
2016 |
Tasmania |
Low hydro inflows compounded by a lengthy outage
of the Bass Link cable. |
Hydro
storage in Tasmania reached critically low levels. |
September
2016 |
South
Australia |
Tornadoes
blew down about 20 towers on the Murray and Heywood interconnectors to
Victoria. |
State-wide
blackout in South Australia. |
December
2016 |
Adelaide |
Severe
storms causing flooding. |
Loss
of supply to 160,000 customers in Adelaide. |
February
2017 |
NSW,
Victoria |
Extreme
high temperatures causing high air conditioning demand. |
AEMO
market alerts |
The various investigations
The
following investigations into the security of Australia’s electricity system
are either in progress or proposed…
· The Senate Environment and Communications Reference Committee inquiry into the closure of coal-fired power stations (refer to Pipes & Wires #160).
· The Independent Review into the Future Security of the National Electricity
Market.
· The Tasmanian Energy Security Taskforce, in response to the energy security challenges of early
2016. One of the interim reports recommendations was that the gas-fired Tamar Valley Power Station be retained.
· The AEMO’s ongoing investigations into the sequence of events that led to load shedding in
South Australia in early February 2017.
· The NSW Energy Security Taskforce. A draft report is expected by mid-2017.
The
fact that there are 5 investigations (along with hard questions being asked in
Victoria) suggests that energy security is now a very critical issue for the
eastern states. Pipes & Wires will examine the various conclusion as they
are released.
Regulatory decisions
Aus – the Victorian gas distribution access arrangements
Introduction
The 3
gas distributors in the Australian state of Victoria (MultiNet Gas, AusNet Services and Australian Gas
Networks) recently submitted their Access Arrangement Proposals
(rate cases) to the Australian Energy Regulator (AER) for the 5 year regulatory period commencing on 1st
January 2018. This article examines the key features of those Proposals to set
some context for analysing the AER’s decisions later in 2017.
A bit about the gas distributors
· MultiNet owns and operates 165km of transmission pipelines
and a further 9,900km of distribution mains that supply about 700,000 customers
throughout the eastern suburbs of Melbourne, the Yarra Ranges and South
Gippsland. MultiNet is wholly owned by DUET.
· AusNet Services owns and operates 9,400km of distribution pipelines that supply 665,000 customers throughout central and
western Victoria. AusNet is majority owned by State Grid Corporation of China.
· AGN owns and operates 10,500km of distribution pipelines
that supply 614,000 customers through the Melbourne area, rural areas to the
immediate north and east and across the NSW border into Albury. AGN is owned by
Cheung Kong Infrastructure.
Regulatory framework
The
regulatory framework for gas distribution includes the following…
· National Gas (South Australia) Act 2008 which has also been enacted in the other participating
states through application statutes.
· National Gas (South Australia) Regulations.
· National Gas Rules, for which Part 8 addresses Access Arrangements.
Key features of the Access Arrangement to date
Key
features of the MultiNet Access Arrangement to date include…
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
Gross
CapEx |
$517m |
|
|
|
OpEx |
$385m |
|
|
|
Opening
RAB |
$1,211m |
|
|
|
WACC |
6.12% |
|
|
|
Regulatory
depreciation |
$342m |
|
|
|
Unsmoothed
revenue requirement |
$1,101m |
|
|
|
P0 |
-9.12% |
|
|
|
X |
-2.00% |
|
|
|
Key
features of the AusNet Services Access Arrangement to date include…
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
Gross
CapEx |
$514m |
|
|
|
OpEx |
$305m |
|
|
|
Opening
RAB |
$1,575m |
|
|
|
WACC |
5.63% |
|
|
|
Regulatory
depreciation |
$259m |
|
|
|
Unsmoothed
revenue requirement |
$1,086m |
|
|
|
P0 |
5.00% |
|
|
|
X |
-2.00% |
|
|
|
Key
features of the AGN Access Arrangement to date include…
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
Gross
CapEx |
$555m |
|
|
|
OpEx |
$344m |
|
|
|
Opening
RAB |
$1,616m |
|
|
|
WACC |
5.28% |
|
|
|
Regulatory
depreciation |
$235m |
|
|
|
Unsmoothed
revenue requirement |
$1,158m |
|
|
|
P0 |
11.5% |
|
|
|
X |
2.45% |
|
|
|
Pipes
& Wires will re-examine this as the AER makes its Draft and Final
Decisions.
Aus – the Victorian gas transmission access arrangement
Introduction
Gas
transmission operator APA Group recently submitted their Access Arrangement Proposal (rate case) to the Australian Energy
Regulator (AER) for the 5 year regulatory period commencing on 1st
January 2018 for the Victorian Transmission System (VTS). This article examines
the key features of that Proposal to set some context for analysing the AER’s
decisions later in 2017.
A bit about APA Group and the VTS
APA
owns and operates inter alia 15,000km
of gas pipelines across Australia, which includes 7,500km of interconnected
pipelines in the eastern states. The VTS comprises 1,990km of pipelines which
form an integral part of the eastern states interconnected network.
Regulatory framework
The
regulatory framework for gas transmission includes the…
· National Gas (South Australia) Act 2008 which has also been enacted in the other participating
states through application statutes.
· National Gas (South Australia) Regulations.
· National Gas Rules, for which Part 8 addresses Access Arrangements.
Key features of the Access Arrangement to date
Key
features of the VTS Access Arrangement to date include…
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
Gross
CapEx |
$168m |
|
|
|
OpEx |
$131m |
|
|
|
Opening
RAB |
$1,007m |
|
|
|
WACC |
7.88% |
|
|
|
Regulatory
depreciation |
$106m |
|
|
|
Smoothed
revenue requirement |
$167m |
|
|
|
X |
-6.0% |
|
|
|
Pipes
& Wires will re-examine this as the AER makes its Draft and Final
Decisions.
NZ – the draft gas default price paths
Introduction
The
Commerce Commission recently released its draft decisions for the default price path (DPP) that will apply to…
· The gas distribution businesses owned by GasNet, Powerco, Vector and First Gas.
· All gas transmission businesses.
This
brief article discusses the key features of the draft decision to set some
context for the final decision (which Pipes & Wires will discuss around
June 2017).
Regulatory framework
The regulatory
frameworks are drawn from Part 4 of the Commerce Act 1986. Subpart 10 addresses gas pipeline services, and in particular subjects
all gas pipeline services to price-quality regulation (s55D).
Key features of the draft distribution decision
Key
features of the draft distribution determination include…
· Provision for submitting a customised price path (CPP)
application any time before 1st October 2021 (ie the start of Year
5).
· Starting prices are specified as maximum allowable revenue
(MAR), and will be specified in the final decision.
· The allowable annual rate of change of revenue is 0%.
· No more than 20% of response to emergencies (RTE’s) can take
more than 60 minutes.
Key features of the draft transmission decision
Key features
of the draft transmission decision include…
· The allowable annual rate of change of revenue is 0%.
· Revenue forecasts are to be built up from forecast
quantities multiplied by price.
· A wash-up account will be included in the revenue forecast.
· Average price increase from year to year will be a visible
parameter.
· A WACC of 5.67% which will be updated for the final
decision.
Next steps
The
Commission will receive submissions on the draft decisions until 10th
March 2017. The Commission must then publish its final decision by 31st
May 2017.
Aus – the Roma – Brisbane gas transmission access
arrangement
Introduction
Gas
transmission operator APA Group recently submitted their Access Arrangement Proposal (rate case) to the Australian Energy
Regulator (AER) for the 5 year regulatory period commencing on 1st
July 2017 for the Roma – Brisbane Pipeline (RBP). This article examines the key
features of that Proposal to set some context for analysing the AER’s decisions
later in 2017.
A bit about APA Group and the RBP
APA
owns and operates inter alia 15,000km
of gas pipelines across Australia, which includes 7,500km of interconnected
pipelines in the eastern states. The RBP comprises 438km of pipeline which forms an integral part of
the eastern states interconnected network.
Regulatory framework
The
regulatory framework for gas transmission includes the…
· National Gas (South Australia) Act 2008 which has also been enacted in the other participating
states through application statutes.
· National Gas (South Australia) Regulations.
· National Gas Rules, for which Part 8 addresses Access Arrangements.
Key features of the Access Arrangement to date
Key
features of the RBP Access Arrangement to date include…
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
Gross
CapEx |
$67m |
|
|
|
OpEx |
$71m |
|
|
|
Opening
RAB |
$452m |
|
|
|
WACC |
7.70% |
|
|
|
Regulatory
depreciation |
$73m |
|
|
|
Smoothed
revenue requirement |
$234m |
|
|
|
Pipes
& Wires will re-examine this as the AER makes its Draft and Final
Decisions.
Energy policy
Aus – developing a coherent energy strategy
Introduction
A
couple of months ago the Australian Energy
Council (AEC) called for the development of a national climate and
energy strategy as an adjunct to the federal government’s Climate Change Review 2017. This article examines the Review, and the AEC’s call for a
coherent national strategy.
The specifics of the Climate Change Review
The
Review commenced in February 2017 with the release of the Terms of Reference which includes consideration of integrating climate change
and energy policy. Public submissions will be called for, and the Review will
be concluded by the end of 2017. As the AEC has noted, this would seem an ideal
context within which to strongly link energy and climate change policy and
provide some policy direction on what the future role of thermal generation
will be.
The AEC’s call for a coherent national strategy
The
AEC’s call for a coherent national climate and energy strategy notes the
following…
· Visible deterioration of the system.
· Decommissioning of large power stations with no plan to
replace them.
· Paralysis of investment due to a decade of policy
uncertainty.
· There is a jurisdictional hodgepodge of targets, subsidies
and schemes.
The editor comments
Managing
system risk (in the traditionally understood context of dry years) has been a
major theme in recent issues of Pipes & Wires.
It was
therefore pleasing to see that the Senate Standing Committee on Environment and
Communications report into the retirement of coal-fired power stations was instructed to consider the increasing penetration of
renewables and the impact on security of supply. It is of concern, however,
that the four recommendations in Chapter 5 of the interim report don’t include any obvious reference to security of supply
(the final report is expected to be released at the end of March), hence the
call from the AEC for a coherent national energy policy is timely.
US – post-election energy policy
Introduction
Pipes & Wires #159 took a quick look at where post-election energy policy
might go, and noted that this would be revisited once President Trump got
established in the Oval Office. However the rapid pace of appointments and
policy decisions both before and after the inauguration suggests we should take
a look now.
The emerging energy policy
The
following table notes progress to date on some of Trump’s previously stated
energy policies…
Previously
stated policy position |
Progress
to date |
An
expected use of coal and shale gas to benefit American families and to
support American jobs. |
· Immediate publication of the America First Energy Plan which emphasises use of domestic
fossil fuels. · Eliminating policies that would
restrict the use of coal (such as the Climate Action Plan). |
Support
for the Keystone XL Pipeline (Phase IV), which by implication supports
increased imports from the Alberta oil sands. |
· Presidential Memorandum dated 24th
January 2017 invited TransCanada to promptly re-submit its
application, and instructed the Secretary of State to expeditiously review
that application. |
Strong
support for the coal industry. |
· Appointment of Rick Perry as Secretary of Energy (as governor of Texas, Perry was
known as a vocal champion of coal, despite Texas having more gas than coal). |
Strong
support for nuclear energy. |
· Trump’s acceptance speech referred to
untapped potential, which is considered to refer to nuclear energy. · Advisors already exploring ways to
support nuclear generation that is being squeezed out of the electricity
market by gas and wind. · Appointment of Rick Perry as
Secretary of Energy (as governor of Texas, Perry took the view that the
federal government must remove barriers to further investment in nuclear
generation). |
Support
for natural gas. |
· Appointment of Rick Perry as
Secretary of Energy (as governor of Texas, Perry incentivised the development
of gas-fired generation). · Appointment of Rex Tillerson as Secretary of State (former ExxonMobil chairman who has
promoted gas). |
Support
for renewable energy, but not to the exclusion of other forms of energy that
are working much better. |
· Appointment of Rick Perry as
Secretary of Energy (as governor of Texas, Perry continued the Bush initiatives
of increasing wind generation and transmission interconnections, and proudly
boasted that Texas generates more electricity from wind than all but 5
countries). |
A
rejection of the principles of green energy, including the view that man-made
CO2 emissions are causing global warming. |
· Appointment of Rick Perry as
Secretary of Energy (Perry’s view on wind energy was that it was good for
jobs, and federal subsidies were available). |
To
strengthen America’s energy independence as a key strategic and foreign
policy goal. |
· Immediate publication of the America
First Energy Plan which emphasises use of domestic fossil fuels. · Appointment of Rick Perry as
Secretary of Energy (as governor of Texas, Perry encouraged wind, solar and
the economic recovery of oil, and specifically stated a goal of ending
America’s dependence on hostile sources of foreign energy). |
Key
appointments to date would certainly suggest a more broadly based energy policy
that includes renewables (but not because of emissions), fossil and nuclear
energy and focuses on reducing America’s dependence on imported oil. Pipes
& Wires will take a further look at the evolving energy policy in a couple
of months.
UK – Scotland sets 50% renewable target
Introduction
The
recently released (draft) Scottish Energy Strategy embodies a target of 50% of Scotland’s heat, transport and
electricity consumption being supplied by renewables by 2030. This article
examines Scotland’s current energy mix and how big the shift might have to be
to achieve that 50% target.
Scotland’s current energy mix
Scotland
annual energy consumption is about 169,000 GWh, of which about 80% is direct
fossil fuel use. The remaining 20% is electricity consumption of which about
23% is fossil-fired and 35% is nuclear. The remaining 43% of electricity
generation is renewable.
This
indicates that only about 8% to 9% of Scotland’s total annual energy
consumption is renewable, suggesting that they have a long way to go to achieve
50%.
Examining the likely impact of the transition
Perhaps
the most obvious transitions that could be made are…
· Migration from petrol and diesel vehicles towards an
electric vehicle fleet.
· Migration from domestic gas use (space heating, water heating
and cooking) to all-electric.
To
achieve the 50% renewable target, 40% of annual energy consumption would need
to migrate from fossil to renewable (which in practice means electricity).
Even
if half the vehicle fleet became electric (so about 22% of annual petroleum
consumption was displaced by electricity) and 65% of all gas use was displaced
by electricity (a further 18% of total energy consumption) that would mean
about 48% of total final energy consumption would be electricity. This means
that Scotland’s annual nett electricity generation would need to increase by
about 2.7x and all of that increase would need to be generated by
renewables.
Obtaining
such a significant increase in annual renewable generation over the next 13
years will be a real challenge for Scotland in itself. Scratching below that
headline reveals further challenges in regard to exactly what mix of primary
energy will be involved (with extensive discussion of on-shore wind, off-shore
wind and tidal in the draft strategy) and exactly how the mix will contribute
to security of supply and customer prices.
Next steps
The
government will receive submissions on the (draft) energy strategy until 30th
May 2017. Pipes & Wires will revisit this once the strategy is finalised.
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.
· 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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