Pipes & Wires

INSIGHT AND ANALYSIS OF COOL ENERGY & INFRASTRUCTURE STUFF

Issue 161 – March 2017

 

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.

 

House-keeping stuff

 

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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 contents of Pipes & Wires including any loss, damage or exposure to offensive material from linking to any websites contained herein, or from any republishing by a third-party whether authorised or not, nor from any comments posted on Linked In, Face Book or similar by other parties.