From the
editor’s desk…
Welcome
to Pipes & Wires #162. This month begins with a look at security of supply
risks in Australia, and then moves on to examine the regulatory and competition
issues around electric companies providing fast chargers in the United States.
We then look at the proposed sale of grid-scale solar electricity in the United
States, and then examine some regulatory decisions from various countries. We conclude
this issue with a look at some energy policy issues in New Zealand.
There
is also a small correction from Pipes & Wires #161. The article on the
Victorian gas distribution access arrangements incorrectly stated that State
Grid Corporation of China is the majority owner of AusNet Services, when in fact
the biggest stake is public ownership. Apologies to all concerned.
So …
until next month, happy reading…
What’s trending ??
Some
of the industry themes and trends that are emerging include…
· Rapidly rising pressure to retain secure thermal generation
in Australia.
· 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. This one might go through some ups and downs (like
what is happening in Australia with Hazelwood) along the path to
de-carbonisation.
System security & energy mix
Aus – reviewing Tasmania’s security of
supply
Introduction
Recent issues
of Pipes & Wires have examined Tasmania’s recent security of supply difficulties
(Pipes & Wires #152) and the raft
of high level investigations into security of supply (Pipes & Wires #161). This article
examines the Tasmanian Energy Security
Taskforce in detail, and notes its recent interim report.
The recent security of supply
difficulties
Pipes &
Wires #152 noted the convergence of several unfavorable factors…
· Closure of the Tamar Valley combined cycle
generation plant.
· Failure of the Bass Link cable that took about 6 months to repair.
· Low rainfall
compounding already low hydro storage (the worst since the 1967 drought that
prompted the building of Bell Bay).
This resulted
in a rapid recommissioning of Tamar Valley and the hiring of about 200MW of
diesel generators.
The Taskforce’s terms of reference
The
Taskforce will undertake an independent energy security risk assessment for
Tasmania having regard to…
·
Best practice water management including consideration of water
requirements across a range of stakeholders.
·
Tasmania’s future load growth opportunities and risks and likely impact
on projected energy supply and demand.
·
The opportunity for further renewable energy development in Tasmania,
including in wind, solar, biomass and other renewable technologies considered
in the context of anticipated transition of the national electricity market and
the potential for a second interconnector.
·
Likely developments in technology, such as battery storage and electric
vehicles.
·
Tasmania’s future exposure to gas price risk;
·
The potential impact of climate change on energy security and supply;
and
·
A review of energy security oversight arrangements.
The interim report
The interim
report recommends five priority actions…
· Define energy
security and responsibilities.
· Strengthen
independent energy security monitoring and assessment.
· Establish a
more rigorous and more widely understood framework for the management of water
storages.
· Retain Tamar
Valley as a backup, and to provide clarity to the Tasmanian gas market.
· Support new
generation within Tasmania, and customer innovation.
Next steps
Pipes & Wires
will revisit this story when the final report is released, and then look to tie
up the other security of supply reviews into a single consolidated article.
Aus – gas under pressure on the east
coast
Introduction
Pressure on the
Australian energy sector seems to be coming from all angles, and at a
quickening pace. This article examines the east coast’s gas supply industry in
light of a couple of recent announcements.
Quick overview of the east coast gas
supply industry
Most of the
east coast’s natural gas reserves are in either the hot, sandy bit near the
middle (areas like the Cooper Basin and the Amadeus Basin) or around
western Victoria (the Otway Basin and the Gippsland Basin). These
reserves are connected to the east coast markets by several long pipelines, many of which
feature in Pipes & Wires. These long pipelines in turn supply the
distribution networks (many of which also feature in Pipes & Wires) and
large industrial customers including gas-fired power stations.
It should be
noted that these reserves are minor compared to the huge reserves along the
northern coast of Western Australia which are not connected to the east coast
by pipelines.
Increasing gas-fired generation
Two major
issues are putting upward pressure on gas-fired generation…
· The expected
closure of coal-fired generation, starting with Hazelwood and Yallourn W. At the time
of writing it is noted that various groups including former PM Tony Abbott have
been pressuring the Commonwealth Government to keep Hazelwood open (and which
they appear to be unwilling to do).
· An increasing
recognition that renewables must be supported by generation that is both secure
and quick starting ie. gas (eg. refer to the companion article in this issue on
Tasmania that recommends keeping Tamar Valley open).
Moratoria on new gas exploration
The status of
moratoria on gas exploration is as follows…
· Victoria – announced
a permanent ban on all unconventional on-shore gas development (including fracking
and coal seam gas exploration) on 30th August 2016, and a moratorium
on any other on-shore gas exploration until 30th June 2020.
· Tasmania – extended
the 1 year moratorium on fracking introduced in March 2014 by a further 5 years
until March 2020.
· Northern
Territory – moratorium on fracking introduced in September 2016 for an
undefined period.
· South Australia
– proposing a 10 year moratorium on unconventional gas exploration if the
Liberals are elected in 2018.
· NSW – the Gas Plan attempts to
provide a strengthened regulatory framework for ensuring that water purity and
customer prices are well managed, however it is unclear how new exploration and
development will be incentivised.
The likely result
Putting
together increased demand for gas and the strong possibility of reduced supply
suggests an uncertain future. A couple of reports make interesting reading…
· The East Coast Gas Inquiry noted that
future gas supply outlook is uncertain, and there is a need for more gas
supplies in the southern states.
· The AEMO 2017 Gas Statement of
Opportunities notes that declining gas production
could result in electricity shortages as soon as the 2018/19 summer (that’s
only 18 months away !!).
· The interim report of the Tasmanian Energy Security
Taskforce recommends keeping Tamar Valley
available for dry year operation. That will require gas from somewhere, most
likely from the mainland.
· The Gas Vision 2050 sets out a
bold vision for gas’ role in de-carbonising Australia’s electricity, transport,
industry and domestic energy use. Tightening gas supply is specifically noted.
So one way or
another Australia needs to either quickly make more gas available or face
severe electricity shortages. Articles in the media following recent blackouts
suggest that the industry and communities alike have little tolerance left for
more blackouts.
Emerging
technologies
US – recovering the cost of fast chargers
Introduction
Electric
companies are understandably getting behind the installation of electric car
chargers. This article notes the withdrawal of a plan to install 810 chargers
in the high traffic areas of the US state of Michigan, and then looks at some
of the wider regulatory and competition policy issues.
Consumers Energy proposal
In
March 2016 Consumers Energy filed its rate case (regulatory proposal) with the Michigan Public
Service Commission. The details of the rate case included…
· The proposed recovery of the costs of installing charging
stations.
· An incentive scheme which would pay $1,000 to the first
2,500 customers who installed a car charger which operated on Consumers’
residential car charging tariff.
The PSC’s response
The PSC staff recommendations were inter alia…
· That all the capital costs of the charging stations be
excluded from the rate base (RAB). Charging station manufacturer ChargePoint argued that allowing recovery of such capital costs could
“stymie competition” and “slow rather than accelerate adoption of EVs in the
near and long term in Michigan”.
· Allowing the costs of the residential charger rebates to be
treated as a regulatory asset.
Consumers Energy’s response to the PSC recommendations
Consumers
Energy response was to withdraw both the charging station cost recovery
proposal and the incentive scheme from its rate case. Consumers’ went on to
note its willingness to participate in the Michigan Electric Vehicle
Collaborative, but not if cost recovery was prohibited.
A look at the energy and competition policy issues
Two
salient points come to mind…
· These things are great until an electric company wants to
recover the cost, then all of a sudden they’re not so great. Long time readers
might remember that Baltimore Gas & Electric’s (BGE) smart metering plan was consistent with Maryland’s energy policy until BGE
sought to recover the costs through their regulated tariffs, and then suddenly
the benefits weren’t there. More recently Kansas City Power & Light’s (KCPL) proposed recovery of the costs of
fast chargers were denied.
· Is a (regulated) monopoly service better than no service at
all ? The evidence is that the capital cost of fast chargers does create at
least some entry barriers, so we are seeing a fast charging market dominated by
electric companies. Surely that is better than no market at all ?
US – selling renewable energy for a premium
Introduction
One of
the behind-the-scenes battles around solar energy is between rooftop solar and
grid-scale solar. This article looks at a proposal by NV Energy for selling grid-scale solar and wind electricity to its
customers as a starting point to unpack this issue.
NV Energy’s proposal
The
key features of NV Energy’s Green Rider proposal include…
· The offer of blocks of 100kWh of renewable energy aligned to
the individual customers demand profile.
· The cost is expected to add about $2 to the average monthly
electric bill.
· The program will target 7.3 MW of capacity.
· The program doesn’t commit customers long-term (like buying
rooftop solar would).
The strategy aspects of the Green Rider proposal
Some
aspects of NV Energy’s strategy appear to be…
· Capturing a share of the renewable energy generation market
· Ensuring that generation stays in front of the meter.
· Further improving the cost advantage of grid-scale solar
over rooftop solar.
· Ensuring a future for the distribution network, and moreover
one that continues the existing model of centrally generated electricity and
mitigates the expected migration to a network based predominantly on LV
interconnection.
· Migrating customer perceptions to a position of “its makes
more sense to buy renewable electricity from the electric company rather than
install rooftop solar”.
Charging a premium for renewable products
Customer
uptake will obviously be key to the success of the Green Rider proposal. A bit
of thought suggests that while some customers are prepared to pay a premium for
“ethically correct” products such as fair trade coffee and organic vegetables,
some customers have a fairly limited willingness and ability to pay a premium.
From memory, attempts to sell wind-generated electricity for a premium in New
Zealand were less successful than hoped.
Grid-scale versus rooftop
A
little research reveals that grid-scale solar has a per-kWh cost of between 35%
and 50% of rooftop solar, with some recent grid-scale solar installations
selling electricity at around 4c per kWh. This suggests that tax credits and
subsidies for rooftop solar are adding a significant distortion to the national
economy.
Regulatory decisions
Aus – the Murraylink revenue determination
Introduction
The
Murraylink recently submitted its Revenue Proposal (rate case) for the five year period beginning on 1st
July 2018. This article examines the key features of that Proposal to set some
context for analysing the Australian Energy Regulator’s (AER) Draft and Final Determinations.
A bit about the Murraylink
The
Murraylink is a 180km long HVDC cable link between Berri (South Australia) and
Red Cliffs (Victoria) which operates at 150kV and has a rating of 220MW. It was
built by TransEnergie Australia and commissioned in 2002, and is now owned by
Energy Infrastructure Investments Pty Ltd.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which is made pursuant to the National Electricity Law.
Key features of the process
Key
features of the process to date include…
|
Parameter |
Initial
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
CapEx |
$34m |
|
|
|
|
OpEx |
$22m |
|
|
|
|
Opening
RAB |
$114m |
|
|
|
|
Post-tax
nominal vanilla WACC |
6.54% |
|
|
|
|
Regulatory
depreciation |
$27m |
|
|
|
|
Smoothed
revenue |
$96m |
|
|
|
Next steps
The
next step is for the AER to release its Draft Decision.
France – increasing the WACC
Introduction
It’s
not often that the government requests a WACC higher than the regulator’s
recommendation, so when it does happen it’s worth having a look at. This
article looks at the French governments’ recent request that the Commission de
Régulation de l‘Énergie (CRE) allow a higher asset beta for Enedis to compensate for the extra risk of customers transitioning
to renewables.
A bit about Enedis
Enedis
(formerly known as ERDF) distributes electricity to 35,000,000 customers over
1,300,000km of network throughout France. Annual revenues are about €13b.
The TURPE 5 tariff determination
The TURPE 5 tariff determination of November 2016 for the regulatory
period beginning 1st July 2017 embodied a nominal pre-tax cost of
equity of 6.7% based on an asset beta of 0.34.
The recommended WACC increase
In
response to the TURPE 5 tariff recommendation of November 2016, the Minister for Energy requested that the CRE increase the (nominal pre-tax) cost
of equity to better compensate Enedis shareholders for the risks of asset
stranding as customers install solar and batteries.
The CRE’s response
The
CRE rejected the Minister’s non-binding recommendation, claiming that the
recommended 6.7% cost of equity already included the risk of asset stranding.
Aus – the TransGrid revenue determination
Introduction
The
electricity transmission grid owner in the Australian state of NSW, TransGrid, recently submitted its Revenue Proposal (rate case) for the five year period beginning on 1st
July 2018. This article examines the key features of that Proposal to set some
context for analysing the Australian Energy Regulator’s (AER) Draft and Final Determinations.
A bit about TransGrid
TransGrid
owns and operates 13,000km of lines at 500kV, 330kV, 220kV and 132kV that
supply 99 bulk supply substations (GXP’s). Following the completion of the 99
year lease process in 2015, TransGrid is owned by a consortium led by Hastings Funds Management.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which is made pursuant to the National Electricity Law.
Key features of the process
Key
features of the process to date include…
|
Parameter |
Initial
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
CapEx |
$1,612m |
|
|
|
|
OpEx |
$908m |
|
|
|
|
Opening
RAB |
$6,406m |
|
|
|
|
WACC |
6.6% |
|
|
|
|
Regulatory
depreciation |
$678m |
|
|
|
|
Smoothed
revenue |
$3,973m |
|
|
|
Next steps
The
next step is for the AER to release its Draft Decision.
Austria – setting the gas transmission tariffs
Introduction
This short
article examines the recent tariff that will apply to Austria’s gas
transmission pipelines for the 2017 to 2020 regulatory period, and looks at the
movements in the various components of the tariff.
A bit about the Austrian gas transmission industry
Austria
has about 2,900km of high pressure pipelines which have two key roles…
· Supplying gas to 39,500km of distribution pipelines.
· Transporting bulk gas east to west towards Western Europe.
These
pipelines are regulated by the E-Control agency.
The transmission tariff
E-Control’s
revised cost determination methodology allows a return on equity of 8.92% (down
from 9.33%) and a real pre-tax WACC of 4.60%. Key parameters include…
· An increase in asset beta from 0.325 to 0.4.
· A continuation of the volume risk mark-up of 3.5%.
The
overall result is a decline in tariffs for the 2017 – 2020 period.
NZ – cost
of capital for gas distribution
Introduction
The Commerce Commission
recently released its cost of capital decision that will apply to all gas distribution and gas transmission businesses
subject to a default price-quality path (DPP) for the disclosure year starting on
1st October 2017. This article examines the key features of that
determination.
Regulatory frameworks
The applicable
regulatory frameworks are…
·
Clauses 4.4.1 to 4.4.10
of the Gas Distribution Services Input Methodologies Determination 2012.
·
Clauses 4.4.1 to 4.4.10
of the Gas Transmission Services Input Methodology Determination 2012.
These
determinations are made pursuant to Part 4 of the Commerce Act 1986.
Key features of the WACC
Key features of
the WACC include…
|
WACC description |
Mid-point |
67th
percentile |
|
Vanilla |
5.97% |
6.43% |
Energy policy
NZ – the Energy Innovation Bill works its way through
Parliament
Introduction
The Energy Innovation (Electric Vehicles and Other Matters) Amendment Bill is currently before Parliament. This article examines the
Bill, its objectives and its progress through Parliament.
Objective of the Bill
The
objective of the Bill is to encouraging energy innovation in regard to emerging
energy technologies and varying energy-related business models so that New
Zealand can respond to environmental and energy objectives.
Legislation to be amended
The
Bill will amend the Electricity Industry Act 2010 to achieve the following…
· Focus levy funding on areas where the greatest impact can be
made.
· To clarify how industry legislation applies to secondary
networks.
The
Bill will also amend the Energy (Fuels, Levies and References) Act 1989, the
Land Transport Act 1998, and the Road User Charges Act 2012.
Specific amendments to the Electricity Industry Act 2010
Part 1
of the Bill amends the Electricity Industry Act 2010 as follows…
· Amends s128 to expand the purposes for which the electricity
efficiency levy can be used.
· Inserts a new Subpart 2A into Part 5 (s131A) to clarify the
meaning of a secondary network, and to make the Act, any Regulations and the
Code apply to any secondary network operator as if they were a distributor.
Progress of the Bill and next steps
The
bill was introduced to Parliament on 27th October 2016 and had its
first reading on 8th November 2016. It is currently before the
Commerce Select Committee, and the report is due in May 2017.
NZ – unpacking the IEA report
Introduction
The International
Energy Agency (IEA) recently published its 2017 Review of New Zealand. This article unpacks the key recommendations of that
report.
Key recommendations of the IEA report
Key
recommendations for the Government to action include…
|
Goal
area |
Specific
actions |
|
De-carbonisation. |
· Enhance the emissions trading scheme
(ETS). · Enhance sector specific plans for
transport and industry, including alignment with energy and climate goals. |
|
Improve
markets. |
· Improve the liquidity and depth of
markets to manage risk more efficiently. · Ensure efficient transmission
pricing. · Amending market design to better
integrate renewables. · Consider adopting a dry year reserve
auction. |
|
Improve
security of supply. |
· Develop a scenario based assessment
of the impacts of increasing renewables on grid stability and reliability. |
|
Review
the distribution sector. |
· Identify options to improve
flexibility and productivity. · Improve ability to respond to energy
transformation challenges. · Encourage more regional management
and operation. |
|
Enhance
the regulation of distribution. |
· Extend price quality regulation to
all distributors where it is cost effective. · Enforce reliability standards. · Facilitate through regional
integration. |
Responses to date
Energy
& Resources Minister Judith Collins has called for advice on the
performance of the distribution sector, noting that any disruption additional
to the energy transformation would be undesirable. Pipes & Wires will
examine this advice as it is made public.
The editor comments
Just a
couple of comments from and on the IEA report…
· The electricity chapter’s opening emphasis is on sector
de-carbonisation.
· Structuring of reserve capacity for dry years in a
low-carbon system is noted as a future challenge.
· The distribution chapters have a definite tone of industry
consolidation. Interestingly, the IEA’s 2013 report on Sweden notes 171 distribution companies with no obvious hints of
consolidation.
· Based on 2015 figures (noting that things have changed since
then), a national nett capacity margin of 18% is noted (which is probably about
right), however this is only 1.6% in the North Island. The report goes on to
note that under the scenario of Huntly closing the nett capacity margin in the
North Island would decline to -9.0%, and that if Huntly and Tiwai both close
the North Island nett capacity margin will still be -9.0%.
· The expectation that the forecast growth in annual
generation of about 4,000GWh by 2040 will be met by renewables.
· The limited usefulness of solar in a winter peaking system
is noted.
· The recent closure of thermal generation will reduce the
flexibility to respond to hydro variability.
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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Consultants Ltd accepts no liability for action or inaction based on the
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