Pipes & Wires


Issue 162 – April 2017


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




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




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




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









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




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…



Initial Proposal

Draft Decision

Revised Proposal

Final Decision











Opening RAB





Post-tax nominal vanilla WACC





Regulatory depreciation





Smoothed revenue






Next steps


The next step is for the AER to release its Draft Decision.


France – increasing the WACC




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




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…



Initial Proposal

Draft Decision

Revised Proposal

Final Decision











Opening RAB










Regulatory depreciation





Smoothed revenue






Next steps


The next step is for the AER to release its Draft Decision.


Austria – setting the gas transmission tariffs




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




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


67th percentile





Energy policy


NZ – the Energy Innovation Bill works its way through Parliament




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




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


·   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.


House-keeping stuff


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These articles are of a general nature and are not intended as specific legal, consulting or investment advice, and are correct at the time of writing. In particular Pipes & Wires may make forward looking or speculative statements, projections or estimates of such matters as industry structural changes, merger outcomes or regulatory determinations. These articles also summarise lengthy documents, and it is important that readers refer to those documents in forming opinions or taking action.


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