Pipes & Wires

INSIGHT AND ANALYSIS OF COOL ENERGY & INFRASTRUCTURE STUFF

Issue 163 – May 2017

 

From the editor’s desk…

 

Welcome to Pipes & Wires #163. This issue has a strong focus on the United States …. a merger and some policy and tariff issues. We also examine some network access decisions in New Zealand and Australia, and round out this month’s analysis with some thoughts on the French nuclear policy.

 

So … until next month, happy reading…

 

What’s trending ??

 

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 have been “market-led”.

 

·      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.

 

·      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.

 

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Tariffs, subsidies & tax credits

 

US – introducing a demand charge

 

Introduction

 

Most of us are very familiar with two-part tariffs … a fixed monthly charge, and a variable charge based on kWh consumption. This article examines Eversource’s proposal to include a demand charge on the customers of its 2 regulated electric distribution businesses (NStar Electric, and Western Massachusetts Electric Company) on top of those fixed and variable charges.

 

Eversource’s proposed tariff changes

 

Eversource is proposing to include a demand (kW) charge based on the greatest amount of electricity used in any half-hour during a billing period.

 

A bit of a re-cap on tariff rebalancing

 

As rooftop solar nibbles away at variable (kWh-based) revenue, electric companies are seeking to re-balance their tariffs by increasing the fixed monthly charges and reducing the kWh charge primarily to ensure that revenue becomes less dependent on kWh consumption and remains sufficient to fund the high fixed costs of distribution system operation. This has two effects…

 

·      In the short-term, the reduction in kWh charge reduces the value (benefit) of avoiding mains consumption, thereby reducing the value proposition of rooftop solar.

 

·      In the long-term, increasing the fixed monthly charge increases the value (benefit) of going off-grid, thereby increasing the value proposition of rooftop solar. Key arguments include the possible acceleration of the death spiral of the distribution network, and that it is generally impractical to go off-grid (ie. respond to the price signal).

 

The impact of a demand charge

 

Notwithstanding that other components of the monthly bill may decline, the most obvious impact of demand charge is to prima facie increase the monthly electric bill.

 

Some … perhaps many … will undoubtedly argue that sending price signals for inelastic goods and services is a crock, but some thought would suggest that commonly accepted household practices performed during peak electric periods could be performed at other periods eg. using clothes dryers. However our experience from recent customer surveys in New Zealand is that some customers would want to save at least $15 to $20 per month to shift the use of appliances to off-peak periods whilst others are not prepared to at all. This suggests that customers simply don’t want to respond to price signals rather than being unable.

 

Some philosophical ramblings

 

One of Pipes & Wires’ observations over the last few years is that rooftop solar lobby groups think that it’s acceptable to connect to the distribution network at less than true economic cost. Some closing thoughts include…

 

·      Reference to the article “US – how much is solar really worth to a distribution network ?” in PW #157 suggests that solar electricity injected into a distribution network during the middle of the day may not be worth that much after all.

 

·      Rather than going off-grid, at least some renewable energy proponents are staying very much on-grid to capture the various subsidies (refer to “Germany - the district of Feldheim goes self-sufficient” in PW #139.

 

·      Claims that “solar progress would come to a halt if the demand charge is approved” could be expressed alternatively as “solar progress depends on not paying its’ fair share of distribution charges”.

 

US – curtailing Oklahoma’s zero emission tax credit

 

Introduction

 

The US state of Oklahoma recently signed legislation that will end the state zero emission tax credit on 1st July 2017. This article unpacks that news and looks at some of the wider issues.

 

Zero emission tax credit regulatory framework in Oklahoma

 

The zero emission tax credit regulatory framework in Oklahoma is the Zero Emission Facilities Production Tax Credit. Key features of the credit include…

 

·      Applicable to all zero emission generation facilities placed in operation after 4th June 2001.

 

·      The facility must be rated at 1 MW or greater.

 

·      The electricity must be sold to an unrelated party.

 

·      The credit applies for all tax years beginning on or after 1st January 2003 as follows…

 

Period

Tax credit

1st January 2003 to 1st January 2004.

$0.0075 per kWh.

1st January 2004 to 1st January 2007.

$0.0050 per kWh.

1st January 2007 to 1st January 2012.

$0.0025 per kWh.

 

·      For facilities that began operating after 1st January 2007, the applicable tax credit is $0.005 per kWh until 1st January 2021.

 

Repealing the tax credit

 

House Bill 2298 created the Zero Emission Facility Tax Credit Amendment Act 2017 in February 2017. The House voted 74 – 24 in favor allowing the Bill to pass to the Senate. The Senate then voted 40 – 3 in favor, allowing the Bill to pass to the Governor who signed the Bill into law in April 2017.

 

The thinking behind curtailing the tax credits

 

So now we’ve looked at the legal and procedural details, we might well ask why owners of zero emission generation might willingly agree to curtail a tax credit ?

 

The wind component of zero emission generation proved hugely successful, and (according to the Wind Coalition) has attracted billions of $$$ of private investment and given Oklahoma some of the cheapest electricity in the United States whilst allowing wind energy to be financially sustainable. Consequently the tax credit (which cost the state about $40m per year) was seen as no longer necessary.

 

Network access decisions

 

NZ – the revised draft gas DPP’s

 

Introduction

 

As part of its compilation of the default price-quality paths (DPP’s) the Commerce Commission recently released its revised draft DPP’s for consultation that will apply to…

 

·      the gas distribution businesses owned by GasNet, Powerco, Vector and First Gas.

 

·      all gas transmission businesses.

 

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 revised draft gas distribution DPP

 

Key features of the revised draft gas distribution DPP 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, with the added requirement that the RTE to any 1 emergency cannot exceed 180 minutes.

 

These revised draft requirements are virtually identical to the draft decision.

 

Key features of the revised draft gas transmission DPP

 

Key features of the revised draft gas transmission DPP include…

 

·      Provision for submitting a CPP application any time before 1st October 2012.

 

·      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.

 

·      No RTE may exceed 180 minutes, neither can there be a major interruption.

 

·      A WACC of 5.67% which will be updated for the final decision.

 

Similarly to distribution, these devised draft requirements are virtually identical to the draft decision.

 

Aus – final Victorian electricity transmission decision

 

Introduction

 

The Australian Energy Regulator (AER) recently published its Final Decision in regard to Victoria’s electricity transmission operator, AusNet Services, for the 5 year regulatory period beginning on 1st April 2017. This article examines the key features of that Final Decision.

 

A bit about AusNet Services electricity transmission business

 

AusNet Services is a limited company that is part publically owned and also part owned by a consortium including State Grid Corporation and Singapore Power. Its electricity transmission business operates 6,570km of lines at 132kV, 220kV and 500kV. Annual revenue is about $620m.

 

Regulatory framework

 

The basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which are made pursuant to the National Electricity Law.

 

Key features of the process

 

Key features of the process to date include…

 

Parameter

Initial Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$746m

$573m

$751m

$719m

OpEx

$1,102m

$1,032m

$1,058m

$1,132m

Opening RAB

$3,130m

$3,195m

$3,181m

$3,170m

WACC

7.22%

6.16%

7.41%

5.8%

Depreciation

$603m

$521m

$624m

$506m

Smoothed revenue

$3,161m

$2,695m

$2,835m

$2,742m

 

That concludes Pipes & Wires coverage of AusNet’s revenue determination for the next few years.

 

NZ – setting the WACC for electricity distribution

 

Introduction

 

The Commerce Commission recently released its cost of capital decision that will apply to electricity distribution businesses for the year ending 31st March 2018. This article examines the key features of that determination.

 

Regulatory framework

 

The regulatory framework for setting the WACC is set out in clauses 2.4.1 to 2.4.9 of the Electricity Distribution Services Input Methodologies Determination 2012 (consolidated to February 2017). That determination is made pursuant to Part 4 of the Commerce Act 1986.

 

Key features of the WACC’s

 

Key features of the Vanilla WACC’s include…

 

Parameter

25th percentile

Mid-point

67th percentile

75th percentile

Vanilla WACC

4.92%

5.60%

6.05%

6.29%

Post-tax WACC

4.36%

5.04%

5.48%

5.72%

 

Aus – the Queensland electricity transmission revenue reset

 

Introduction

 

The Australian Energy Regulator (AER) recently published its Final Decision for the Queensland electricity transmission operator, Powerlink, for the 5 year regulatory period beginning on 1st July 2017. This article examines the key features of that Final Determination.

 

A bit about Powerlink

 

Powerlink is a limited company owned by the Queensland State Government. It operates 14,310km of lines at 110kV, 132kV, 275kV and 330kV between Cairns and the NSW border. Annual revenue is about $1b.

 

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

$957m

$775m

$886m

$836m

OpEx

$977m

$1,051m

$1,049m

$1,051m

Opening RAB

$7,238m

$7,165m

$7,082m

$7,069m

WACC

7.3%

6.5%

5.5%

6.0%

Depreciation

$623m

$606m

$643m

$626m

Smoothed revenue

$4,017m

$3,721m

$3,742m

$3,940m

 

This concludes Pipes & Wires analysis of Powerlink’s revenue reset for the next few years.

 

Energy policy

 

France – does nuclear have a post-election future ?

 

Introduction

 

The race to be the next President of France is on, with immigration being a key issue (or at least that’s what the mainstream media kept telling us). This article briefly examines the two candidates’ (Emmanuel Macron and Marine Le Pen) positions on nuclear energy to get a sense of where France’s nuclear power industry might go.

 

The French nuclear industry

 

France has a very long and well established nuclear power industry that resulted from a deliberate strategy recognising France’s lack of indigenous energy resources and its heavy engineering capability. However France is not completely without anti-nuclear sentiment (at least since the Fukushima earthquake) … sure it is not as strong as in Germany, Sweden or Japan, but nonetheless there is at least some anti-nuclear feeling.

 

Where the candidates stand

 

The two leading candidates’ electioneering positions on energy and in particular nuclear energy appear to be as follows…

 

Candidate

Positions

Marine Le Pen (Front National)

·      Will retain state control of EDF and restore its public service mission.

·      Immediately reduce regulated gas and electric tariffs by 5%.

·      Aims to maintain, modernise and restore the nuclear industry, including life extensions beyond 40 years.

·      Doesn’t support the closure of the Fessenheim Nuclear Station in Alsace.

 

Emmanuel Macron (En Marche!)

 

·      Restore purchasing power to the least well off by reducing their heating and energy bills (not clear whether that would be a reduction in tariffs or a top-up).

·      Possible signs of supporting a move away from nuclear, including support for the reduction of nuclear’s share of the electricity fuel mix to 50% by 2025 (apparently in support of the out-going government’s intentions), whilst ensuring supply remains secure and CO2 emissions don’t increase.

·      Will wait for the ASN to deliver its findings in 2018 before committing to any life extensions.

·      Supports the closure of Fessenheim.

 

So there are obviously some quite different views, with Le Pen wanting to prolong nuclear power and Macron apparently wanting to reduce its role.

 

The election results

 

Emmanuel Macron has emerged as France’s new President, so we should probably expect a swing away from nuclear. Pipes & Wires will re-examine this in a few months to see what progress has been made.

 

System security & energy mix

 

US – juggling emissions and security

 

Introduction

 

Concern over the balance between emission reductions and security of supply is one of Pipes & Wires’ recurring themes, and we’ve taken a lengthy look at those issues in the Australian context in previous issues. This article continues that theme but shifts location to America by examining Secretary of Energy Rick Perry’s recent order to review inter alia the impact of regulation and federal subsidies on base-load coal-fired generation.

 

Background

 

The shift across the trilemma model towards higher environmental sustainability has bought the inevitable consequences of declining energy security and declining energy equity (ie. higher prices). Some key points include…

 

·      Federal subsidies for wind and solar that were renewed in late 2015 are due to wind down early next decade (except in Oklahoma, where they will curtail earlier).

 

·      Some states are now subsidising base-load generation (especially nuclear) which has been getting squeezed out of the markets by cheap natural gas and subsidised renewables.

 

·      Over 100,000 MW of coal-fired generation has been retired since 2000.

 

·      Almost 14,000 MW of that 100,000 MW was retired during 2015, with almost 30% of that 14,000 MW being retired in April 2015 when the Mercury & Air Toxics Standards came into force.

 

·      A further 21,000 MW of base-load coal-fired, gas-fired and nuclear generation could be retired by 2020.

 

·      Concerns over whether current market structures are correctly valuing the security provided by nuclear and coal-fired generation. Readers might recall from PW #157 that one of the four points in the Nuclear Promise’s Strategic Plan was to “leverage federal and state policies to ensure monetary recognition of nuclear energy’s value”.

 

·      The arguments that stagnant load growth and cheap gas are what’s really squeezing nuclear and coal-fired generation out of the markets.

 

·      Concern that primary energy supply is lacking diversity, and has become too dependent on gas supplies (especially during cold winters) and on intermittent renewables.

 

Terms of reference of Perry’s review

 

The terms of reference of Perry’s review require the Department of Energy to explore and analyse inter alia

 

·      The extent to which federal policies and changing fuel mix are challenging the original assumptions of wholesale markets.

 

·      Whether markets are correctly paying for attributes that contribute to security of supply.

 

·      The extent to which regulations, mandates, taxes and subsidies are forcing the premature retirement of base-load generation.

 

Perry notes his commitment to President Trump to not only analyse problems but to also provide solid solutions and policy recommendations.

 

Next steps

 

Perry’s order requires the Department to submit its report by mid-June 2017. Pipes & Wires will provide further analyse and comment as that report is made public.

 

Mergers & asset sales

 

US – rejecting the Great Plains – Westar merger

 

Introduction

 

The Kansas Corporation Commission (KCC) recently voted to reject Great Plains Energy’s proposed acquisition of Westar Energy. This article examines that decision.

 

Background

 

Great Plains Energy launched its $12.2b cash + stock + debt acquisition bid for Wester Energy in mid-2016, with a view to creating an enlarged electric company with 1,500,000 customers, 13,000MW of generation and $5.1b in annual revenues.

 

Obtaining regulatory approval

 

There were early signals that the KCC would allow a wider range of intervenors than what many of us are accustomed to considering. This included large electric customers, electric companies that buy wholesale power from Great Plains subsidiary Kansas City Power & Light (KCPL), and local chapters of labor unions.

 

Readers will recall that in late December 2016 the KCC recommended that the Commissioners reject the proposal on the basis that it doesn’t promote the public interest, and creates an unacceptably high financial risk for both customers and shareholders.

 

Key features of the KCC’s decision

 

Salient comments from the Commissioners’ decision include…

 

·      That the merger was presented to the KCC as a “take it or leave it” proposal which flatly rejected any significant customer safeguards such as maintaining a separate, independent Westar board.

 

·      Questioning the high price offered for Westar (which consumer advocates argued was too high).

 

·      While the merger of adjacent service territories makes sense, the terms of the merger didn’t make sense.

 

Great Plains response to the KCC’s decision

 

Great Plains and Westar have filed a Petition For Reconsideration with the KCC. This is to allow further discussions between Great Plains and Westar to resolve the concerns that led to the KCC’s rejection of the merger. This is expected to take all of the month of May.

 

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.