From the
editor’s desk…
G’day
cobbers ... this issue of Pipes & Wires has a strong Australian emphasis.
Much of PW #165 deals with the critical issue of system security and energy
mix, not in the sense that these issues are uniquely Australian and couldn’t
happen anywhere else but rather that they have happened in Australia and there
is a lot of analysis by various agencies that provides a useful starting point to
examine those issues.
PW
#165 starts with 2 articles from New Zealand, one on asset strategy and the
other on defining jurisdiction for hearing a tariff complaint. We then move
through a series of Australian articles including a couple of semi-related articles
on system security and energy mix interspersed with a quick look at evolving
energy policy in France, and a recent electric transmission grid tariff
adjustment in the Netherlands. So … until next month, happy reading…
What’s trending ??
Some of
the industry themes and trends that are emerging include…
· A shift towards government financial support for secure
generation.
· Reducing the options for appealing regulatory decisions.
· 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”.
· 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.
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Asset strategy
NZ – strengthening asset management practices
Introduction
The
Office of the Auditor General (OAG) recently released its report into the asset management practices of NZ’s electricity distribution businesses (EDB’s). This
article summarises the key conclusions of the OAG’s report.
Background to the OAG’s report
In
2016 the OAG reviewed the 2014/15 financial results. That work noted that the electricity industry is very
asset intensive, and that further scrutiny of EDB’s asset management practices
was planned.
Key conclusions of the OAG’s report
Key
conclusions of the OAG’s report are…
· That the core distribution activities are profitable, with
low levels of debt that provide flexibility to respond to short-term changes.
Reinvestment levels are maintaining average network ages, however EDB’s are
encouraged to consider how well they are identifying and managing asset aging
risks.
· There was no evidence that subsidiary investments at the 3
EDB’s examined (Alpine Energy, Unison and Waipa Networks) were distracting attention away from the core distribution
business. Varying levels of risk around fiber and offshore contracting were
noted, however the OAG is confident that those risks are being well managed.
· There is further scope for risk management methods to be
integrated, whilst also ensuring that the significant trends don’t get lost
amongst the details.
· Variations of approach to and the completeness and detail of
asset condition information between the 3 companies were noted, although this
was not considered unreasonable. The OAG was emphatic that understanding the
condition of main assets needs to improve.
· None of the 3 companies had a complete list of maintenance
task procedures, which the OAG considers important.
· Varying sophistication of asset renewal decision tools were
noted, however they are adequately considering age, performance, condition,
safety, risk and cost. The uncertainty around renewal forecasts was noted.
· Surprise was expressed that maintenance and renewal forecasts
adopted a 10 year horizon. This was contrasted with firstly lives in excess of
50 years and secondly councils working to a 30 year horizon. The OAG were firm in
its view that EDB’s need to do more work to understand longer term renewal and
maintenance.
· Concern was expressed that the 10 year forecasts do not
include increases for maintenance or renewals, with the apparent lack of
robust, detailed condition monitoring data compounding that concern. The EDB’s
responded that assets are out-living their standard lives (ie. condition is
deteriorating slower than calendar age would suggest).
· Useful asset lives need to align to financial reporting and
regulatory lives. The OAG’s commentary suggests that it is the financial
reporting and regulatory lives that needs to align with expected useful lives,
and not the other way round. Note that s2.2.8 of the Electricity Distribution
Services Input Methodologies Determination 2012 allows adoption of non-standard lives.
· Some concern was expressed that the 3 EDB’s might be left
unprepared if the uptake of emerging technologies is greater than forecast.
Hence it was recommended that scenario modelling be regularly reviewed.
Next steps
EDB’s will obviously need
to digest the OAG’s conclusions within their own contexts. One suggestion would
be to include a reconciliation of the OAG’s conclusions with an EDB’s status in
the March 2018 AMP. For help with this pick here or call
Phil on (07) 854-6541.
Tariffs, subsidies & tax credits
NZ – Court rules on additional rooftop solar tariff
Introduction
The
battle over electric companies imposing additional tariffs for connecting
rooftop solar in the United States will be familiar to readers. This article
examines recent similar events in New Zealand in which the introduction of a
rooftop solar tariff went to Court.
The issue
The
issue is Unison’s introduction of a new tariff for rooftop solar installed after 1st April 2016 to ensure that customers with rooftop solar pay their fair
share of operating the network. Renewable energy company SolarCity condemned
this as a “solar tax” and complained to the Electricity
Authority (EA) that Unison’s new tariff breached Schedule 6.4 of the Electricity Industry Participation Code on the basis that connection charges for distributed
generation must not exceed the incremental cost of providing connection
services to the distributed generation. Unison went to the High Court arguing
that the EA’s Rulings Panel did not have the required jurisdiction to hear the
case.
It is
therefore important to note that the Court has not upheld Unison’s solar tariff
per se, but rather has upheld Unison’s
view that SolarCity’s complaint could not be heard by the Rulings Panel.
The regulatory framework
The
regulatory framework includes the following…
· Schedule 6.4 of the Electricity Industry Participation Code
sets out the pricing principles for connection of distributed generation.
· The Electricity Industry (Enforcement) Regulations 2010.
The sequence of events
The
approximate sequence of events is…
· April 2016 – Unison introduces its new tariff.
· May 2016 – SolarCity complains to the Electricity Authority.
· July 2016 – an investigator at the Electricity Authority
determined that the issue was in fact a retail consumer tariff and therefore
did fall within the provision of distributed generation in Part 6.
· August 2016 – the EA advised SolarCity in writing that it
had decided not to take any further action.
· September 2016 – SolarCity formally complained to the
Electricity Authority’s Rulings Panel.
· October 2016 – Unison argued inter alia that because the EA’s investigation had not been
discontinued, SolarCity’s complaint under Part 6 of the Code was in fact invalid.
· January 2017 – the Rulings Panel determined that it did not
have jurisdiction to hear the matter.
· May 2017 – the matter is heard in the High Court.
· June 2017 – the High Court concluded that the Rulings Panel does
not have jurisdiction to hear the matter.
The Court’s judgement
The
Court concluded that…
· The Rulings Panel does not have jurisdiction to hear the
dispute.
· Unison’s appeal (of the decision that the Rulings Panel has
jurisdiction to hear the matter) is allowed.
Aus – calls to re-regulate retail electricity markets
Introduction
Populist
calls to re-regulate electricity markets are nothing new. This article examines
retail electricity market regulation using a recent call by the Opposition
party in the Australian state of New South Wales as a starting point.
The Oppositions’ call for re-regulation
The leader
of the Opposition Labour Party, Luke Foley, recently indicated that one of Labour’s campaign platforms
for the next state election in 2019 will be rising electricity prices, and that
it will “re-regulate” the electricity market so companies cannot make “super
profits”.
What the issues seem to be…
Obviously
high prices (along with various pronouncements of further price rises) are what
Labour sees as the issue, with the added view that all the money is simply
going to profits. A simplistic but undoubtedly politically popular view.
… and what the issues really are
It
would nice to think that rising prices have one and only one cause (and in
Labour’s mind, they seem to), but they don’t. The underlying reasons are many
and diverse and include…
· The closure of Hazelwood, with the consequent increase in
gas-fired generation.
· Shortages of gas, and demand for gas exports driving up gas
prices.
· Increased investment in grids and networks.
· Policy uncertainty reducing investor confidence so that a
long-term, least-cost investment program doesn’t occur.
The coupling and de-coupling of prices and costs implicit in
Labour’s plan
Costs
are largely what they are, and then a profit margin gets added. Market
structures tend to put downward pressure on prices, encouraging companies to
reduce their costs and optimise their profits. In an asset-intensive industry
like electricity that will inevitably be over a long time period, but
ultimately prices will settle at a level of cost plus a margin.
A
simple re-regulation of retail prices will simply de-couple prices from costs
with the most likely outcome being reduced investment certainty. A wider
reading of the Australian energy sector is that it is this reduced investment
certainty that is putting upward pressure on prices.
Network access decisions
Netherlands – setting the electricity transmission tariffs
Introduction
The Consumer &
Markets Authority (ACM) recently amended a component of the tariff that will
apply to Dutch electricity transmission operator TenneT for the 2017 – 2021 regulatory control period. This article
examines that amendment and why it occurred, and then draws a parallel with the
recent Federal Court judgement in Australia.
A bit about TenneT
TenneT
owns and operates the following electricity grids…
· The 220kV and 380kV grids throughout the Netherlands.
· The 110kV and 150kV grids throughout the Netherlands, which
were acquired around 2010.
· The former E.On Transpower
Stromübertragungs GmbH grid, which was acquired in 2010 and makes TenneT the
largest grid operator in Germany.
· Various AC and DC interconnections.
TenneT
is owned by the Dutch government through the Ministry of Finance. Annual revenue is about €3.2b
How TenneT’s tariffs are set
TenneT’s
tariffs for the Netherlands are set by the ACM using the building block
approach that most of us are familiar with … all the usual parameters like
individual efficiency factors, sector productivity (efficient frontier), cost
of capital, regulated asset bases, depreciation etc. It is important to note
that the Electricity Act 1998 provides for ex-post adjustment of TenneT’s
tariffs around annual surpluses and deficits (which in theory should minimise
transmission volume risk).
ACM
had previously set tariffs for 3 years, however the decision was made that the
current tariff would be for the 5 year period from 1st January 2017
to 31st December 2021, with an annual adjustment of the X factor
prior to the start of each calendar year.
The most recent X factor decision
The
ACM released its 5 year tariff decision in August 2016, which TenneT then
appealed to the Trade And Industrial Appeals Tribunal (CBb). The Tribunal upheld TenneT’s appeal and required the
ACM to amend its X factor decision of August 2016, which the ACM released in
April 2017. This amended decision (including the X factor) will allow TenneT to
increase its annual revenue by about €40m.
Parallels from the recent Australian Court decision
The
TenneT decision has broad parallels with the recent Federal Court judgement in Australia that upheld 1 particular aspect (the use of benchmarking)
of the appeals against the Australian Energy Regulators’ decisions.
Aus – abolishing the Limited Merits Review
Introduction
Pipes
& Wires’ examination of the Federal Court’s judgement in regard to the electricity DNSP’s appeal of the Australian Energy
Regulator’s decisions to the Australian
Competition Tribunal noted that one of the likely implications would be a
renewed effort to abolish the Limited Merits Review (LMR) process. This article
examines recent announcements by the Australian Government that will inter alia reduce the ability of DNSP’s
to appeal the AER’s decisions.
Exactly what is the Limited Merits Review ?
The
LMR was introduced in 2008 to provide for the Australian Competition Tribunal
to identify aspects of the AER’s decisions that may be reviewed. The regulatory
framework for the LMR is set out as follows…
· Division 3A of the National Electricity (South Australia) Act 1996. In particular s71c defines the grounds on which an
application to the Tribunal can be made.
· Section 9 of the National Electricity (South Australia) Regulations, which defines the clauses of the National Electricity
Rules for which AER decisions are reviewable.
Previous amendments to the Limited Merits Review
The
LMR was previously reviewed in 2013. A further review was commenced in 2016 for which the conclusions were expected in mid-2017.
The Government’s announcement
On 20th
June 2017 the Government announced that it would inter
alia “strengthen the Australian Energy Regulator by providing it with an
additional $67.4m to stop energy network companies gaming the system and
overturning rulings in the courts”.
What the commentators think of the abolition
Criticism
of the Government’s announcement by various commentators includes the following
themes…
· Ad-hoc decisions seem to be a large part of the problems
facing Australia’s energy sectors.
· Claims that higher prices are being driven by energy costs
rather than lines costs.
· The announced abolition is contrary to the decision reached
by the COAG Energy Council 2 months previously, is contrary to the 2016 review
of the LMR in which 80% of stakeholders rejected abolition, and also blindsides
the Finkel Report’s recommended reform of the LMR.
System security & energy mix
Aus – examining the Finkel Report
Introduction
Australia’s
energy sector has recently faced some significant issues that strike right at
the heart of the Security – Price – Emissions trilemma. This article examines the Blueprint For The Future: Independent Review Into The Future Security Of
The National Electricity Market (commonly referred to as the Finkel Report, after its
author Dr Alan Finkel).
The wider context
The
preface to the Finkel Report usefully sets some context for the Independent
Review…
· Increasing costs of gas (noting that the Hon Josh Frydenberg’s announcement of 19th June 2017 includes some
bold statements about gas pricing).
· Uncertainty around emission reduction policies was pushing
up prices and undermining reliability.
· The need to balance downward pressure on prices whilst also
not prematurely displacing low-cost generation.
· Financially rewarding customers for managing demand and
installing embedded generation and storage.
· The need to emphasise incentives rather than prohibitions.
· That emission reduction is not simply a State or
Commonwealth Government decision, but rather a complex array of global trends
including policy, trade competitiveness, new technologies and pressure for
lower prices.
Pipes
& Wires also notes that other inquiries into the trilemma have been held by the individual States.
Key conclusions of the Finkel Report
The
Finkel Report identifies 4 necessary outcomes for Australia’s continued
prosperity and well-being…
· Increased security of energy supply, including obligations
on new generators to provide essential security services and a more
conservative system operation in each region including maintaining system
inertia and tighter frequency control.
· Future reliability of supply, including obligations around
dispatchable capacity and ensuring low-cost generators do not close
prematurely.
· Rewarding consumers for reducing demand when needed, and
ensuring that new system capacity is least-cost.
· Lower CO2 emissions, including a trajectory
towards inter alia zero emissions in the second half of the century.
The
approaches recommended by the Finkel Report include…
· An orderly transition to provide certainty through an agreed
emissions reduction trajectory including a Clean Energy Target and a
requirement for all generators to provide 3 years notice of closure.
· System planning to help the transition to an innovative, low
emissions system including a system-wide grid plan and regional security and
reliability assessments.
· Stronger governance to drive faster rule changes and
overcome challenges, including a new Energy Security Board and strengthened
energy market bodies.
Not
surprisingly, one of the detailed recommendations is that the AEMO review its
2018 summer demand forecast and “prepare”.
The editor comments
An
observation is that many of these inquiries and reports start off with the
general view that security of supply must be improved (because that is what has
prompted most of them to start with), however the final recommendations to
improve security always seem to be subordinated to emission reduction.
Aus – does coal have a future after all ?
Introduction
This
one has been percolating away for a while, but it is still surprising that
Australian Prime Minister Malcolm Turnbull now publically supports coal, albeit “clean coal”. This
article examines the shift in Turnbull’s views in the context of a seemingly
inexorable path towards low emissions, and considers what the implications for
Australia might be.
The shift in Turnbull’s views
Going back
to 2010 when Turnbull was Shadow Minister in the Liberal Opposition he believed
that Australia needed to move towards a zero or near-zero emissions position to
avoid catastrophic climate change. Earlier this year (2017) Turnbull led a
charge against an obsession with renewable energy at the expense of
security of energy supply. All rather curious…
The wider context of security of supply and low emissions
The
wider context of Australia’s energy policy landscape is the myriad of reviews,
reports, inquiries and announcements about various aspects of Australia’s
energy sector at State and Commonwealth levels…
· The Finkel Report, whose principle recommendation was the establishment of a
clear emissions reduction trajectory to assist an orderly closure of coal-fired
generation.
· The Senate Environment and Communications Reference Committee inquiry into the closure of coal-fired power stations (refer to Pipes & Wires #160).
· 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 COAG Energy Council’s review on the Limited Merits Review regime.
While
these reviews, reports and inquiries highlight concerns about security of
supply, the underlying theme is that one way or another emissions will be
reduced.
Implications for Australia’s energy sector
So at
a guess, some of the possible implications for Australia’s energy sector include…
· Tinkering with the Clean Energy Targets recommended by the
Finkel Report, noting that Cabinet viewed most of the recommendations as
uncontroversial and ticked them off.
· Political concessions around energy storage (possibly
hinting at the extended Snowy Hydro scheme).
· Populist price regulation to squeeze down electricity prices
(noting that the NSW Opposition is already talking about this).
· Financial support for new generation, including clean coal.
· Maybe a re-think on the intended closure of coal-fired
generation. The Finkel Report recommended a 3 year notification period for
closures so it’s not hard to imagine this period being extended, and perhaps even
beyond that a requirement for Government approval to close (like in Germany).
· A likely continuation of ad-hoc interventions (eg. the announcement of 20th June 2017) to shift around the energy trilemma as the various
competing voices wax and wane.
A closing remark
Back
in 2014 the ESAA (now the Australian Energy
Council) stated that “nearly a decade of constant policy changes
and interventions by successive governments has left Australia’s electricity
generation sector virtually unbankable”. It’s hard to see how recent events
will improve investor confidence...
Grid operations
Aus – maintaining rotating inertia on the grids
Introduction
Most of us understand the
need for rotating inertia within a power grid. This article examines a recent
report by the Australian Energy Markets Commission that makes a range of recommendations for
maintaining minimum levels of “system strength” precisely to ride through
disturbances and meet increasingly steep ramping rates.
The AEMC’s System Security Market Frameworks Review
The AEMC launched the Review in July
2016 to consider what changes might be necessary to the NEM market and
regulatory frameworks to ensure continued system security as the generation mix
transitions away from synchronous (rotating) generation.
It is thought that
abolishing the requirement for all generators bigger than 100 MW to have
governors capable of responding to changes in grid frequency back in 2001 has
contributed to the recent decline in frequency control in the NEM. Perhaps
another line of thought is the closure of a lot of heavy rotating plant.
Key features of the Final Report
Key features of the Final Report include inter alia…
·
A recognition that many
(ancillary) services necessary for system security were implicitly provided by
legacy rotating generation.
·
A recommendation that grid
operators maintain a minimum level of “system strength” at generator connection
points, including a requirement that new generators “do no harm” to the
previously agreed levels of system strength.
·
Requiring transmission grid
operators to provide minimum required levels of inertia or equivalent services.
·
Assess whether mandatory
governor response requirements should be introduced.
·
Assess whether existing
frequency control arrangements will remain fit for purpose as increased solar
penetration requires increased ramping requirements.
·
Consider requiring all new
generation to include fast active power control capabilities
The editor comments
The core of the issue being
addressed by the AEMC’s work is the increasing amount of low inertia (wind and
solar) generation that reduces the grids ability to ride through disturbances. That
ability to ride through disturbances benefits all grid users, so it is sensible
that all generators should contribute to it.
Where this may get
difficult is when low inertia generators are required to contribute to the
minimum system strength at a defined connection point. A possible mechanism
could be for solar and wind generators to pay synchronous generators to provide
that system strength (spinning reserve, frequency keeping etc), resulting in a
tripartite agreement between the low inertia generator, the synchronous
generator and the transmission grid operator.
Energy policy
France – post-election shifts in energy policy
Introduction
Pipes & Wires #163 compared the nuclear energy policy positions of Front National (Marine Le Pen) and En Marche! (Emmanuel Macron) prior to the recent election. Noting Macron’s view that
nuclear should play a lesser role, this article examines progress to date.
Macron’s nuclear energy policy positions
The
following table compares Macron’s current position / progress with his
pre-election positions…
|
Policy
issue |
Pre-election
position |
Current
position / progress |
|
Energy
bills and fuel poverty. |
Reduce
heating bills for the least well off. |
· Nothing obvious has emerged on this
one yet, or even whether it will be a simple political intervention such as
retail price regulation or a subsidy. |
|
Nuclear’s
share of the primary energy mix. |
Preference
for nuclear’s share to reduce to 50% by 2025. |
· Early word after the election was
that Macron may delay plans to reduce nuclear’s share of the primary energy
mix, although an anonymous source subsequently claimed that the goal of 50%
remains but the date could change (possibly because it would be difficult to
close that many reactors in 8 years). · Macron may instead introduce a
subsidy mechanism to build new reactors. · Newly appointed Minister Nicolas Hulot has said that France should have a “medium-term goal” of
ending nuclear power. |
|
Life
extensions for existing plants. |
Would
wait for the ASN’s findings in 2018 before committing. |
· Not yet clear. · About 25,000 MW of capacity will be
withdrawn from the market if the ASN declines to approve 10 year life
extensions for the 34 reactors that will soon be 40 years old. |
|
Fessenheim
nuclear station. |
Supports
closure |
· Not clear, although Hulot has said he
will not force a closure. |
So …
some interesting maneuvering on the policy front already.
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…
· 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.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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