Pipes & Wires


Issue 165 – July 2017


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




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




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




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




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




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




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 ?




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




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




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.


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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