From the
editor’s desk…
Welcome
to Pipes & Wires #166. This issue starts with a look at batteries and where
trends in cost and capacity might lead. We then examine what Brexit might mean
for the UK’s energy policies and then take a quick look at a re-juvenated
merger in the US. We then examine some emerging regulatory frameworks for water
and rail, closely followed by some security of supply issues in Australia. This
issue then closes with some WACC decisions in NZ.
It was
also great to meet many Pipes & Wires readers at the ACCC Conference (as
well as escaping a cold, wet winter). 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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Emerging technologies
Global – declining battery costs & disruption
Introduction
Just
how much batteries could disrupt the legacy industry seems to be the trillion
dollar question, with views ranging from significant disruption to … well … not
much at all. This article takes a look at the declining costs of batteries, and
tries to form a view on the likely extent of disruption and in particular how
likely is wide scale substitution of legacy transmission and generation.
Declining costs
and increasing storage
Pressure to improve both electric cars and micro devices has
driven huge advances in battery technologies. A few representative figures for
cost and storage trends include…
|
Year |
Cost |
Storage |
|
2010 |
$1,000 per kWh |
0.2 kWh per kg |
|
2011 |
$800 per kWh |
|
|
2012 |
$650 per kWh |
|
|
2013 |
$600 per kWh |
|
|
2014 |
$550 per kWh |
|
|
2015 |
$280 per kWh |
0.56 kWh per kg |
|
2016 |
$230 per kWh |
0.88 kWh per kg |
|
2020 |
Projected $190 per
kWh |
3 kWh per kg |
|
2030 |
Projected $100 per kWh |
|
So there has undoubtedly been a huge decline in costs (about
5x to date with a projected further 2x decline) and also increases in storage
(energy density). One way or another that makes the prima facie business case look way better.
Opportunities
Large scale battery storage raises a wide range of
opportunities, including…
|
Operational |
Commercial |
Asset investment |
|
· Load
following. · Voltage
support. · Frequency
support. · Black start
capability. · Spinning
reserve. · Renewable
buffering. · Smoothing
disturbances. · Security of
supply. · Ramping off
the base of the Duck Curve. |
· Peak
chopping. · Arbitrage
between time periods. · Demand charge
mitigation. · Self-consumption. |
· Deferring or
avoiding grid capacity investment. · Avoiding grid
security investment. · Possible
avoiding peak generation investment. |
A little though
reveals that some of the operational aspects are traditional system operator
functions that grid operators have purchased from the market, typically hydro
generators. Purchasing some of those services from battery owners might become
increasingly feasible.
Operational feasibility
Declining costs
and increasing storage suggest a bright future for batteries. But will it mean significant
disruption to legacy power grids ?? By significant I mean a fundamental change
(eg. disappearance of large scale generation, reduced dependence on
transmission interconnections etc) and not just a few batteries dotted around
the grid. Consider the following…
· Batteries need
to be charged. Sounds trite, but I get a sense some people are overlooking
this. So there will always be a need for some form of power supply. With
reference to the next bullet point, the issue then becomes one of how quickly
do we want those batteries to be recharged ?
· Batteries need
to be charged quickly to be practically useful. We’re seeing this very strongly
with electric cars … the emphasis is on even shorter charging times. A grid
scale battery for supporting contingent events probably won’t be much use if it
takes a couple of days to recharge … all things being equal, a 100 MWh battery
would need a 100 MW power supply (a station the size of Karapiro or Waitaki) to recharge
in 1 hour, whilst a 500kW power supply would take over a week to recharge it.
The likely extent of disruption
The bold view
is that batteries (accompanied by solar panels) will significantly disrupt the
industry as we know it, whilst the nay-sayers say there will be little impact
at all. My forecast is that it will be somewhere a bit less than the middle
ground … definitely some changes to operational modes, tariff options and
investment patterns, but probably not significant disruption because large
scale batteries will very likely require large scale, interconnected rechargers.
Energy policy
UK – what might Brexit mean for energy policy ?
Introduction
Brexit
has obviously been a focal point of UK politics for the last year or so. This
article tries to get to the bottom of exactly (or even broadly) what it might
mean for key aspects of the UK’s energy policy.
Regulatory framework of the EU
The EU
is based on a number of treaties dating back to the Treaty establishing the European Coal & Steel Community in April 1951. The treaty of most interest to this article
is the Treaty on European Union of 2009 (TFEU, the follow on from the Treaty of Maastricht and the Treaty of Lisbon), and in particular Article 50.
The
Brexit process invokes the withdrawal provisions of Article 50, which involved
the tabling and subsequent passing of the European Union (Notification of Withdrawal) Act 2017 in Parliament.
Options for post-Brexit legislation
The
UK’s options for post-Brexit legislation include…
· Simple statutes that adopt the equivalent EU law (similar to
how the Australian states have adopted the South Australian energy
legislation).
· Re-enacting (repealing the repeal ?) the UK statutes from
the pre-EU era.
· Drafting and enacting new statutes that reflect the issues that
the UK currently faces.
Implications for specific aspects of energy policy
Some
aspects of the UK’s energy policy that might need some policy and legislative
re-think include…
· At an operational and market level, imports of gas and
electricity from Europe (and exports and imports to and from the Republic of
Ireland) will probably need a new international trade framework. This is likely
to particularly affect…
· Interconnectors with continental Europe and the Republic of
Ireland.
· The Irish Single Electricity Market (SEM) which will now have a border through the middle.
· At a commercial level, it may complicate the daily workings
of UK electric and gas companies that are subsidiaries of European companies.
· At a policy level, the UK may have a freer hand to develop
its own climate and energy policies but will still have to consider wider EU
and Irish stakeholder concerns to make their policies practically workable.
It
will be interesting to watch exactly where this all goes.
Mergers & asset sales
US – Great Plains and Westar take another go at merging
Introduction
A few
months ago Great Plains Energy’s acquisition of Westar was rejected by the Kansas Corporation
Commission because inter alia
the estimated acquisition price of $4.9b was considered too high. This article
examines a renewed approach that looks more like a merger.
Background
Great
Plains Energy launched its $12.2b cash plus stock plus 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.
It became apparent early in the approval process that the regulatory stakes
would be raised as an increasing range of intervenors were permitted and a
wider range of assessment criteria were included.
The revised approach
The
following deal was recently announced…
· A yet-to-be named company will be formed from the merger of
Great Plains and Westar.
· Westar shareholders will receive 1 share in the merged
company for each Westar share.
· Great Plains shareholders will receive 0.5981 shares in the
merged company for each Great Plains share.
· Westar shareholders will own about 52.5% of the merged
company, with Great Plains shareholders owning the remaining 47.5%.
· A one-off total credit of $50m to customers will be included
(regulators have made their expectation of sharing of merger benefits with
customers increasingly clear).
Pipes
& Wires will comment further as the regulatory approval process proceeds.
Network access frameworks
England & Wales - the PR19 water price review
Introduction
Water
regulator Ofwat has recently published its Draft Methodology entitled Delivering Water 2020 as part of the PR19 water price review. This article
examines the key features of that Draft Methodology and draws some parallels
with other regulatory frameworks.
The regulated water industry
The
regulated water industry in England and Wales comprises 25 companies that
supply about 50,000,000 houses and businesses. These include 11 water and
sewage companies such as Thames Water and United Utilities, and 14 water only companies.
The
industry operates within a complex regulatory framework that includes
legislation establishing Ofwat and its functions, as well as industry
legislation in both England and Wales, and overarching EU legislation.
Key features of Delivering Water 2020
Key
features of Delivering Water 2020 include…
· Building on the PR14 framework that emphasised an outcomes
and TotEx approach.
· Implementing the expectations of the Water 2020 regulatory
framework.
· Four key themes of improving water quality, improving
affordability, improving resilience, and meeting increasing customer
expectations.
· An emphasis on engaging with customers, particularly in
regard to affordability.
· Increased emphasis on resilience and the long-term investment
requirements.
· An expectation of attention to affordability.
· A range of wholesale and retail controls
Expected criteria for assessing the business plans
Ofwat
expects to assign water companies business plans to 1 of 4 categories
(exceptional, fast track, slow track, significant scrutiny) based on the level
of…
· Forecast efficiency improvements.
· Improved resilience, particularly to natural disasters and
climatic variations in water availability.
· Efficient management of risk.
· A demonstrated progression from customer engagement to
customer participation.
· Thoughtful improvement in the use of resources and existing
assets.
Those
businesses whose plans are assessed as exceptional will be rewarded through
earlier draft determinations and increased financial rewards. Similarly, those
companies whose plans require significant scrutiny may be required to further
justify or even re-submit their business plan, have their financial rewards
capped and be subject to controls to limit customers’ exposure to risks and
higher costs.
Parallels with other regulatory regimes
PR19
has some obvious parallels with both RIIO (UK electricity and gas) and PREMO
(Victorian water)…
· Overarching emphasis on prolonged customer participation to
fully inform outcomes and prices.
· Regulatory framework emphasis on outcomes rather than on
detailed inputs.
· An emphasis on TotEx to make the outcomes indifferent to
CapEx and OpEx.
· Strong procedural incentives to present high quality
business plans.
· Financial incentives to deliver on forecast outcomes.
Next steps
Key
steps in PR19 include…
· December 2017 – final methodology published after
consultation period.
· September 2018 – companies submit business plans.
· January 2019 – initial assessment of business plans.
· March 2019 – draft deteminations published.
· December 2019 – publication of final determinations.
Pipes
& Wires will comment further as PR19 progresses … probably around February
2019 when the business plans are assessed.
Aus – implementing PREMO for the Victorian water price
controls
Introduction
Previous
issues of Pipes & Wires examined the development of the PREMO water price
regulatory framework in Victoria, Australia. This article examines the
Framework & Approach to the next water price control that has resulted from
the PREMO model.
The evolution of price control frameworks
Controlling
the revenues of infrastructure businesses with monopoly characteristics attempts
to emulate the downward pressure on prices of competitive markets. This appears
to date back to the “penny per mile” railway price control from the UK in the
1830’s, which then found its way into gas pipeline price control in the 1850’s.
The
development of RPI – X incentive regulation in the UK in the late 1980’s was
seen as a great break-through, however it has morphed into “cost plus” with a
final step of calculating a P0 and an X. So the development of the
RIIO framework in the UK a few years ago to emphasise key outcomes of safety
and reliability seems a helpful step back towards the right direction.
Re-capping PREMO
The PREMO framework essentially requires water businesses to strongly link Risk
and costs between customer Engagement and customer Outcomes, as
opposed to simply building a cost model to set its prices. The key incentive
will be adjustments (either upwards or downwards) from a base price based on
how well the water business performs in the four aspects of Risk, Engagement,
Management accountability and Outcomes.
Further
details about PREMO can be found at Pipes & Wires #153 and #158, whilst further details about RIIO can be found at Pipes & Wires #94 and #101.
The F&A for the next Victorian water price control
Late
last year the Essential Services Commission released its Water Pricing Framework And Approach: Implementing PREMO From 2018, which embodies 3 key themes…
· Engagement.
· Incentives.
· Accountability.
The
F&A emphasises at length that PREMO is not looking to simply bring
customers into the regulatory process, but rather to turn water businesses
focus strongly towards their customers ie. a stronger focus on allocative
efficiency. Key features of the F&A include…
· The return on equity (ROE) for each business will be
determined by the quality of its Price Submission (assessed as Basic, Standard,
Advanced or Leading) rather than a uniform ROE based on the capital asset
pricing model (CAPM).
· An expectation of extensive customer engagement that visibly
balances customers’ preferences against the business’ capabilities and constraints.
Although not prescribed by the ESC in detail, there are strong expectations
that the ESC’s model will be followed.
· An emphasis on describing the customer outcomes, with the
obvious expectation that those customer outcomes will be identified by the
engagement process.
· An emphasis on submitting measurable targets that can be
used to hold the business to account for delivering those outcomes within the
proposed prices.
· The inclusion of Guaranteed Service Levels that provide
strong investment and performance signals.
· The revenue requirement will continue to be based on the
commonly understood building blocks and RAB, with the notable exception of the
ROE which will be incentivised by outcomes.
The editor comments
A
couple of salient comments from the editor…
· It wouldn’t be unreasonable to conclude that the current
focus on the regulatory process rather than customers is due at least in part
to the regulators themselves.
· I’ve been involved in many customer consultations for
electric distribution companies since 2004. These consultations have
consistently revealed that customers firstly want supply continuity, secondly
they want prompt supply restoration, and thirdly they want to pay about the
same for the same level of continuity. This is exactly what most if not all
electric companies focus their efforts on ie. they are already being
allocatively efficient.
· Readers might remember that the 4 Business Plans submitted
by UK electricity distributor Western Power Distribution under RIIO – ED1 were
fast-tracked by Ofgem because of their high quality.
Next steps
The
water businesses will prepare their Price Submissions and submit them to the
ESC. Pipes & Wires will provide further analysis once the ESC releases its
decisions.
Britain – the PR18 railway access price review
Introduction
The Office of Rail and
Road (ORR) has begun work on the PR18 price review that will
apply to Network Rail for the period 1st April 2019 to 31st
March 2024. This article examines the key features of PR18 that have emerged to
date.
A bit about Network Rail
Network
Rail is a government-owned corporation that owns and operates 20,000 miles of
railway infrastructure throughout England, Wales and Scotland that is managed
as 8 routes. That track infrastructure is provided on an open-access basis to
independent train operating companies (TOC’s). Network Rail’s regulatory and funding framework
includes legislation, statements of expectations from the English and Scottish
governments, and grant funding.
Key features of the PR18 framework
ORR
expects that PR18 will regulate Network Rail more closely at a route level,
with a key objective being to enable comparison of performance between routes.
Key features of PR18 include…
· Focusing on routes to allow performance comparison between
routes. This is expected to focus Network Rail’s relationships with the TOC’s
at a route rather than national level.
· Stronger emphasis on understanding fixed costs and how those
fixed costs need to be reflected in charges.
· An increased focus on Network Rail’s country-wide management
of the business (the National System Operator function).
Similarities to other emerging regulatory frameworks
In
contrast to the UK and Victorian water regulatory frameworks discussed in PW
#166 and the UK electricity and gas RIIO framework, the setting of service
levels for PR18 seems focused on government agencies rather than customers
(which is understandable given the level of government funding, and that
Network Rail is essentially a wholesaler).
Next steps
The
next key steps for PR18 include…
· Government agencies submit their high-level output
specifications (HLOS) to ORR by July 2017.
· Network Rail submits its strategic business plans to ORR by
December 2017.
· ORR assesses the efficiency of Network Rail’s strategic
business plan in early 2018 and consults on its draft determination by June
2018.
· ORR will publish its final determination by October 2018.
· Network Rail will publish its delivery plan in March 2019.
System security & energy mix
Aus – assessing the risk of
closing coal-fired generation
Introduction
Concern about how closure of coal-fired fired
generation is likely to reduce security of supply is a popular topic in
Australia. This article notes a recent request to the Australian Energy Market Operator (AEMO) from the Minister of
Energy, the Hon Josh Frydenberg, to assess the risks of closing
a large number of coal-fired power stations.
Other recent studies on system
security and energy mix
Other
recent studies at State and Commonwealth levels into system security and the
energy mix of Australia’s energy sector include…
· The Finkel Report, whose principle recommendation was the establishment of a
clear emissions reduction trajectory to assist an orderly closure of coal-fired
generation (refer to Pipes & Wires #165).
· 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. The interim report is examined in a separate article in
this issue.
Frydenberg’s request to the AEMO
Frydenberg’s letter has requested the AEMO to inter alia “provide detailed advice on
the risks to reliability and affordability posed by the recent and expected
exit of base-load generation”. Some wider context for this letter is the Finkel
Report’s recommendation that coal-fired generators provide 3 years notice of
closure.
Coal-fired generation closures
The following closures have occurred or are
expected…
|
Station |
Already closed |
Expected closures |
Proposed 50 Year Rule * |
|||
|
Capacity |
Closure date |
Capacity |
Closure date |
Capacity |
Closure date |
|
|
Swanbank B |
480 |
2010 –
2012 |
|
|
|
|
|
Munmorah |
1,400 |
2012 |
|
|
|
|
|
Collinsville |
190 |
2012 |
|
|
|
|
|
Wallerawang |
1,000 |
2014 |
|
|
|
|
|
Energy Brix |
170 |
2014 |
|
|
|
|
|
Redbank |
150 |
2014 |
|
|
|
|
|
Anglesea |
150 |
2015 |
|
|
|
|
|
Playford B |
240 |
2015 |
|
|
|
|
|
Northern |
520 |
2016 |
|
|
|
|
|
Hazelwood |
1,600 |
2017 |
|
|
|
|
|
Yallourn W |
|
|
1,400 |
???? |
|
|
|
Liddell |
|
|
2,000 |
2022 |
|
|
|
Bayswater |
|
|
2,600 |
2035 |
|
|
|
Gladstone |
|
|
|
|
1,680 |
2026 |
|
Vales Point B |
|
|
|
|
1,320 |
2028 |
|
Eraring |
|
|
|
|
2,800 |
2032 |
|
Total |
5,900 |
|
6,000 |
|
5,800 |
|
* A proposal that coal-fired generation must either
modernize or shut down after 50 years could see a further 10 coal-fired
stations (including the 3 big stations noted in the above table) close over the
next 15 years.
Next steps
The AEMO has been requested to provide its advice
to the COAG Energy Council by 1st September so that the Federal and
State Governments can respond by the end of 2017.
Aus – interim report from the NSW
Energy Taskforce
Introduction
Pipes & Wires #161 noted that the NSW Government
was establishing an Energy Taskforce to investigate inter alia energy security and resilience. This article takes a
(belated) look at the Taskforce’s interim report and notes the wider context of
various reviews into security of energy supply.
Key conclusions of the interim
report
Key conclusions from the interim report include….
·
That during periods of high demand (typically hot
weather) the reliability of generation and thus system reserves may not be as
high as expected.
·
Questions around whether market incentives for
reliable supply are working effectively (but also noting that the AEMO is not
forecasting any breach of NSW reliability standards).
·
An increase in the number of “lack of reserve”
notices issued in NSW in 2017, despite an overall decline in the number of
notices across the NEM since 2009.
·
The closure of Hazelwood is expected to exacerbate the
noted risks of hot weather operation (high air conditioning load, de-rating of
generation plant, low wind speeds, ramping up the duck curve in the late
afternoon, and general reliability) across Victoria and South Australia and by
implication, NSW.
·
The need to pick up the 10,000 GWh that Hazelwood
will now not be generating is likely to test the reliability and ability to
supply gas to other generators.
·
The possibility of restricted coal supplies.
·
The need to systematically plan for widespread
blackouts, including the possibility of all of Sydney or the entire State.
·
The primary recommendation is that the COAG Energy
Council encourage a national approach to climate change and integration of
renewables to safeguard energy security.
The wider context
The wider context is set out in the article on
assessing the risk of closing coal fired generation.
Next steps
The Taskforce’s final report is expected later in
2017.
Network access decisions
NZ – setting the WACC for various regulated suppliers
Introduction
The Commerce
Commission recently released its cost of capital determination that will apply for the Disclosure Year 2018 for…
·
Transpower.
·
First Gas’ distribution business and transmission businesses with a September year
end.
·
Gas distribution
businesses with a June year end (Vector and GasNet).
·
Airports with a
June year end (Auckland and Christchurch)
This article
examines the key features of that determination.
Regulatory frameworks
The regulatory
framework for setting the WACCs are set out in…
·
Clauses 2.4.1 to
2.4.11 of the Transpower Input Methodologies Determination.
·
Clauses 2.4.1 to
2.4.11 of the Gas Distribution Services Input Methodologies Determination
(First Gas distribution)
·
Clauses 2.4.1 to
2.4.9 of the Gas Distribution Services Input Methodologies Determination
(Vector and GasNet distribution).
·
Clauses 2.4.1 to
2.4.11 of the Gas Transmission Services Input Methodologies Determination 2012.
·
Clauses 5.1 to 5.7
of the Airport Services Input Methodologies Determination.
These
determinations are made pursuant to Part 4 of the Commerce Act 1986.
Key features of the WACC’s
Key features of
the Vanilla WACC’s include…
·
Transpower
(Disclosure Year 2018).
|
Parameter |
25th
percentile |
Mid-point |
67th
percentile |
75th
percentile |
|
Vanilla WACC |
4.57% |
5.29% |
5.75% |
6.00% |
|
Post-tax WACC |
4.03% |
4.75% |
5.21% |
5.46% |
·
First Gas
(Disclosure Year 2017 – 3 month period).
|
Parameter |
25th
percentile |
Mid-point |
67th
percentile |
75th
percentile |
|
Vanilla WACC |
5.18% |
5.99% |
6.52% |
6.80% |
|
Post-tax WACC |
4.64% |
5.45% |
5.98% |
6.26% |
·
Vector and GasNet
(Disclosure Year 2018).
|
Parameter |
25th
percentile |
Mid-point |
67th
percentile |
75th
percentile |
|
Vanilla WACC |
5.02% |
5.73% |
6.19% |
6.44% |
|
Post-tax WACC |
4.49% |
5.20% |
5.66% |
5.91% |
·
Auckland and
Christchurch Airports (Disclosure Year 2018).
|
Parameter |
25th
percentile |
Mid-point |
67th
percentile |
75th
percentile |
|
Vanilla WACC |
- |
6.41% |
- |
- |
|
Post-tax WACC |
- |
6.19% |
- |
- |
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
Now
that I seem to have accumulated just about every book on the history of NZ
electricity, my attention turns global. So if anyone has any old electricity
history books, magazines or journals that they no longer want… please contact
me.
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Disclaimer
These articles are
of a general nature and are not intended as specific legal, consulting or
investment advice, and are correct at the time of writing. In particular Pipes
& Wires may make forward looking or speculative statements, projections or
estimates of such matters as industry structural changes, merger outcomes or
regulatory determinations. These articles also summarise lengthy documents, and it is important that readers refer to those
documents in forming opinions or taking action.
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