Pipes & Wires


Issue 166 – August 2017


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




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…






$1,000 per kWh

0.2 kWh per kg


$800 per kWh



$650 per kWh



$600 per kWh



$550 per kWh



$280 per kWh

0.56 kWh per kg


$230 per kWh

0.88 kWh per kg


 Projected $190 per kWh

3 kWh per kg


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.




Large scale battery storage raises a wide range of opportunities, including…




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 ?




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




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.




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




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




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




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




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…



Already closed

Expected closures

Proposed 50 Year Rule *


Closure date


Closure date


Closure date

Swanbank B


2010 – 2012


























Energy Brix





















Playford B





















Yallourn W




























Vales Point B






















* 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




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




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).



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






·      First Gas (Disclosure Year 2017 – 3 month period).



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






·      Vector and GasNet (Disclosure Year 2018).



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






·      Auckland and Christchurch Airports (Disclosure Year 2018).



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






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.


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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