From the
editor’s desk…
Welcome
to Pipes & Wires #169 …. this issue marks a change
in format and in distribution, using Mail Chimp so hopefully that works out for
everyone. We start with a look at how Ofgem I the UK are trying to clarify the
regulatory framework for battery storage, and then examine 2 energy policy
issues in Australia.
We
then look at some network access decisions in New Zealand, examine 2 inquiries
in Australia, and then conclude with a look at how California plans to meet
peak demand with low-emission generation. So … until next month,
happy reading…
Recent client projects
Recent
client projects include…
· Reviewing recent AER decisions to
understand the expectations around asset management practices and methods.
· Reviewing the AER’s recent treatment of
network transformation expenditure.
· Compiling overhead conductor and wooden
cross-arm fleet strategies.
· Identifying the issues around customer-owned
lines on private land.
· Developing a risk-based tree trimming
strategy.
· Developing an EV charging strategy.
· Analysing transmission charges as a
percentage of total electric bills.
· Compiling a strategy for improving the
resilience of a sub-transmission network.
· Developing a best-practice guideline
for smart metering.
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Regulating emerging technologies
UK – clarifying the regulatory
framework for storage
Introduction
The battle
around whether battery storage should be regulated or unregulated seems to have
advanced a long way very quickly, with energy companies in particular arguing
that allowing batteries to be included in a lines business’ regulatory asset
base (RAB) threatens the development of a competitive market for storage. This
article examines some recent work by Ofgem to clarify the regulatory
treatment of storage.
Ofgem’s thinking
Ofgem’s
thinking is to prohibit lines businesses from operating storage. Whilst Ofgem
recognises that storage can assist to integrate renewables and defer network
investment, they also hold the view that lines businesses engaging in what is
ostensibly a competitive activity could distort competition and create
inefficient outcomes (the usual efficient market arguments).
Ofgem’s proposed mechanism and the
likely outcomes
Ofgem’s
proposed mechanism is to add a new condition to the electricity distribution
license to prohibit operation of storage (noting that no specific mention of
battery technologies is made). The likely outcomes include…
· Lines businesses may have to
contract for storage with a third party, most likely through a competitive
tendering process.
· Lines businesses could conclude that
although storage would be the most economically efficient long-term approach,
contracting for it is too hard so they settle for network investment and hope
it can be rolled into the RAB.
The editor comments
There seems to
be two quite separate issues here that are at risk of getting confused…
· The potential usefulness of
(battery) storage for integrating renewables and deferring network investment.
· An insistence on a theoretically
efficient market for that storage.
Care is
required to ensure that we don’t end up with an all-or-nothing situation in
which the benefits of storage are foregone simply because a theoretically
efficient market can’t be achieved.
Readers might refer back to the article on recovering the cost of fast
chargers in Michigan in Pipes & Wires #162.
Next steps
Ofgem is
consulting on this until 27th November. As this is a critical issue
for the industry in general and for lines businesses in particular, Pipes &
Wires will comment further as Ofgem (and other regulators) reach their
conclusions.
Energy policy
Aus – the National Energy Guarantee
Introduction
Last
month the Australian Government began implementing a new National Energy Guarantee (NEG) upon the advice of the newly
established Energy Security Board. This article examines the key features of
the NEG against whether it will provide policy certainty, and how it will shift
around the energy trilemma.
Wider context
Many
industry stakeholders have expressed concern over the last few years about
rising prices, which has been more recently followed by declining security of
supply (and a lot of diesel generation). There have also been many reports and
inquiries in to various aspects of pricing and security of supply, with perhaps
the most notable being the Finkel Report (refer to Pipes & Wires #165).
Key features of the NEG
The
NEG comprises two parts that will require energy retailers and some large
customers in the NEM to deliver reliable, low-emission generation each year,
viz…
· A reliability guarantee which will be
set by the Australian Energy Markets Commission (AEMC) and the Australian Energy
Market Operator (AEMO). This will aim to deliver the right level of
dispatchable energy needed by each state.
· An emissions guarantee that will be set
to contribute to Australia’s international emission reduction targets. This
will be set by the Commonwealth and enforced by the AER.
Retailers
will be at the sharp end of the NEG, and will be required to supply a mix of
dispatchable and low-emission energy with the possibility of penalties for not
meeting expectations. Key claims in regard to the NEG include…
· It will deliver affordable, reliable
energy.
· It won’t involve subsidies, taxes,
emissions trading schemes or carbon prices.
· It will be a market-based integration
of energy and climate policy.
· Past approaches have ignored
reliability and affordability
· The NEG is technology-neutral.
Assessing the NEG – policy certainty
We
all accept that the most bits of the electricity supply chain are very
expensive and have long lives. Recovering that investment requires policy
certainty, but unfortunately continual policy shifts have provided anything but
certainty that has left the generation sector unbankable. So even if the NEG of itself might be
better, it still represents a policy change which is likely to spook investors.
Assessing the NEG – the trilemma
The
trilemma clearly provides for 2 of the 3 variables (cost, reliability and
emissions) to be manipulated, with the third variable responding to the first
2.
In a
world of increasing political pressure to reduce emissions we can take the emission
reduction variable of the trilemma as a given, hence the only possibilities are
either reliability or cost. Both of these are very salient issues for both the
Australian public and for politicians, so it will be interesting to see which
variable leads and which one follows.
The political responses
Early
political responses suggest that the NEG will have a hard journey, viz…
· Tasmania has announced a
“Tasmania-first” energy policy.
· South Australia has indicated that it
will not be reversing any of its emission reduction policies to help the
Turnbull Government out of its predicament.
Aus – lowest prices in Tasmania
Introduction
Readers
will recall that the Australian state of Tasmania had a shortage of electricity during 2016, and followed this up with an inquiry
in 2017 (refer to Pipes & Wires #152, #162 and #167). This article unpacks some recent
announcements by the Energy Minister Guy Barnett.
The Minister’s announcement
In
early October the Minister made an announcement that included the following
themes…
· Tasmania will pursue a “Tasmania first”
energy policy.
· Delivering the lowest prices in the
nation by 2022.
· Making secure supply … his number one
priority.
In
mid-October the Minister spoke publically of $1.8b of wind farm developments,
and reiterated that he would work towards lowering prices, ensuring energy
security and developing renewable generation.
Unpacking the announcements – the
Tasmania first aspect
The
wider context includes the Federal Government’s recent National Energy Guarantee (refer to the companion article in
this issue) which emphasizes an NEM-wide approach. It is not clear how break-away
approaches by individual states will fit with that NEM-wide emphasis, however a
media comment from Prime Minister Malcolm Turnbull predicts that states will
ultimately sign up and that the Federal Government will do it with the states.
Unpacking the announcements – lower
prices, security and developing renewables
The
energy trilemma seems a useful starting point to unpack these claims, and it
immediately becomes obvious that it will be difficult to lower prices, ensure
security and increase renewable generation all at the same time. It is of
course possible to lower prices by decoupling prices from costs through such
means as subsidies or instructing state-owned companies to forego
dividends.
The editor comments
The
“Tasmania-first” policy will prove interesting on 2 separate issues…
· Whether it is actually achievable,
noting the trilemma constraints.
· Whether there will be pressure from
Canberra to align with the NEG.
Network access decisions
NZ – reviewing the Input Methodologies
for gas pipelines
Introduction
The Commerce
Commission is currently reviewing the Input Methodologies (IM’s), which define
how the Commission must treat various building block components in setting
electricity line, gas pipe and airport revenues. This article examines the Commission’s
draft decision on the customised price path (CPP)
information requirements for gas pipeline businesses.
Regulatory framework
The regulatory
framework for the IM’s is as follows…
· Part 4 of the Commerce Act 1986 provides for regulation of goods or services,
and includes 11 sub-parts.
· Sub-part 3 specifies inter
alia the matters to be covered by the IM’s, the process for determining the
IM’s, and the requirement to review the IM’s.
The application
of these statutes has resulted in inter
alia the Gas Distribution Services Input Methodologies Amendments
Determination 2016 and the Gas Transmission Services Input Methodologies
Amendments Determination 2016.
Key features of the draft decision
The draft
decision is to not make any amendments to the CPP information requirements for
the following reasons…
· The commission has no reason to believe that the
existing requirements are not achieving the policy intentions.
· There is no experience to date in evaluating a
gas CPP, hence it is unclear whether the amendments proposed would reduce the
cost or complexity of a gas CPP application.
· Given that a gas CPP application has been
signaled, the Commission believes that delaying making any amendments until
after that application has been assessed will result in a more effective and
complete review.
Next steps
The Commission
has consulted on this issue, and will publish its final decision in due course.
NZ – draft decision on Powerco’s CPP
application
Introduction
The
Commerce Commission recently released its draft decision on Powerco’s customised price path
(CPP) application. This article follows on from Pipes & Wires #164 and examines the key features of that
draft decision.
Powerco’s CPP application
In
June 2017 Powerco submitted its CPP application pursuant to Subpart 6 of Part 4 of the
Commerce Act 1986 which provides the opportunity for individual regulated
businesses to seek an alternative price-quality path that better meets its
particular circumstances than the default price path.
Key features of the process to date
Key
features of the process to date include…
|
Parameter |
Proposal |
Draft
decision |
Final
decision |
|
Total
CapEx |
$873m |
$825m |
|
|
Growth
CapEx |
$286m |
$281m |
|
|
Network
OpEx |
$289m |
$282m |
|
|
Non-network
OpEx |
$165m |
$165m |
|
|
SAIDI |
195.9 |
191.5 down to 176.0 |
|
|
SAIFI |
2.31 |
2.28 down to 2.19 |
|
|
Revenue |
$1,470m |
$1,453m |
|
Next steps
The
Commission is currently consulting on its draft decision, and expects to
release its final decision in late March 2018.
NZ – gas under pressure
Introduction
The Commerce Commission recently released its
cost of capital
decision that will apply to…
·
First Gas and Powerco’s gas distribution businesses.
·
First Gas’ gas transmission business.
for the 12 months
starting on 1st October 2017. This article examines the key features
of that determination.
Regulatory frameworks
The regulatory frameworks for setting the WACC are set out in clauses
4.4.1 to 4.4.10 of the Gas Distribution Services Input
Methodologies Determination 2012 and the Gas Transmission Services Input
Methodologies 2012 respectively. Those determinations are
made pursuant to Part 4 of the Commerce
Act 1986.
Key features of the
WACC’s
Key features of the WACC’s include…
|
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
5.00% |
5.71% |
6.17% |
6.41% |
|
Post-tax WACC |
4.47% |
5.18% |
5.64% |
5.89% |
Energy markets
Aus – inquiring into retail electric pricing
Introduction
Residential
electric bills have increased by an average of 44% in the Australian national
electricity market (NEM) since 2007/08. This article examines the Australian
Competition & Consumer Commission’s preliminary report into retail electricity pricing.
Background to the inquiry
In
March 2017 the ACCC was instructed to inquiry into the retail supply of
electricity and the competitiveness of the retail markets in the NEM. The
inquiry’s terms of reference are very broad, and required the ACCC
to examine inter alia retail market
entry barriers, vertical integration and the possibility of anti-competitive
behavior as well as retail cost components and how they have changed over time.
Key findings of the preliminary report
The
key findings of the preliminary report include…
· Retail bills have increased by between
35% and 50% since 2007/08, and are considered severely unaffordable by the
ACCC. Key drivers of those increases were higher transmission and distribution
costs, higher retailer operating costs, higher environmental scheme costs, and
some increase in retailer margins (which varied on a state-by-state basis).
Wholesale energy costs increased but at less than the CPI.
· Wholesale generation is highly
concentrated, and has become more concentrated and vertically integrated as
large coal-fired stations such as Hazelwood and Northern close down. This is
thought to be contributing to higher wholesale prices.
· A shift in fuel-mix to a higher
proportion of gas has coincided with tightening domestic gas supply, leading to
higher wholesale electricity prices.
· Tightening demand-supply balance and the
dominance of AGL, Origin and EnergyAustralia has made it difficult for
non-generating retailers to compete with vertically integrated retailers,
especially in buying hedges.
· Environmental schemes such as the early
feed-in tariffs have both increased costs, and created subsidies between
classes of customers.
· Consumers have difficulty comparing
retail price offers, especially when the comparison points and terminology are
inconsistent.
Next steps
The
ACCC’s final report is due in June 2018. Pipes & Wires will comment further
then and compare the final and preliminary findings.
US – recovering the costs of baseload
generation
Introduction
Pipes & Wires #168’s article examining the Department of
Energy’s (DOE) recent proposal for better recovery of baseload generation costs
seems to have met some resistance. This article re-caps the DOE’s proposal and
examines that resistance.
The DOE’s proposal and its context
The
DOE recently filed a Notice of Proposed Rulemaking (NOPR) directing the Federal Energy
Regulatory Commission (FERC) to “accurately price generation resources
necessary to maintain reliability and resiliency”. The context to the NOPR is
the recent DOE study on markets and reliability ordered by Secretary of
Energy Rick Perry (refer to Pipes & Wires #163 and #167).
The initial resistance
The
key phrase that seemed to grab the headlines was the emotive “blow up the
market” which presumably referred to the destruction of the existing wholesale
market structures. This opens up a range of thoughts including the question of
why the wholesale markets shouldn’t be extensively overhauled if they are
underpricing coal and nuclear.
The resistance becomes a bit better
defined
As
the furor subsides and clearer heads appear to be prevailing, the FERC’s
position (at the time of writing) appears to be…
· Recognition that paying secure
generation is not a zero-sum game.
· The view that paying for baseload
generation is not the same as destruction of the market.
· Recognising that this issue represents
a step toward accurately pricing the contribution of all market participants.
· A desire to correct market deficiencies
that aren’t properly valuing the attributes (of secure generation).
The FERC’s response
The
FERC has a statutory obligation to respond to the NOPR within 60 days (ie. by
the end of November), with requests by a range of stakeholders for a 90 day
response period being curtly denied. It should also be noted that the FERC has
a range of options to respond to the NOPR including denial and proposing a new
order.
Next steps
This
critical issue cuts across many themes, and Pipes & Wires will comment
further as the FERC responds.
Aus – interim report on the Gas Inquiry
Introduction
There
seems to be a lot of inquiries into various aspects of Australia’s energy
markets going on the moment. This article examines the Australian Competition
& Consumer Commission’s interim report from the Gas Inquiry 2017 – 2020.
Background to the inquiry
In
April 2017 the ACCC was instructed by the Treasurer to hold an Inquiry to
improve the transparency and to monitor the gas supply in Australia. The
recently released interim report (September 2017) focused on the East Coast
supply-demand outlook for 2018.
Key findings of the interim report
Key
findings of the interim report include…
· A significant deterioration in the East
Coast supply-demand outlook for 2018 since the ACCC’s previous inquiry in 2016.
This is evidenced by only a small number of contracts for supply beyond 2018
being offered, and then only at high prices. Key factors are thought to
include…
· LNG projects removing gas from the
domestic market.
· Low oil prices discouraging gas exploration,
investment and production.
· Moratoria (refer to Pipes & Wires #162) and regulatory restrictions that are
limiting onshore gas exploration and development.
· An estimated shortfall of between 55 PJ
and 108 PJ for 2018.
· Observed contracted and offered prices
for 2018 and beyond being above the ACCC’s benchmark prices.
· The possibility that low forecast
international LNG spot prices for 2018 may encourage LNG producers to divert
Australian gas into the East Coast market whilst buying cheap(er) international
gas to meet their delivery commitments.
· That one of the LNG producers was
planning to export in excess of its commitments for 2018, a volume that
could’ve been supplied into the Australian market.
· A slow-down in the active marketing of
gas to commercial and industrial customers over the last year or so.
Next steps
The
Inquiry will continue for 3 years and deliver its final report in April 2020. A
further interim report is expected in late 2017 which will focus on
transmission and storage.
Grid operations & security
US – meeting peak demand with low-emission generation
Introduction
The supply-side of the
electricity industry is under pressure to reduce emissions whilst maintaining
reliable supply including to peak demands. This article examines recent
legislation in California which requires electric companies to consider how
peak demand can be met with low-emission generation.
Meeting peak demand as the daily load profile changes
The traditional daily load
profile has a large trough from late morning until late afternoon. Increasing
penetration of rooftop solar in locations such as California and South
Australia has reduced the afternoon demand supplied by the grid which has done
2 things to the demand profile…
· It has deepened the trough ie. reduced the demand seen by the grid
(the “Duck
Curve”)
· It has made the climb up to the evening peak steeper, requiring
generation with higher ramping rates that have also probably been stood down
during the afternoon due to low demand (a role which steam turbines are
generally unsuited for).
The one thing that is certain
is the late afternoon and evening peak which will require dispatchable generation,
so any thought of wind or solar would seem problematic.
Key features of Senate Bill 338
SB 338 would amend s454.52 and s9621 of the California
Public Utilities Code, which
inter alia requires all local
publically owned electric utilities with a demand of more than 700GWh per year to
adopt an Integrated Resource Plan. That IRP requires each load-serving entity
to obtain at least 50% of its electricity from eligible renewable sources by 31st
December 2030.
The critical element of SB 338
requires the Public Utilities Commission to consider the role of existing
renewable generation, grid operational efficiencies, energy storage and distributed
energy resources … to meet energy and reliability needs during the hours of
peak demand. A quick read of the rest of SB 338 reinforces 2 critical issues…
· That emission reduction is the non-negotiable priority (think what
that means for the trilemma).
· That SB 338 has a clear technology bias (in contrast to
Australia’s National Energy Guarantee which claims to be technology neutral).
The political trend
A very apparent trend (which is
certainly not unique to California) is that politicians are moving steadily
towards enforcing low emission energy and transport (including by punishing the
alternatives) rather than simply encouraging it as they presumably become
frustrated with the slow pace of decarbonisation.
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 classic historical 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 scrounged pretty much every book on the history of
electricity in New Zealand, I’m keen to obtain historical book, journals and
pamphlets from other countries. So if anyone has any unwanted documents, please
email 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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