Pipes & Wires


Issue 169 – November 2017


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




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




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




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




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




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…




Draft decision

Final decision

Total CapEx




Growth CapEx




Network OpEx




Non-network OpEx






191.5 down to 176.0




2.28 down to 2.19







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




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…



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






Energy markets


Aus – inquiring into retail electric pricing




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




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




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




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.


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.


Utility Consultants Ltd accepts no liability for action or inaction based on the contents of Pipes & Wires including any loss, damage or exposure to offensive material from linking to any websites contained herein, or from any republishing by a third-party whether authorised or not, nor from any comments posted on Linked In, Face Book or similar by other parties.