From the
editor’s desk…
Welcome
to Pipes & Wires #170. This issue starts with a think about how electric
distributors and their regulators might respond to competition, and then looks
at how secure generation is being squeezed out of the market by low wholesale
prices. We then examine moves in the US to strengthen the role that coal and
nuclear plays.
We
then examine the recent review of energy costs in the UK, and then look at some
network access decisions in Australia and New Zealand. This issue ends with a
quick look at progress on the Flammanville’s third reactor. To close the year,
I’d like to wish you and your families a Merry Christmas and a Happy New Year
until Pipes & Wires returns in 2018.
Recent client projects
Recent
client projects include…
· Assessing asset management spend
forecasts for prudency and efficiency.
· 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
US – when electric distribution faces
competition
Introduction
Small-scale
embedded generation nibbles away at the traditional regulated electric
distribution business model, whilst customer choice aggregation (CCA) is likely
to hit it head on. This article examines what CCA is, and how regulators might
respond to CCA.
A closer look at CCA
CCA
is the process by which an agency (typically a local, not-for-profit) either
purchases energy on behalf of individual customers or generates that energy
with the most common purpose for CCA’s is to purchase renewable energy.
Individual states must legislate to allow CCA, such as California.
How CCA might disrupt the traditional
business model
CCA’s
will typically rely on existing electric transmission and distribution networks
to convey aggregated energy, however the underlying business model will be
subject to two competitive pressures…
· Pushing back against regulated tariffs,
which small individual customers are generally unable to do.
· Bypassing the networks through
arranging on-site generation.
A
quick look at Porter’s Five Forces Model vividly shows how CCA increases both
the bargaining power of buyers and the threat of substitutes.
How might regulators respond to CCA ?
The
observation is that regulators in many jurisdictions are struggling to
understand how to regulate emerging technologies (refer to Pipes & Wires #139). Perhaps the real question is whether
to regulate emerging technologies, and also very importantly whether traditional
monopoly businesses that face increasing competition (bargaining power and
substitution) should continue to be regulated because after all the raison d’être for regulating wires businesses was
because there was no competition.
Thinking about this some more
The
traditional regulatory compact has placed a ceiling above either revenue or
prices, with the implicit quid pro quo
being the floor on revenue (or prices) because customers had to use the wires
at a set price.
CCA
and embedded generation are eroding that floor, so the question remains why
should the ceiling remain ? If regulated wires
businesses increase their prices, the incentive to bypass the wires with
embedded generation only increases.
Grid operations & security
Global – squeezing secure generation
out of the market
Introduction
News
recently emerged that Exelon Generation and Vistra Energy are selling and
closing generation in Texas because of historically low power prices. This
article examines the concerning wider global trend of declining wholesale
prices and the likely financial, market and operational implications.
Wholesale price trends
The
last few years have seen wholesale prices decline in many jurisdictions…
· UK - from a high of over £90
per MWh in 2008, to about £42 per MWh now.
· Europe – from a high of €95
per MWh in 2008, to about €35 per MWh now.
· Texas – from a high of $78 per MWh in
2008, to about $25 per MWh now.
· South Australia – from a high of $101
per MWh in 2007, to $42 per MWh in 2014 (which has since climbed back to $123
per MWh in 2016).
These
declining prices represent a significant hollowing out of revenue for
generators that one way or another will need to be matched by structural rather
than incremental cost reductions ie. plant closures.
The reasons for declining wholesale
prices
Reasons
for declining wholesale prices include…
· Cheap gas squeezed coal-fired
generation out of the market (particularly in the United States).
· Cheap wind squeezed gas out of the
market.
The financial implications
The
short-term financial implication is the inability to recover fixed costs, so
some incremental cost-cutting will need to occur that will probably only chisel
the edges off the variable costs. When that extends beyond the short-term, structural
changes will be required to reduce fixed costs ie. mothballing
or closing plant (which was one of my first jobs when I began working in
thermal power station).
The market implications
Withdrawal
of thermal capacity from the market may lead to a concentration of (market)
power in the hands of the lowest short-run cost generators, with the
possibility of price increases.
The operational implications
The
key operational implication is that coal-fired and gas-fired generation gets
removed from the market, so the percentage of capacity available to meet demand
that is secure declines.
Where might it go ?
That the $1b question … where
might it go ? Even if wholesale prices recover to
sustainable levels, electric companies will need to be convinced that prices
will stay at sustainable levels for many years.
US – strengthening the role of coal and nuclear
Introduction
The emerging global picture is
that secure, dispatchable generation plays a critical role in providing
security of supply. This article examines recent moves in the United States to
strengthen the role that coal and nuclear play in securing power grids.
Background
Pipes
& Wires #168 noted
the Department of Energy’s filing of a Notice of Proposed Rulemaking (NOPR) directing the Federal Energy
Regulatory Commission (FERC) to “accurately price generation resources
necessary to maintain reliability and resiliency”. Not surprisingly, that NOPR
met some resistance along the way that includes accusations that it is simply
returning a favor to coal-fired generators in the PJM that supported President
Trump’s campaign.
The wider context
The wider
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 FERC’s recent plans
In November 2017 the FERC
considered directing RTO’s and ISO’s to update their market tariffs to ensure
that coal and nuclear generation remained available for grid security whilst
the FERC considers the NOPR by way of a show cause order under s206 of the Federal
Power Act. The
order would require each RTO or ISO to provide interim payment for generators
that provide grid security, or to show cause that it is not required to do so.
The FERC’s plan is also similar
to the compensation plan advocated by coal-fired generators which would provide
a monthly standby payment to all generation deemed resilient by the RTO.
Readers might remember from Pipes
& Wires #119 that Statkraft in Germany called for a capacity payment
of €15 per kW per year that should apply to all gas-fired plants so that their Knapsack
gas-fired station would receive about €12m per year.
Tariffs & pricing
UK – reviewing electricity costs
Introduction
Reviews and inquiries into the
cost of electricity and gas seem very popular (refer to Pipes & Wires #169.
This article examines the key findings of the recently completed independent
review into energy cost in the UK.
Terms of reference
The terms of reference are
lengthy, however the specific aim of the review was to report and make
recommendations on how Britain can best meet its emission reduction target of
80% by 2050 whilst also ensuring security of electricity supply at minimum cost
and without any further cost to the tax-payer.
Key findings and recommendations of the review
Key findings of the review
include…
· That energy costs are than what is necessary to meet the Climate
Change Act targets.
· Customers have not seen lower prices as a result of declining coal
and gas costs, declining renewable costs, or from efficiency gains.
· Legacy costs, policies and regulation along with continued exercise
of market power have dampened the flow of benefits to customers.
· Multiple interventions have added complexity and costs.
· Recognising that technology is changing too rapidly to reflect in
8 to 10 year price controls.
Key recommendations of the review include…
· That a universal carbon tax be set on a common basis across the
whole country.
· A unified equivalent firm power capacity auction should be
established that places the cost of intermittency on those who cause them.
· That the assumptions behind the RIIO price caps should be
re-visited.
· That national and regional system operators should be established,
and they should be guided by annual statements of required capacity margin.
The energy trilemma
The energy
trilemma
provides a really useful framework for unpacking the terms of reference for the
report. The terms of reference firstly specifies that emission levels must be
met (a common theme amongst most if not all of these inquiries), and then
secondly that supply must be secure. That leaves cost as the dependent
variable, and effectively constrains costs to be on the emissions – security
side of the trilemma.
Network access decisions
Aus – the draft SA electricity transmission decision
Introduction
The Australian Energy Regulator
(AER) recently published its Draft
Decision in
regard to South Australia’s electricity transmission operator, ElectraNet, for the 5 year regulatory period beginning on 1st
July 2018. This article examines the key features of that Draft Decision.
A bit about ElectraNet
ElectraNet owns and operates
South Australia’s electricity transmission grid, which includes 5,600km of
lines and 91 grid substations operating at 275kV, 132kV and 66kV covering
200,000km2. ElectraNet is owned by the State Grid Corporation of China, YTL
Power Investments and Hastings Investment Management.
Regulatory framework
The basis of the regulatory
framework is Chapter
6a of the National Electricity Rules, which are made pursuant to the National
Electricity Law.
Key features of the process
Key features of the process to
date include…
|
Parameter |
Initial Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$458m |
$459m |
|
|
|
OpEx |
$436m |
$474m |
|
|
|
Opening RAB |
$2,552m |
$2,569m |
|
|
|
WACC |
6.02% |
5.7% |
|
|
|
Depreciation |
$379m |
$315m |
|
|
|
Smoothed revenue |
$1,738m |
$1,588m |
|
|
Pipes & Wires will report
further once ElectraNet submits its Revised Proposal.
NZ – updating Transpower’s individual price-quality path
Introduction
The Commerce Commission
recently released the Transpower
Individual Price-Quality Path Amendment Determination 2017 (#1) which updates the following…
· The forecast Maximum Allowable Revenue (MAR) for the years ending
31st March 2019 and 2020.
· The approved base CapEx for the years ending 30th June
2018 and 2019.
Regulatory framework
The regulatory framework starts
with Part 4 of the Commerce Act 1986 and includes…
· The Transpower Input
Methodologies Determination 2010.
· The Consolidated
Transpower Capital Expenditure Input Methodology Determination.
The #1 Determination amends the
Transpower
Individual Price-Quality Path Determination 2015.
Key features of the updates
Key features of the updates
include…
·
Reducing the MAR for the year
ending 31st March 2019 from $949.9m to $932.1m.
·
Reducing the MAR for the year
ending 31st March 2020 from $957.3 to $938.7m.
·
Increasing the approved base
CapEx for the year ending 30th June 2018 from $242.0m to $243.0m.
·
Increasing the approved base
CapEx for the year ending 30th June 2019 from $231.6m to $241.2m.
Aus – reviewing the WACC guidelines
Introduction
Allowable
cost of capital is a critical component of any infrastructure revenue decision.
This article examines the Australian Energy Regulator’s Review of the Rate of Return Guidelines.
Purpose of the Review
The
purpose of the Review is to ensure that the allowed rates of return have
achieved the respective purposes of the…
· National Electricity Objective.
· Allowed Rate of Return Objective
· Revenue and Pricing Principles.
The regulatory framework
The
regulatory framework for the ROR Guidelines is as follows…
|
|
Electricity |
Gas |
|
Legislation |
||
|
Regulations |
||
|
Rules |
||
|
Guidelines |
NER
6.5.2(m) to (q). |
NGR
Part 9, Division 5, (13) to (19). |
The review process and its progress to
date
The
NER and the NGR require the ROR Guideline to be reviewed within 5 years of its
first publication, which corresponds to 17th December 2018.
The
process began in July 2017 with the publication of a Consultation Paper in July
2017 which was followed by an Issues Paper in October 2017 that the AER has
recently consulted on. Experience to date and feedback on the Consultation
Paper has led the AER to build on the existing Guideline rather than start
afresh.
Specific cost of capital components
Some
of the specific issues raised in the Issues Paper include…
· The AER’s view that a nominal vanilla
WACC will continue to achieve the various objectives.
· The AER’s view that its current
adoption of debt-equity ratios is appropriate.
· The AER’s view that the Australian
Government 10 Year Bond rate remains a suitable proxy for the Risk Free Rate
(because an efficient network company would issue 10 year debt).
· The transition to a 10 year historical
average for estimating the allowable return on debt.
· Whether a more prescriptive approach to
setting the Equity Risk Premium is required.
· How should the Equity Beta point
estimate be set ?
Next steps
Following
the current consultation period, the AER expects to releases its draft
Guideline in May 2018.
The editor comments
As
(electricity) distribution revenues come under increased threat from emerging
technologies, a review of how the Equity Beta is set is definitely appropriate.
Nuclear &
emissions reduction
France – progress on Flammanville’s third
reactor
Introduction
Pipes & Wires #151 and #155 discussed
the metallurgical difficulties encountered during construction of the third
reactor at Flammanville in
north-western France. This article examines the Autorité de Sûrete Nucleaire’s (ASN)
conclusions.
A summary of the difficulties
Tests performed in 2014 revealed that some zones of the steam
generator channel heads included significant concentrations of carbon, which
could reduce the resilience of the steel and its ability to resist cracking.
Concern spread to a further 18 reactors at 9 stations that could have similar
difficulties.
The ASN’s decision
The ASN
recently concluded that Flammanville #3 can be started, but the head of the
reactor pressure vessel will need to be replaced by the end of 2024.
Progress continues
EDF
subsequently announced that construction will continue, fuelling will begin at the
end of 2018, and that full commercial load of 1,630MW is expected to be
achieved by November 2019.
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.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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