From the
editor’s desk…
Welcome
to Pipes & Wires #171. We start this issue with a look at summer
preparedness in the Australian NEM and in Texas, and then take a quick look at
progress on the Hinkley Point C nuclear station in Britain. We then examine
some network access decisions in Australia and New Zealand, followed by a
comparison of how regulatory stability effects solar investment. This issue
ends with an examination of solar metering and fixed tariffs in the United
States.
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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Grid operations & security
Aus – securing the NEM for summer
Introduction
The closure of the coal-fired Hazelwood Power Station removed 1,600MW of firm capacity from
Australia’s National Electricity Market (NEM) earlier in 2017, which caused
concern over how peak summer demand would be supplied. This article examines
the Australian Energy Market Operators’ security of supply plans for the
2017/18 summer.
The NEM reliability standard
The reliability standard for the NEM is set by the Australian Energy Market Operator’s (AEMO)
Reliability Panel, and is 0.002% of Unserved Energy, meaning that in any
given (financial) year the maximum amount of forecast energy demand that should
be at risk of not being supplied is 0.002%, or alternatively that 99.998% of
forecast energy demand should be met. As an example, NSW’s annual consumption
is about 69,500 GWh, so the requirement is for no more than 1,390 MWh to be at
risk (eg. 1,390 MW for 1 hour at a transmission grid level).
The
AEMO and the AEMC are reviewing this reliability standard, and expect to publish a revised
standard in April 2018.
Capacity closures in the NEM
Pipes & Wires #166 noted that 5,900 MW of firm capacity (including
Hazelwood during 2017) had closed since 2010, along with a further 5,000 MW
(Yallourn W, Liddell and Gladstone) expected to close by 2026. There were also
some anxious moments during September 2017 when the possibility that the
Springvale Coal Mine supplying Mt Piper (1,400 MW) might be closed due to
environmental activism.
The AEMO’s plans
The
AEMO released its Summer Operations 2017-18 plan in November 2017. Key features of
that plan include…
· A reiteration of the heightened risk of
supply interruptions (specifically noting the Hazelwood closure) noted in the June 2017 Energy Supply Outlook.
· A recognition that declining firm
capacity, longer and hotter summers and the introduction of intermittent
generation requires an additional emphasis on summer preparedness.
· An
explanation that the primary focus of the plan is on the medium-to-long term
balancing of energy supply and demand rather than the immediate-term balancing
of MW.
· Refined modelling that includes inter alia a lower peak period
contribution from rooftop solar than previously thought, and higher demands for
South Australia than previously forecast.
· The view that customers are less likely
to reduce energy consumption than the AEMO previously thought.
· Recognising that the number of Lack Of Reserve notices issued to the market has increased over
the last 3 years.
· Recognition that the risk of unserved
energy (USE) in Victoria and South Australia would exceed the reliability
standard during the 2017/18 summer.
Specific
measures to meet the reliability standard
Specific measures set out in the Summer Operations 2017-18
plan include…
· Returning 833 MW of previously
mothballed gas-fired capacity to the NEM (including Pelican Point, Swanbank E
and Tamar Valley).
· Obtaining commitments to 884 MW of
interruptible load under the Reliability & Emergency Reserve Trader (RERT)
arrangement.
· Obtaining commitments for 266 MW of
non-market generation and 170 MW of emergency diesel generation in South
Australia (both through the RERT), along with a further 96 MW of emergency
diesel generation in Victoria).
All
going well, that represents about 2,000 MW of previously unavailable capacity.
US – tightening reserve in the Lone
Star State
Introduction
Pipes & Wires #170 noted that generation is being closed
or sold in Texas because of historically low wholesale prices (currently about
$25 per MWh, down from $78 per MWh in 2008). This article examines the Electric
Reliability Council of Texas’ (ERCOT) recently signaled decline in
reserve capacity margin for the 2018 summer.
ERCOT’s recent forecasts
Key
feature of ERCOT’s recent reports include…
· A December 2017 forecast of a reserve
capacity margin of 9.3% for the 2018 summer (much less than ERCOT’s preferred
minimum of 13.75%), in contrast to the May 2017 forecast of 18.9%. This sharp
decline is due to recently announced capacity retirements and construction
delays totaling 7,200 MW offset by 3,800 MW of new capacity during 2017.
· A December 2017 forecast that reserve
capacity margin would decline to 9.6% by 2027 primarily due to a forecast 1.7%
annual peak demand growth.
· An expected 10,000 MW of new capacity
expected to be added during 2018, of which 5,500 MW is expected to be summer-capable.
The
difference between the May and December 2017 Reports highlights how quickly
available capacity can change, although ERCOT notes that reserve margins are
expected to fluctuate in the current market design.
The wider trends
Some
likely wider trends and issues include…
· Some increase in forward wholesale prices
for the 2018 summer has occurred since ERCOT’s latest report was released.
· Cheap gas and wind have eroded the
wholesale prices (and not just in Texas, as noted in Pipes & Wires #170),
which will increasingly couple wholesale electricity prices to wholesale gas
prices.
· A headline view from the Texas Coalition For Affordable Power that retiring old, expensive
coal-fired capacity should improve overall market efficiency and should not be
seen as bad for customers (Editor’s note – that would depend on what cost
recovery commitments have been agreed to).
· A view from the Texas
Association Of Manufacturers’ that the energy market is encouraging
the replacement of older capacity with new, efficient, reliable capacity.
Nuclear &
emissions reduction
UK – progress on Hinkley Point C
Introduction
Last time Pipes & Wires
examined Hinkley Point C was just after the UK Government’s review of security
and ownership that resulted in increased control over any on-sale. This brief article
revisits progress and notes the expected dilution of returns.
Latest progress on the works
Although work is proceeding,
recent construction updates suggest that Unit #1 will be commissioned in 2027
instead of the originally planned late 2025, and the likely cost of completion
will creep up from £18b to about £20.2b. It might be worth considering that
although the cost and time over-runs (at least at this stage anyway) seem a lot
they are of the order of 10% which maybe isn’t so bad for a complex
construction project.
The investment characteristics
EDF’s expected rate of return
for Hinkley Point C is 9%, which is expected to retreat to about 8.2% if the
cost over-runs do amount to £2.2b. That suggests that every £1b over-run will
dilute the return by about 0.36%. Keep this figure in mind for future analyses…
Network access decisions
Aus – the Murraylink revenue
determination
Introduction
The Murraylink recently submitted its Revised
Proposal for the five year period beginning on 1st July 2018 to the
Australian Energy Regulator (AER). This article examines the key features of
the Revised Proposal.
A bit about the Murraylink
The
Murraylink is a 180km long HVDC cable link between Berri (South Australia) and
Red Cliffs (Victoria) which operates at 150kV and has a rating of 220MW. It was
built by TransEnergie Australia and commissioned in 2002, and is now owned by
Energy Infrastructure Investments Pty Ltd.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which is made pursuant to the National Electricity Law.
Key features of the process
Key
features of the process to date include…
|
Parameter |
Initial
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
CapEx |
$34m |
$27m |
$29m |
|
|
OpEx |
$22m |
$22m |
$22m |
|
|
Opening
RAB |
$114m |
$114m |
$114m |
|
|
Nominal
vanilla WACC |
6.54% |
5.7% |
6.4% |
|
|
Regulatory
depreciation |
$27m |
$23m |
$21m |
|
|
Smoothed
revenue |
$96m |
$85m |
$89m |
|
Next steps
Pipes
& Wires will comment further when the AER releases its Final Decision.
NZ – gas under pressure
Introduction
The
Commerce Commission recently released its Final Decision on the detailed requirements for customised price-quality
paths (CPP’s), which are set out in the Input Methodologies. This article summarises the key
features of that decision.
Regulatory framework
The
regulatory framework for regulated suppliers is set out in Part 4 of the Commerce Act 1986.
Subpart 6 of Part 4 sets out the requirements for default
price-quality paths (DPP) and for customised price-quality paths (CPP). A
regulated supplier that is subject to a DPP and believes it cannot adequately
fund its business has the option of applying for a CPP pursuant to s53Q.
Key features of the decision
Key
features of the Final Decision include…
· The view that single-issue CPP’s are
problematic, and that CPP’s should therefore be full scope with perhaps a
lesser level of scrutiny.
· Widening the range of circumstances
under which a DPP can be reopened, including allowing a reopener for varying
quality standards (which replaces the option of applying for a quality-only
CPP).
· Allowing the recovery of the prudent costs of
urgent work performed after a CPP is applied for but before the CPP takes
effect.
· Allowing a gas distribution or
electricity distribution CPP to be reopened for contingent and unforeseen
projects.
· Aligning the WACC requirements between
DPP’s and CPP’s so the decision to apply for a CPP is independent of the WACC.
· A preference for top-down assessment of
spend forecasts with limited bottom-up assessment of selected projects and
programs.
· CPP applications will need to include a
works deliverability risk assessment to demonstrate that the forecast work can
be physically delivered.
Aus – the Victorian gas transmission Final
Decision
Introduction
The Australian
Energy Regulator (AER) recently released its Final Decision for the 5 year regulatory period
commencing on 1st January 2018 for the Victorian Transmission System
(VTS). This article examines the key features of that Final Decision.
A bit about APA Group and the VTS
APA Group owns and operates inter alia 15,000km of gas pipelines across Australia, which
includes 7,500km of interconnected pipelines in the eastern states. The VTS
comprises 1,990km of pipelines which form an integral part of the eastern
states interconnected network.
Regulatory framework
The
regulatory framework for gas transmission includes the…
· National Gas (South Australia) Act 2008 which has also been enacted in the
other participating states through application statutes.
· National Gas (South Australia) Regulations.
· National Gas Rules, for which Part 8 addresses Access Arrangements.
Key features of the Access Arrangement
to date
Key
features of the VTS Access Arrangement include…
|
Parameter |
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
Gross
CapEx |
$256m |
$215m |
$239m |
$239m |
|
OpEx |
$131m |
$132m |
$132m |
$132m |
|
Opening
RAB |
$1,007m |
$986m |
$998m |
$971m |
|
WACC |
7.88% |
5.75% |
7.67% |
5.75% |
|
Regulatory
depreciation |
$106m |
$78m |
$84m |
$85m |
|
Smoothed
revenue requirement |
$732m |
$555m |
$684m |
$562m |
This
concludes Pipes & Wires coverage of this access decision.
NZ – regulating related party
transactions
Introduction
The
Commerce Commission recently released its Final Decision on how it intends to regulate related party transactions as part of its review of the Input
Methodologies review. This article examines related party transactions and
summarises the key features of the Final Decision.
Thinking a bit more about related party
transactions
Put
simply a related party transaction is a transaction that occurs between an entity that is related to the entity preparing its financial
statements. The context of this discussion is regulated pipes & wires
businesses where the “do” (field services) activity may be related to the
“think” (asset management) activity as either an internal business unit, as a
subsidiary of the “think” activity, or as a subsidiary of the parent company.
Some of the issues around related party
transactions
Some
of the issues around related party transactions include…
· The possibility that an “own” activity
(owner of regulated assets) might be able to pass on inefficient costs derived
from a related party “do” activity.
· The additional possibility that a
related party “do” activity might set its prices to the “think” and “own”
activities higher than what a market-based transaction would allow, depressing
the prima facie ROI for the “own”
function whilst attributing those funds back to the “own” function as profit
from the “do” function.
· The fact that many regional areas
simply don’t have a robust market for major line and substation construction
and maintenance activities that asset owners can readily access, so there are
often no comparable arms-length transactions for comparison.
· At least some “think” activities are
regularly tendering out “do” work where external contractors exist and have
sufficient internal tension and separation to obtain competitive prices.
Key features of the Final Decision
Key
features of the Final Decision include…
· The Commission’s view that it doesn’t
want to prohibit the use of related party services, but rather require
regulated suppliers to demonstrate that the price paid for related party
services are consistent with the prices that are (or would be) paid for
arms-length services.
· Removing the original prescriptive
valuation options for disclosing related party transactions.
· The introduction of a principles-based
approach requiring demonstration that inter
alia the price of related party purchases is no more than an equivalent
arms-length purchase.
· A requirement to disclose how
competitive markets have been tested.
Readers
should note that the Final Decision amends the Input Methodologies and the
Information Disclosure Determinations for electricity distribution services,
gas distribution services and gas transmission services.
Aus – the TransGrid revenue
determination
Introduction
The
electricity transmission grid owner in the Australian state of NSW, TransGrid, recently submitted its Revised Proposal for the five year period beginning on
1st July 2018 to the Australian Energy Regulator (AER). This article
examines the key features of that Draft Decision.
A bit about TransGrid
TransGrid
owns and operates 13,000km of lines at 500kV, 330kV, 220kV and 132kV that
supply 99 bulk supply substations (GXP’s). Following the completion of the 99
year lease process in 2015, TransGrid is owned by a consortium led by Hastings
Funds Management.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which is made pursuant to the National Electricity Law.
Key features of the process
Key
features of the process to date include…
|
Parameter |
Initial
Proposal |
Draft
Decision |
Revised
Proposal |
Final
Decision |
|
CapEx |
$1,612m |
$992m |
$1,534m |
|
|
OpEx |
$908m |
$857m |
$878m |
|
|
Opening
RAB |
$6,406m |
$6,373m |
$6,377m |
|
|
WACC |
6.6% |
6.5% |
6.5% |
|
|
Regulatory
depreciation |
$678m |
$631m |
$635m |
|
|
Smoothed
revenue |
$3,973m |
$3,910m |
$3,781m |
|
Next steps
Pipes
& Wires will comment further once the AER releases its Final Decision.
Regulating emerging technologies
US – different lessons from different
states
Introduction
We
all know that long-term stability of cost recovery is a major investment driver
for large capital projects. This article examines the differing regulatory
frameworks in California and Massachusetts that are leading to
counter-intuitive outcomes for community solar investment.
The investment in question
The
investment in question is privately developed community solar, which refers to
a solar installation that…
· Provides electricity to more than 1
property.
· Is owned by a “community” or possibly
by a third party such as an electric company.
Comparing the two states
A
quick comparison of California and Massachusetts reveals…
|
Parameter |
California |
Massachusetts |
|
Average
annual number of sunny days |
284 (Los Angeles) |
200 (Boston) |
|
Land
area |
424,000 km2 |
27,300 km2 |
|
Installed
private-sector led community solar |
0 MW |
130 MW |
|
Regulatory
stability |
Moderate |
High |
|
Regulatory
complexity |
High |
Moderate |
|
Solar
tariffs |
Moderate |
High |
|
Complexity
of tariffs |
High |
Low |
|
Stability
of tariffs |
Moderate |
High |
The apparent lessons
So
the apparent lesson here (like in many other areas of life) is that it is not
necessarily the abundance of the natural resources that creates the opportunity
but rather the stability of the regulatory framework.
Tariffs & pricing
US – striking the right balance for
solar metering in Nevada
Introduction
Opposition
to increasing the fixed component of electric tariffs is nothing new …
promoters of rooftop solar have claimed that increasing the fixed tariff
component whilst also reducing the variable component undermines the benefits
of solar (which electric companies have never disputed). This article follows
on from Pipes & Wires #168 and examines the Nevada Public Utility
Commission’s response to NV Energy’s proposed implementation of the nett
metering law.
Nevada’s nett metering law
Assembly Bill
405 was introduced to the Nevada Legislature in March 2017 with
the aim of…
· Protecting customers who use renewable
energy.
· Revising provisions for nett metering.
A
key feature of the Bill was that it restored nett metering rates to 95% of the
retail rate. The Bill was signed into law in June 2017 by Governor Brian
Sandoval.
NV Energy’s proposed tariff rebalancing
Key
features of NV Energy’s proposed tariff rebalancing include…
· Increasing the fixed monthly tariff
from $12.75 to $16.76, but noting that customer bills should remain about the
same because of a corresponding reduction in the kWh tariff.
· Paying rooftop solar customers 95% of
the prevailing import rate for their exported energy. This will decline by 7%
for every 80MW of rooftop solar installed until a floor of 75% is reached.
The Nevada PUC’s response
Key
features of the PUC’s response include…
· A strong commitment to implement the
recently passed Assembly Bill 405, providing for the immediate
reestablishment of the rooftop solar market in Nevada.
· A directive that solar and non-solar
customers be treated equally.
· Approval to establish regulatory assets
to protect NV Energy against any under recovery of costs.
· A return to (traditional) monthly nett
kWh metering.
· A requirement that public purpose
levies must continue to be paid by all applicable classes of customers, whether
solar or non-solar.
The editor
comments
On the face of it, the PUC’s conclusions seem reasonable,
especially the approval to establish regulatory assets to protect against under
recovery of costs. Only time will tell how successful this works out in
practice.
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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