Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 172 – February 2018

 

From the editor’s desk…

 

Welcome to Pipes & Wires #172. We start this month with a look at energy costs and prices, and then we examine how grid-scale battery storage might be regulated. We then look at 2 network access determinations, and the n conclude this issue by examining some divergent views on coal-fired generation.

 

So … until next month, happy reading…

 

Recent client projects

 

Recent client projects include…

 

·     Facilitating a series of client workshops to better understand asset information criticality and in-service failure risk.

 

·     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.

 

Electricity training courses

My 2 day Fundamentals Of The NZ Electricity Industry training course will be held as follows…

 

·     Wellington – 2nd and 3rd May 2018.

 

·     Auckland - 26th and 27th June 2018.

 

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Energy markets

 

US – recovering the cost of baseload generation (continued…)

 

Introduction

 

Pipes & Wires #169 examined the Department of Energy’s Notice of Proposed Rulemaking (NOPR) directing the Federal Energy Regulatory Commission (FERC) to “accurately price generation resources necessary to maintain reliability and resiliency”. This article examines the FERC’s response to that NOPR.

 

The core of the NOPR

 

The NOPR sought recovery of costs for generation plants that kept 90 days of fuel on site. This followed the recent DOE study on markets and reliability ordered by Secretary of Energy Rick Perry (refer to Pipes & Wires #163 and #167) which noted that continued retirement of coal-fired and nuclear generation could put security of supply at risk.

 

The FERC’s response

 

In early January 2018 the FERC voted to reject the DOE’s NOPR, and has instead asked the RTO’s to respond to an extensive list of questions about grid resilience. Key arguments made by the FERC in its rejection include…

 

·     There was no evidence that existing market rules are unjust or unreasonable.

 

·     The likely outcome if the NOPR was carried through would be a cost-of-service payment to all generation regardless of need or cost, which could not be demonstrated to be just and reasonable.

 

·     Evidence submitted by RTO’s and ISO’s does not point to past or planned retirements threatening grid resilience.

 

·     The eligibility criteria of 90 days fuel supply would discriminate against other generation that may provide resilience.

 

The DOE’s response to the FERC’s response

 

For its part, the DOE has publically stated that it will respect and honor the FERC’s decision whilst also reiterating its concern that while market models are working today they may not work tomorrow.

 

UK – capping energy prices

 

Introduction

 

The UK Government is pressing ahead with its plans to cap energy prices. This article takes a close at the proposed price caps, and also notes the recent inquiry into energy prices.

 

The proposed price caps

 

The Domestic Gas And Electricity (Tariff Cap) Bill was introduced into Parliament in October 2017 for scrutiny and comment. Key features of the Bill include…

 

·     A statement that whilst the Government believes in markets as the best driver of value, it is also prepared to act when markets are not working for all consumers (for which the energy market is a clear example).

 

·     The conclusion that vulnerable and low income customers are the most likely to be on the most expensive Standard Variable Tariffs (SVT’s).

 

·     A recognition that whilst Ofgem has committed to protect a further 1,000,000 families from the expensive SVT’s, it has not gone far enough.

 

·     Temporary price caps for domestic customers on SVT’s and  default tariffs, which will initially last until the end of 2020 (which would take in the 2018/19, the 2019/20 and the first part of the 2020/21 winters) with the possibility of being extended a further 3 years.

 

·     The requirement for Ofgem to manage the price caps by way of amending the supply license conditions to include tariff cap conditions.

 

The process to date

 

Following the introduction of the draft Bill in October 2017, various hearings were held in December 2017 with further evidence being given in January 2018.

 

The recent energy price review

 

Pipes & Wires #170 noted the recently completed independent review into energy cost in the UK. Key findings of the review include…

 

·     That energy costs are greater 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.

 

A few thoughts from the editor

 

The following thoughts spring to mind…

 

·     I’m not much of an economist, but I always understood that markets signaled a shortfall of capacity with respect to demand by increasing prices. So perhaps the market is working and the real question to be asked is why are those supposedly excessive prices not leading to more investment ?

 

·     Simply capping prices does nothing to the underlying costs.

 

·     Capping prices tends to make suppliers less innovative, whilst removing retail price caps (as in the various states of Australia) stimulates innovation and more competitive offers from suppliers.

 

·     A commentator noted that perhaps a better measure of the retail electricity market’s competitiveness is the number of customers that are switching, rather than prices.

 

Pipes & Wires will comment further as this issue progresses.

 

Regulating emerging technologies

 

Aus – regulating grid-scale battery storage

 

Introduction

 

Pipes & Wires #169 examined Ofgem’s recent work on clarifying the regulatory framework for battery storage. This article follows that theme with a look at the grid scale battery at Hornsdale in South Australia.

 

The technical aspects of the Hornsdale battery

 

The Hornsdale Power Reserve is a 129 MWh battery capable of discharging at up to 100 MW, and is located adjacent to the 315 MW Hornsdale windfarm 225km north of Adelaide. The battery is divided into 2 parts … 70 MW contracted to the South Australian Government that can supply for 10 minutes, and a further 30 MW that can supply for about 3 hours. Its’ ramping rate is thought to be in the order of milli-seconds, with recent grid frequency drops indicating that it can certainly ramp at about 8 MW/s.

 

Readers may have noted Tesla’s boast that it would be built in 100 days or it would be free. It was completed in about 60 days of signing the contract.

 

Recent grid events and Hornsdale’s response

 

Within a few weeks of being completed, Hornsdale got to prove its worth when Unit #3 at Loy Yang A tripped dropping 560 MW form the National Electricity Market (NEM) and causing the frequency to drop to just under 49.8 Hz. Hornsdale was able to release 7.3 MW into the NEM within a few seconds until Gladstone picked up the remaining load and restored the frequency back to 50 Hz.

 

About a week later, a second trip at Loy Yang dropped 353 MW from the NEM and Hornsdale was able to provide 16 MW within a few milli-seconds.

 

The regulatory framework

 

Whilst the technical and grid operating issues are really interesting, the regulatory treatment of batteries such as Hornsdale are really tricky, with the short answer being that whilst legacy market rules and structures include contractual arrangements for Frequency Control Ancillary Services (FCAS), those rules and structures don’t obviously extend to batteries. The Australian Energy Markets Commission (AEMC) and the Australian Energy Market Operator (AEMO) are both working on grid security plans which will inter alia allow networks to contract with inertia substitutes like batteries, presumably allowing batteries to be paid.

 

Network access decisions

 

Aus – the SA electricity transmission Revised Proposal

 

Introduction

 

South Australia’s electricity transmission operator, ElectraNet, recently submitted its Revised Proposal for the 5 year regulatory period beginning on 1st July 2018 to the Australian Energy Regulator (AER). This article examines the key features of that Revised Proposal.

 

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

$461m

 

OpEx

$436m

$474m

$453m

 

Opening RAB

$2,552m

$2,569m

$2,575m

 

WACC

6.02%

5.75%

5.75%

 

Depreciation

$379m

$314m

$315m

 

Smoothed revenue

$1,738m

$1,588m

$1,610m

 

 

Pipes & Wires will report further once the AER releases its Final Determination.

 

NZ – Wellington Electricity’s Customised Price Path

 

Introduction

 

Disaster resilience of electricity networks is 1 of several hot topics, whilst funding of that resilience work is also a hot topic. This article examines Wellington Electricity’s recent approach to funding earthquake strengthening and resilience work by means of a Customised Price Path (CPP) Application.

 

Background to the CPP Application

 

As part of its disaster preparedness planning, Wellington Electricity identified a range of earthquake strengthening and critical spares requirements. The CPP Application seeks approval to spend an additional $31m of OpEx and CapEx over the 2018/19, 2019/20 and 2020/21 years because Wellington Electricity had indicated that simply reallocating the existing funds within the Default Price Path (DPP) would result in a decline in supply reliability.

 

Regulatory framework

 

The regulatory framework for CPP’s is set out in Part 5 of the Electricity Distribution Services Input Methodologies Determination 2012, which is made pursuant to Subpart 6 of Part 4 of the Commerce Act 1986.

 

The Commission’s approach to assessing the CPP Application

 

The pressing need to approve the additional $31 of expenditure would’ve been difficult to accommodate within the established CPP evaluation framework. The Commission advised that if the Government were to issue a Government Policy Statement (GPS) on resilience of essential services in Wellington that it (the Commission) would consider applying some flexibility that would not require a full CPP process. That GPS was issued in September 2017, and resulted in the Commission proposing a slimmed-down process.

 

Key features of the CPP Application

 

Key features of Wellington Electricity’s CPP Application include (noting the changes proposed on 16th February 2018)…

 

Parameter

Application

Draft Decision

Final Decision

Resilience CapEx and OpEx

$31.24m

$31.24m

 

Base CapEx for Y3 of CPP

$35.8m

$35.8m

 

Base OpEx for Y3 of CPP

$33.4m

$33.4m

 

Revenue for Y1 of CPP

$107.4m

$105.2m

 

 

Pipes & Wires will re-visit this story when the Commission releases its Final Decision.

 

Energy mix & emissions reduction

 

US – what future hath coal ?

 

Introduction

 

Pipes & Wires #164 examined President Trump’s instructions to review the Clean Power Plan (s111b of the Clean Air Act). This article adopts the title from an article in Pipes & Wires #90, and examines more recent changes that may give coal-fired generation a stay of execution.

 

Background

 

Over the years Pipes & Wires has examined the various rises and falls of coal-fired generation in the US, the UK, Germany, Canada and Australia. The politics behind coal-fired generation and its wider driver of man-made global warming is obviously very broad and deep, but two patterns have emerged from these various articles…

 

·     Declines in grid security prompt government inquiries which then conclude that secure thermal generation is necessary.

 

·     The acceptability of coal-fired generation declines under left-wing governments and increases under right-wing governments.

 

Recent events

 

The following events have occurred…

 

·     On 28th March 2017, President Trump issued an Executive Order promoting energy independence.

 

·     On 9th October 2017 the Environmental Protection Agency (EPA) boss Scott Pruitt told Kentucky coal miners that he would move to repeal certain aspects of the Clean Power Plan.

 

·      On 18th December 2017 issued an Advance Notice of Proposed Rulemaking (ANPRM) that the EPA would seek public input on its proposed setting of CO2 emission guidelines, which it notes is a separate but related action to the proposed repeal.

 

Some deeper thoughts on coal-fired generation

 

Those familiar with the energy trilemma will understand how the two macro patterns noted above shift a state or country’s location on the trilemma model, with various swings between lowering emissions and increasing grid security (along with a third semi-related issue of price, which is also the subject of various inquiries).

 

Next steps

 

Pipes & Wires will pick up this story again as the repeal process progresses.

 

Canada – progress on phasing out coal

 

Introduction

 

Pipes & Wires #159 examined Canada’s plans to phase out coal-fired generation by 2030. This article checks back in to see what progress (or lack of progress) has been made.

 

Re-capping the phase-out plans

 

Regulating CO2 emissions from Canada’s coal-fired generation is based on the Reduction of Carbon Dioxide Emissions from Coal-fired Generation of Electricity Regulations (SOR/2012-167), which were made pursuant to the Canadian Environmental Protection Act 1999. Policy changes included requiring all traditional coal-fired units to achieve an emission level of 420 tons per GWh no later than 2030 (regardless of commissioning date), and introducing a range of emission levels for gas-fired generation and for coal-fired generation converted to gas firing.

 

A little further research reveals that some provinces are heavily dependent on coal and gas (noting that the emission limit of 420 tons per GWh will probably also limit gas-fired generation as well)...

 

Province

Coal

Natural gas

Renewables

Alberta

50%

40%

10%

Saskatchewan

46%

37%

17%

Nova Scotia

63%

12%

12%

  

* above table is approximate, and excludes nuclear, oil, imports and exports.

 

Opposition to the phase out

 

The phase out plans have understandably met with resistance, including push-back from individual provinces (similar to the Federal – State disconnect we’ve observed in Australia), and include…

 

·     Saskatchewan is negotiating with Ottawa to obtain credits for its one carbon capture and storage facility to offset the emissions from continuing to use a conventional plant after 2030.

 

·     Nova Scotia is also negotiating an equivalency agreement to obtain credit for capture and storage.

 

·     Conservatives are arguing that 2030 is too soon for an orderly transition that won’t hurt the economy or increase electric bills, noting the 70% increase in Ontario when it phased out coal from 2006 to 2014.

 

The wider picture

 

The ideological battle lines have obviously been drawn between the coal advocates and the climate change advocates … certainly nothing new or significant in that observation. Some further observations include…

 

·     The world is on an inexorable path towards reducing CO2 emissions, and the election of right-wing governments will provide only temporary wins for coal.

 

·     Grid security will decline (or may even collapse), which will prompt a government inquiry which to date have usually concluded that closing secure thermal generation is at least part of the problem. However the recommendations to avoid further grid security issues will usually be subject to continued emission reductions.

 

·     State or provincial governments who are closer and probably more politically sensitive to black-outs, rising electric bills and unemployed coal miners are increasing pushing back against federal governments.

 

·     Other states and cities that are determined to reduce emissions are establishing their own clean energy programs in defiance of federal policy.

 

Sweden – progress on the return to nuclear

 

Introduction

 

Pipes & Wires #154 examined Sweden’s surprising decision to allow a return to nuclear generation (around mid-2016). This article follows up that decision to see what progress has been made.

 

Recapping the proposed return

 

The agreement signed by the then government and opposition parties included the following…

 

·     A phase out of the tax on nuclear electricity that was introduced in 1984 and is currently €7.5 per MWh (about 33% of the cost of nuclear generation). This tax generates annual revenues of about €465m.

 

·     Allowing the construction of up to 10 new nuclear reactors to replace aging reactors.

 

·     A target of 100% renewable energy by 2040 (which is clearly underscored as a goal, and not as a final cut-off date for the nuclear generation).

 

The looming gap

 

In common with most if not all other countries, the expected end-of-life closure of nuclear generation will create a capacity shortfall that will need to be filled. Some quick research suggests that this will be of the order of 3,300 MW by 2040 (just under 10% of currently installed capacity) and possibly 7,000 MW by 2045.

 

Progress on the return

 

Progress seems to be rather quiet and incremental, with the only obvious moves being investment in new core cooling systems at Forsmark and Ringhals. Those decisions in turn appear to be based mainly on the phase-out of the tax (which will allow the nuclear stations to become slightly cost competitive in the face of declining wholesale prices) rather than the headline of allowing up to 10 replacement reactors.

 

Poland – investing in coal as electricity demand grows

 

Introduction

 

As noted in the companion article above, the world is on an inexorable path towards reducing CO2 emissions, and the election of right-wing governments will provide only temporary wins for coal. This brief article examines one of those apparent temporary wins … significant commercial support for coal mining in Poland.

 

Expected growth Poland’s electricity sector

 

Poland has an installed capacity of about 38,000 MW, of which about 30,000 is either black coal or brown coal fired. Current plans are for a further 10,000 MW of coal-fired capacity to be built by 2025, along with Poland’s first nuclear unit scheduled for 2029.

 

Insurance company activity

 

News emerged recently that large global insurers are…

 

·     Increasing their shareholdings in coal mining companies and in coal-fired generation companies.

 

·     Insuring coal mining and coal-fired generation assets.

 

Not surprisingly the anti-coal movement is spewing mad, but presumably these insurers have concluded that the commercial rewards are likely to exceed the reputational risks.

 

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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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 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.