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.
Subscribe to Pipes & Wires
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you’re receiving this second-hand, pick this link to subscribe.
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.
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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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