From the
editor’s desk…
Welcome
to Pipes & Wires #175. This issue starts with three regulatory decisions in
Australia and New Zealand, and then examines the strategies behind three
mergers in North America. The issue then concludes with four articles examining
topical issues of grid resilience, thermal generation and batteries in
Australia and North America. So … until next month, happy reading…
Trends and patterns we’re seeing…
· Gas turbine stations being increasingly
recognised as important for providing grid security.
· Increasingly mixed messages about
closing down coal-fired station to reduce emissions on the one hand, and
keeping them open to improve grid security on the other hand.
· Regulators defining multiple classes of
services and payment categories for battery storage.
· Diversified electric companies reducing
their exposure to volatile energy revenues and increasing their exposure to
predictable lines revenue (the opposite of what was fashionable a few years
ago).
· Heightened appreciation of coal-fired
generation during gas supply interruptions.
· A shortage of skilled project managers
and electricity network designers.
· Regulators declining to take jurisdiction
over battery charging services.
· Electric companies extending beyond the
meter with smart services (home wifi etc).
Recent client projects
Recent
client projects include…
· Compiling some introductory thoughts on
digital transformation and blockchain.
· Developing a strategy for complying
with the related party transaction provisions.
· Advising on the regulatory implications
of an aging timber transmission pole fleet.
· Facilitating a series of client
workshops to better understand asset information criticality and in-service
failure risk.
· Assessing the strength of asset
management practices.
· 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…
· Auckland - 26th and 27th
June 2018.
Subscribe to Pipes & Wires
If
you’re receiving this second-hand, pick this link to subscribe.
Network access decisions
Aus – the final SA electricity transmission decision
Introduction
The Australian Energy Regulator (AER) recently released its Final
Decision for 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 Final 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 |
$461m |
$461m |
|
OpEx |
$436m |
$474m |
$453m |
$493m |
|
Opening RAB |
$2,552m |
$2,569m |
$2,575m |
$2,560m |
|
WACC |
6.02% |
5.75% |
5.75% |
5.69% |
|
Depreciation |
$379m |
$314m |
$315m |
$320m |
|
Smoothed revenue |
$1,738m |
$1,588m |
$1,610m |
$1,603m |
This article concludes Pipes
& Wires coverage of this Determination.
NZ – setting the WACC for various
regulated suppliers
Introduction
The Commerce Commission recently released its
cost of capital
determinations that will apply for the Disclosure Year
2019 for…
· Electricity
distribution businesses.
· Wellington Airport.
This article examines the key features of that determination.
Regulatory frameworks
The regulatory framework for setting the WACCs are set out in…
· Clauses 2.4.1 to 2.4.5
of the Electricity Distribution Services Input
Methodologies Determination 2012 (consolidated to 3rd
April 2018).
· Clauses 5.1 to 5.7 of
the Airport Services Input
Methodologies Determination 2010.
These determinations are made pursuant to Part 4 of the Commerce
Act 1986.
Key features of the
WACC’s
Key features of the Vanilla WACC’s include…
· Electricity
Distribution Businesses.
|
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
4.58% |
5.26% |
5.70% |
5.94% |
|
Post-tax WACC |
4.07% |
4.75% |
5.19% |
5.43% |
·
Wellington Airport.
|
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
- |
6.34% |
- |
- |
|
Post-tax WACC |
- |
6.13% |
- |
- |
Aus – the Murraylink revenue decision
Introduction
The Australian Energy Regulator
(AER) recently released its Final Decision for the Murraylink that will apply for the five year period beginning on 1st
July 2018. This article examines the key features of that Final Decision.
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 |
$29m |
|
OpEx |
$22m |
$22m |
$22m |
$24m |
|
Opening RAB |
$114m |
$114m |
$114m |
$113m |
|
Nominal vanilla WACC |
6.54% |
5.7% |
6.4% |
5.69% |
|
Regulatory depreciation |
$27m |
$23m |
$21m |
$20m |
|
Smoothed revenue |
$96m |
$85m |
$89m |
$81m |
This concludes Pipes &
Wires coverage of this decision.
Mergers & acquisitions
US – NextEra Energy sells renewables
Introduction
NextEra Energy (owner of the regulated subsidiaries Florida Power & Light and Lone Star Transmission) has recently agreed to sell its Canadian renewables business to
the Canada
Pension Plan Investment Board (CPPIB). This article examines the sale deal with a particular
focus on why an electric company might buck the apparent trend of more
renewables, not less.
NextEra’s recent moves
Pipes
& Wires #173
examined NextEra’s search for both regulated earnings and earnings growth as it
sought a reduced exposure to its merchant generation business. That included
bidding for Santee-Cooper to increase its exposure to regulated distribution.
The renewables deal
The CPPIB will pay $582m in
cash and assume $689m of debt for a total consideration of $1.27b. Assets sold include
about 400MW of
wind and solar in Ontario.
The strategy behind the deal
The prima facie thinking of most things electric appears to be more
renewables, not less so an examination of NextEra’s strategy is worthwhile.
This deal appears to embody two distinct strategies for maintaining earnings
growth…
· Reducing NextEra’s exposure to merchant generation, whilst
increasing exposure to predictable, regulated revenues.
· Migrating funds back to the US where corporate tax rates have
reduced from 35% to 21%.
US – Avista and Hydro One agree acquisition terms
Introduction
Avista and Hydro
One
recently agreed on the terms under which Hydro One would acquire Avista. This
article examines the deal, and also examines some surrounding issues.
A bit about Avista and Hydro One
The parties to the deal are…
· Hydro One operates 97% of Ontario’s transmission grids and
supplies 1,300,000 rural customers, and stems from the old vertically
integrated Hydro-Electric
Power Commission of Ontario.
Annual revenues are about C$6b.
· Avista supplies 379,000 electric customers and 342,000 gas
customers in Washington, Idaho and Oregon. Annual revenues are about US$1.5b
The merged entity will supply
1,679,000 electric customers and 342,000 gas customers in the geographically
diverse regions of Ontario and the Pacific North-West. Total annual revenue
will be about C$7.9b.
Terms of the deal
Hydro One will pay US$53 for
each Avista share in all-cash deal, which was a 24% premium to Avista’s closing
price on 18th July 2017. The deal is therefore valued at US$5.3b.
Specific features of the deal
In addition to the usual
regulatory approvals that include a commitment not to increase the acquired
company’s prices, this deal also includes an agreement between the various
owners of the 2,094 MW
Colstrip coal-fired station in
Montana and various Washington (state) authorities to accelerate the closure of
Colstrip. That agreement allows some of Avista’s deferred federal income tax to
be applied to Colstrip’s depreciation schedule.
US – Dominion threatens to withdraw from SCANA
acquisition
Introduction
Acquisition deals are obviously very
sensitive to changes in the likely value of the acquired entity. This article
examines Dominion Energy’s
possible withdrawal from its planned acquisition of SCANA if proposed tariff reductions occur.
Recap on the deal from Pipes & Wires #173
Dominion and SCANA proposed an all-stock
merger that would create a giant company with about 6,500,000 electric and gas
customers. SCANA’s key asset is the regulated subsidiary South Carolina
Electric & Gas which supplies about 1,800,000 electric and gas customers throughout South Carolina, North Carolina and Georgia. A complicating issue was the inclusion of the 2 abandoned AP1000 reactors at the Virgil
C. Summer nuclear station in
SCG&E’s regulated asset base. The typical SCG&E customer is paying
about $27 per month (about 18% of their bill) for the abandoned works.
The proposed tariff reductions
South Carolina passed the Base Load Review Act in 2007, which allows an electric company to bill customers
for the construction projects prior to completion, arguing that it would save
on interest costs. Both the House and the Senate are proposing to repeal the
Act…
· The House has proposed cutting the entire 18% charge.
· The Senate proposes a 13% tariff cut (about the
maximum cut that would keep SCG&E solvent). Governor Henry
McMaster
indicated he would veto the Senate’s proposed 13% cut after stating back in
January 2018 that SCG&E should bear the cost.
The implications for Dominion
Given that Dominion’s offer to SCANA
stockholders includes a 7% tariff reduction, a refund of the $1.3b paid for Virgil
C. Summer so far (equating to about $1,000 cash refund per customer), and a
$1.7b write down, further erosion of the acquisition value is unthinkable.
Dominion has now said that it will withdraw from the acquisition if the
proposed tariff cuts are enacted.
Recent happenings
In late April the Senate voted to impose its proposed 13%
tariff cut. Responses include…
· Dominion
stated that the legislation would be a material event that could eliminate the
benefits of the acquisition.
· SCANA stated
that it would consider its options including challenging the law in court.
·
Governor McMaster’s office reiterated that McMaster
planned to sign the House Bill (an 18% tariff cut), suggesting that he may not
sign the Senate’s proposed 13% cut as he originally indicated.
Pipes & Wires will comment further as
this story unfolds.
Energy mix & emissions reduction
US – grid resilience and coal-fired
generation
Introduction
Getting
the right balance between grid resilience and emissions reduction is very
topical, and also very sensitive for many people. This article examines a recent
DOE report which concludes that continued retirement of thermal generation
could reduce the grid’s resilience to extreme weather events.
The Bomb Cyclone
The northeastern United States was hit by a Bomb
Cyclone around Christmas 2017. That Bomb was expected to bring
record low temperatures, and apparently it did.
The DOE report
The
recent (February 2018) report by the DOE’s National Energy Technology
Laboratory (NETL) concluded inter alia
the following…
· Across the six ISO’s included in the
study, fossil-fired generation provided 69% of the kWh during peak periods,
with nuclear providing a further 20%.
· Constrained gas pipelines resulted in
both price spikes of nearly 700%, and a lot of oil-firing.
· That the PJM would’ve almost certainly
had blackouts with coal-fired generation.
· Fuel-based resilience was valued at
$3.5b in the PJM alone.
· Dual-fuel capability (gas and oil)
proved particularly useful.
· Available wind generation was 12% lower
during the Bomb period.
The
overall conclusion of the report is that further closures of aging coal and
nuclear stations could reduce resilience and reserve capacity margins, and
should be subject to further study.
Criticisms of the report
Any
report suggesting retention of fossil-fired generation will undoubtedly attract
criticism from renewable advocates who want to see coal-fired generation closed
down. That criticism is wide ranging and includes the following issues…
· That the NETL report overlooked the
fact that most customer supply interruptions were due to transmission and
distribution interruptions, not lost generation.
· That the metrics used by the NETL
report are flawed, and in particular reveal coal as expensive rather than
resilient.
The editor comments
Unfortunately
the ideological battle between fossil and renewable generation makes it hard to
find a balanced viewpoint, but if I had snow drifts and hurricane force winds I
wouldn’t want to rely on wind, solar and batteries (notwithstanding that the
wires would probably be down anyway).
Aus – retaining coal-fired generation ?
Introduction
Pipes
& Wires #172
featured three articles that overall embody mixed messages on the future of
coal-fired generation. This article examines a recent request by Australian Prime
Minister Malcolm Turnbull to
keep Liddell
Power Station open
until 2027.
A bit about Liddell and its critical role
Liddell is a 2,000 MW coal-fired station near the town
of Muswellbrook in the Hunter Valley, inland from Newcastle. It comprises four
500 MW steam turbines that were commissioned over the period 1971 to 1973. Coal
consumption is about 5,500,000 tons per year.
In 2015 Liddell’s owners AGL announced its scheduled closure by 2022 (refer to Pipes & Wires #166). However the Australian Energy Market Operator’s
(AEMO) Electricity Statement Of Opportunities for September 2017 notes that this would materially
increase the risk of unserved energy in NSW in the 2024/25 summer and in
Victoria in the 2026/27 summer unless replacement firming capacity is built.
The PM’s statement and subsequent events
The following events have occurred…
· In September 2017 Turnbull stated that Liddell’s closure would leave a “very big hole” and asked AGL to extend
its life to at least 2027.
· AGL reiterated its commitment to closing Liddell in
2022 as part of its plans to fully exit coal by 2050.
· In response, Turnbull urged AGL “to do the right
thing” and sell Liddell to a “responsible party”.
· More recently in April 2018, Turnbull has pressured
AGL to sell Liddell to Alinta Energy after Alinta expressed interest in buying Liddell.
AGL said it would consider any formal offer made by Alinta.
· Alinta met with Turnbull and Federal Energy Minister
Josh Frydenberg, noting the Federal Government’s concern about security of
supply and affordability. Turnbull also noted that Delta Electricity had expressed interest in buying Liddell.
· Alinta very significantly notes that although it is
committed to a lower carbon economy, it is “nonsense and folly” to believe that
coal-fired stations can be switched off today.
The editor comments
These
events represent a politically significant back-track from the “low emissions”
corner of the Energy Trilemma back towards the “high security” and
the “low cost” corners as Turnbull appears to have a heightened anxiety over
the lights going off. Such an apparent inconsistency with Turnbull’s long-held
support for climate change action suggests that this must have been an
agonising decision for him that might well alienate him from his traditional
supporters.
US – will batteries displace gas
turbines for peaking ?
Introduction
Batteries
are declining in cost and increasing in capacity, and the suggestion is that
batteries could displace gas turbines for peaking. This article examines some
recent research and adds some wider thoughts on peaking and system security.
The dynamics of gas turbine peaking and
battery storage
Increasing
penetration of wind has seen the need for more gas turbine peaking stations,
with some researchers estimating an additional 20,000 MW of gas turbines by
2027. However an increasingly constrained gas supply casts some doubt over the
cost effectiveness of gas turbines towards the latter half of that period.
In
contrast, battery costs seem to be declining whilst capacities increase,
suggesting that batteries will overtake gas turbines for peaks of up to about 4
hours duration.
Some wider grid performance issues
Using
batteries for peaking requires several assumptions to be made about the duration
of the peak, the capacity of the peak, the expected response time and how fully
charged the battery was at the start of the peak. The following table compares
the likely performance of batteries and gas turbines for peaking…
|
Parameter |
Batteries |
Gas
turbines |
|
Capacity
of peak |
Limited
by the design capacity of the battery and associated components |
Limited
by design capacity of turbine and associated components, but possible also by
fuel supply constraints. |
|
Duration
of peak |
Again,
limited by design capacity. |
Limited
primarily by fuel supply. |
|
Required
response time |
Apparently
very quick, certainly quicker than necessary for predictable peaks (as
evidenced by the Hornsdale Power Reserve response during a recent trip event in
Australia). |
Adequate
for predictable peaks. |
|
State
of charge |
Ability
to supply peak obviously very dependent on the state of charge immediately
prior to the peak. |
Again,
ability to supply peak very dependent on fuel supply, however that fuel
supply can be replenished as the turbine runs. |
The
above table suggests that whilst gas turbines also have their limitations, the
key difference is that a gas turbine can be “recharged” during the grid peak (from
a separate fuel system like a diesel tank or a gas pipeline), whilst a battery cannot
be recharged because the electric grid is already under pressure during a peak.
So declining cost and increasing capacity might not be the only factors to
consider when deciding between batteries and gas turbines.
Aus – prices rise as Hazelwood exits
the NEM
Introduction
Simple
supply and demand tells us that shifting a supply curve to the left (by
decreasing supply) will cause prices to rise. This article examines the Australian Energy Regulator’s recent report into the price increases that occurred
in the National Electricity Market (NEM) following the closure of Hazelwood Power Station in 2017.
The closure of Hazelwood in 2017
In
November 2016 Hazelwood’s owners, Engie, announced that it would close the
entire station by the end of March 2017 (refer to Pipes & Wires #159), removing 1,600MW of secure capacity from
the NEM supply curve. This represented 15% of Victoria’s installed capacity and
about 20% of its energy, and came at a time of increased anxiety over proposed
coal-fired generation closures.
The Federal Government’s concerns
In
November 2016 the Federal Government requested the AER to monitor wholesale
prices in Victoria and South Australia due to concerns of possible
anti-competitive behavior following Hazelwood’s closure. The AER was requested
to report to the COAG Energy
Council within 1 year of Hazelwood’s closure.
Key findings of the AER’s report
Key
finding of the AER’s report include…
· Hazelwood’s closure had a significant impact
(ie. not incidental), noting that although Hazelwood was the tenth coal-fired
station to exit the NEM since 2012, it was also the largest station to exit the
NEM since 1998.
· Hazelwood’s generation was replaced by
black coal-fired generation in NSW and Queensland, and by gas-fired generation in
Victoria and South Australia, resulting in Victoria becoming a nett importer
rather than a nett exporter.
· The cost of black coal increased from
late 2016, particularly coal supplied by short-term contracts. Coal shortages
were further exacerbated by miners’ strikes in NSW during 2017.
· Gas prices also increased.
· Black coal and gas set the NEM marginal
prices in NSW and Queensland more often, whilst brown coal set the marginal
prices in Victoria less often.
· South Australia also became a nett
exporter to Victoria, whereas it had previously been a nett importer from
Victoria.
· There was no evidence of opportunistic
withholding of generation, nor of opportunistic price increases (as distinct
from increased black coal and gas costs).
· Concentration of generation ownership
in Victoria and South Australia has been noted as a potential longer-term
concern.
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.
Opt out from Pipes & Wires
Pick
this link to opt out from Pipes & Wires.
Please ensure that you send from the email address we send Pipes & Wires
to.
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.
