Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #178. This issue starts with a look at recovering the cost
of EV chargers in the US state of Nevada, and then looks at some network
pricing issues in NZ and Australia. We then look at plans to avoid transmission
grid investment in NZ, and then present 3 semi-related articles on the
recurring theme of energy mix and grid security. We then conclude this issue with
a look at the final report on retail electricity prices in Australia.
So …
until next month, happy reading…
What we’re seeing…
· Some regulators warming to the idea of
allowing a “sand pit” for electric companies to play with emerging technology
ideas in, and allowing recovery of the reasonable costs of that playing.
· Increasingly mixed messages about
closing down coal-fired stations 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).
· Inquiries and reviews that are prompted
by security of supply scares having their official terms of reference
subordinate security of supply to reducing CO2 emissions.
· Legacy thermal generation facing
steeper evening ramping rates as solar hollows out the daily demand profile.
· Heightened appreciation of coal-firing capability
during gas supply interruptions.
· A shortage of skilled project managers
and electricity network designers.
· Gas
turbine stations being recognised as important for providing grid security.
· A mixed bag of revenue determinations …
some tougher than expected, some easier.
Recent client projects
Recent
client projects include…
· Compiling some introductory thoughts on
digital transformation and blockchain.
· Advising on likely available electrical
contractors.
· 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.
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Regulating emerging technologies
US – Nevada approves EV charger cost recovery
Introduction
The cautious “chicken & egg” approach
to building EV chargers seems to be swinging towards “build the chargers and
the EV’s will follow”, and this is probably helped in part by policy pressure
to build charging networks followed by the all-important approval of cost
recovery. This article examines the approval of an EV infrastructure program in
the US state of Nevada.
Key features of the Nevada Electric Highway program
The Nevada Electric Highway program plans to install chargers at specific
locations on all of Nevada’s highways, beginning with US 95
between Reno and Las Vegas (about 440 miles). Each station will include two Level 2 Chargers and
one DC Fast Charger.
The NPUC’s approval
Senate Bill 145 was
recently signed into law, which broadly authorises a range of state-wide
initiatives including various detailed provisions for funding the Nevada
Electric Highway. NV Energy expects to begin drawing down the allocated funding
around September 2018.
The editor comments
The last few years have seen some
disconnects between policy and regulation across many jurisdictions, wherein
one branch of government wants various electricity sector transformations
(smart meters, solar panels, batteries and EV chargers) but another branch of
government won’t allow the costs of those initiatives to be recovered. So the
whole EV charging idea seemed to fall into this uneasy hiatus in which everyone
knew that the simple answer is to allow electric companies to recover the cost
of providing and operating EV chargers.
My observation is that the regulatory
framework and resulting decisions in Nevada (on the whole emerging technologies
thing, not just EV’s) seem to be getting close to the right answer … not
perfect, but close … and certainly much closer to the right answer than some
other jurisdictions.
Further reading
Interested readers should read the article
“Global – regulation of EV charging stations” in Pipes & Wires #176.
Network pricing decisions
NZ – accelerated depreciation of electricity distribution assets
Introduction
The Commerce Commission
recently announced that it is beginning work on amending the Electricity
Distribution Services Input Methodologies Determination 2012 which broadly sets out how electricity distribution businesses’
revenue will be regulated.
Proposed amendments to the Determination
The proposed amendment will
focus very narrowly on accelerated depreciation of existing commissioned
assets, which may also require changes to the default price-path (DPP) input
methodologies and the information disclosure treatment of tax. This will
include the timing for applying to the Commission for approval to adopt
accelerated depreciation rates.
Regulatory framework
The regulatory framework is set
out in Part 4
of the Commerce Act 1986…
· Subpart
3 sets
out the requirements for the Input Methodologies.
· Subpart
6 sets
out the requirements for the DPP.
Next steps
The Commission will be
releasing a draft amendment, and expects to receive submissions on that draft
during September 2019. A final decision is expected during October or November
2018 to feed into the 2020 – 2025 DPP reset.
Aus – reviewing the ROR guidelines
Introduction
Most of us have a strong
appreciation of the importance of the cost of capital (and its various components)
to a regulated pipes & wires business. This brief article examines the
Australian Energy Regulators’ recent work on reviewing the rate of return (ROR) Guidelines. It is important to note that this is about reviewing the
methodology used to estimate the ROR, and not simply a re-estimate of the ROR.
The importance of ex-ante guidelines
The capital asset pricing model
relies on a range of inputs that have real-world values, so of course the final
ROR will depend heavily on those input values. Regulators provide ex-ante
certainty by specifying how the ROR is to be calculated, including the range of
permitted input values. That specification is set out in the ROR Guideline (similar to the Cost Of Capital Input Methodologies in New Zealand), and details the treatment of various parameters.
Regulatory framework
The ROR Guidelines references
the National Electricity Rules and the National Gas Rules.
Key features of the Draft ROR Guideline
Key features of the Draft
ROR Guidelines
includes inter alia…
· Specifying how the allowed ROR must be calculated.
· Specifying how the ROE must be calculated, including an equity
beta of 0.6.
· Specifying how the risk-free ROR must be calculated based on 10
year government bonds.
· Specifying the value of imputation credits as 0.5.
Next steps
The AER expected to release its
Final ROR Guideline in December 2018.
Asset investment
NZ – avoiding transmission grid investment
Introduction
Pressure on grid owners to
avoid or defer investment is increasing, and is now extending into other
dimensions as new technologies such as demand response and batteries provide
useful alternatives to grid investment. This article examines a recent
consultation document on transmission
alternatives published by Transpower.
Trends in avoiding grid investment
Demand was traditionally met by
additional grid investment, however new alternatives are now available…
|
|
Investment provider |
|
|
|
Grid owner |
Third party |
Technology |
Traditional components |
Quadrant 1 · Grid owners simply built more copper and concrete. · Often designed and built the works in-house. |
Quadrant 2 · Still building more copper and concrete. · Works designed and delivered by external contractors. |
Non-network solutions |
Quadrant 3 · Occasionally considered. · Often designed and delivered in-house. |
Quadrant 4 · Adopts innovation as technology improves eg. demand
response, batteries etc. · Delivered by external parties, often on a tendered basis. |
Key features of the model are…
· Most of the grid that we currently use results from Quadrant 1.
· A horizontal shift across the model results in increasing
productive efficiency.
· A vertical shift down the model results in increasing dynamic
efficiency.
· A shift to Quadrant 4 is the end goal of economic efficiency.
Key features of the Transpower consultation paper
Key features of the
consultation paper include…
· Setting out the incentives for Transpower to adopt least-cost
solutions, including the possibility of moving away from infrequent, lumpy
investments.
· Recognising the need to actively encourage offers of transmission
alternatives from third parties, including the perception of a level playing
field by third parties.
· A recognition that transmission alternatives will need to provide
similar levels of reliability to grid investment.
· Recognising that interconnection and connection assets might need
to be treated differently.
· A proposal to extract information from the Transmission Planning
Reports and publish opportunities for third party involvement on their website.
Parallels in distribution
Some readers might have
connected the proposed publishing of opportunities for transmission
alternatives with the requirement for electricity distribution businesses to publish a list of
constraints and the options for third party provision of non-network solutions.
The editor comments – a coordinated approach or a market-led
approach
So can we leave it to the market
to efficiently deliver third party non-network alternatives to grid
investments, or should it be regulated ? Observation
suggests that efficient delivery of lumpy investment can be difficult (a large
part of the reason for independent regulatory approval of transmission grid
investment in the United States), but how might it work for smaller and more
frequent investments ? A little thought suggests that
a market-based approach might actually work quite well, possibly with some sort
of default process if no third parties offer non-network solutions ie. at what point can the grid operator stop seeking a third
party non-network solution (Quadrant 4) and adopt a network solution ?
Energy
mix & grid security
Global –
increasing wholesale price volatility
Introduction
Wholesale electricity market prices seem to
be more volatile than they used to be, with the emerging picture being that
increasing penetration of variable renewable energy (VRE) seems to be one of
the causes of that volatility. This article summarises price volatility and
then examines some possible ways forward.
The
emerging picture of price volatility
Some wholesale electricity markets are
showing increasing volatility. Key reasons for that volatility include…
· Higher
gas prices.
· Withdrawal
of coal-fired generation.
· Increasing
VRE penetration.
The last two issues obviously go
hand-in-hand, but one way or another are shifting the supply curve leftwards relative
to the demand curve. The whole issue of price spiking seems to break down to a couple
of key issues…
· Upward
price spikes can often be reflected in higher end-use prices.
· Downward
price spikes hollow out the revenue available for legacy generation.
· More
frequent spikes require quick-start generation to run more often.
A little thought indicates that all of
these issues are problematic.
Increasing
VRE penetration
Getting a single, analytically sound
picture of the exact VRE penetration in each market would be a big job, however
in amongst various media articles that use precise electrical terms like
demand, average demand and energy interchangeably it is clear that the
penetration of VRE is increasing. Moreover, those increasing VRE penetrations
are usually stated triumphantly.
Identifying
the problem
The first issue we need to identify is
whether price spiking is caused by high VRE penetrations, or simply correlated
with it. Given that wholesale prices are set by the interaction of supply and
demand in a market, and that supply curves are now moving left and right more
often it does seem likely that it is actually causal rather than simply
correlated.
Choosing
the best way forward
It would seem there are several broad ways
forward…
· Do
nothing, and allow both the magnitude and frequency of price spiking to
continue (most likely increase). This will most likely see further exit of
secure generation, exacerbating the price spiking.
· Amend
the market mechanisms. This could be anything from averaging prices over a
range of half-hours and possibly adding floors and caps to the MWh market, to
introducing new mechanisms that fairly pay quick-start generation (eg. a MW
market like in the UK, or a fixed annual fee like what E.On requested a few
years ago).
· Limit
the penetration of VRE. This could include capping the penetration of VRE to some
percentage of maximum demand, through to encouraging coal-fired generation to
stay in the market. Both approaches will undoubtedly anger the renewable energy
and climate change advocates.
The
editor comments
The weighting placed on each issue will obviously
depend on where one sits on the energy trilemma, which will in turn define how
one sees the problem or even whether one sees a problem at all. So until we
agree on whether price spiking is a serious problem, or just an unfortunately
necessary consequence of increasing VRE penetration we will be no further
ahead.
NZ –
building new gas-fired peaking generation
Introduction
Todd Corporation subsidiary Todd Generation
has announced indicative plans to build two new gas-fired peaking stations …
one near Tihiroa, and the other near New Plymouth. This article examines Todd’s
plans and considers the wider context of gas turbines in a world of increasing
variable renewal energy (VRE).
Todd
Energy’s plans
Todd Generation plans to build the
following generation…
· A 100 MW
station comprising two 50 MW General Electric gas turbines at Junction Rd near
New Plymouth. This plant is expected to be commissioned in 2020.
· Resource
consents have been secured for a 360 MW station at Tihiroa near Otorohanga,
adjacent to the Taumarunui – Huntly 220kV transmission lines. Any decision to
proceed will obviously depend on market conditions.
The
wider back-drop of thermal plant closures
The last few years have seen a steady
withdrawal of thermal generation from the market in many jurisdictions (refer
to Pipes
& Wires #145 for New Zealand,
and also to Pipes
& Wires #166 for a parallel
analysis of Australia). In some cases this has been compounded by the
withdrawal of renewable generation such as during the Tasmanian drought in 2016,
which required the rapid return to service of the gas-fired station at Tamar
Valley (as well as diesel generators). This has led to declining reserve
capacity margins, so it is great to see those margins being restored.
The
editor comments - balancing generation and demand
In the widest sense increasing VRE makes it
harder to match generation to demand, and this seems to be very much a
double-edged sword ... technology changes have led to increasing VRE, which in
turn requires improved technologies to achieve grid security. The following
model shows this…
|
Historical position |
Emerging position |
Match
generation to prevailing demand |
· Small
number of quick-start gas turbines because generation was very predictable. · Spinning
hydro reserve. |
· Increasing
requirement for quick-start plant as VRE penetration increases. · Definite
role for grid-scale batteries in some circumstances. |
Match demand
to available generation |
· AUFLS
that could shed about 30% of connected load within a few seconds. |
· Demand
response such as remote switching technologies have improved. · Smart
throttling of discretionary demand such as EV chargers. |
As exciting as the bottom-right quadrant
might appear, it is very uncertain ground. Batteries certainly show a lot of
promise, but only for limited time periods … fine for momentary grid
excursions, but no use for extended periods such as dry hydro years.
Aus – retaining
coal in the primary energy mix
Introduction
The Australian Energy Market Operator (AEMO)
recently released its first Integrated
Systems Plan, which takes a 20
year look at the National Electricity Market’s (NEM) transmission grid
requirements. This article examines the key conclusions of the ISP, including
the view that existing coal-fired generation should not be retired early.
Key
conclusions of the ISP
Key conclusions of the ISP include…
· Solar
and batteries are expected to increasingly disconnect actual demand from the
demand seen by the grid, which will mitigate the effect of economic growth and
population growth.
· Increased
use of EV’s is expected to have minimal impact on the demand seen by the grid.
· Existing
coal-fired generation should run to the end of its technical life, and not be
retired early.
· Retired
coal-fired generation should be replaced by a mixture of grid-scale and
distributed renewables and storage, along with quick-start gas turbine
generation and wider transmission interconnection.
· Increasing
variable renewable energy (VRE) will need to be complemented by batteries and
by increased transmission grid interconnection.
· VRE’s
are becoming more geographically dispersed, which is requiring more
transmission grid interconnections.
· The need
for ancillary services (voltage control, frequency control, inertia etc) can be
met by a mix of technical standards and purchasing from markets.
The
editor comments
The ISP’s conclusion that existing
coal-fired generation should run to the end of its technical life seems
contrary to the mounting pressure to close down thermal generation as soon as
possible. The added conclusion that retaining coal-fired generation is a key
element of the least-cost approach is even more interesting, and presumably
also more significant as the National
Energy Guarantee seeks to inter alia reduce the delivered cost of
electricity.
The
editor comments some more
After writing this article during mid-July
2018 the National Energy Guarantee (NEG) seemed to receive a lot of comment on
Linked In and a lot of negative column-inches in the 3 issues of the Australian
that my wife bought home from a holiday in Melbourne, with various commentators
saying the only guarantee will be higher energy prices. The NEG includes a
reliability guarantee and an emissions guarantee, and apparently treats cost as
the dependent variable but notes an expectation that the NEG could reduce
residential energy costs by about $120 per year over the 2020 to 2030 period.
Given the political frenzy over increasing energy costs, it does seem rather
odd that cost ends up being the dependent variable.
Energy markets
Aus – the final report on retail electricity prices
Introduction
Pipes
& Wires #169
examined the Australian Competition
& Consumer Commission’s preliminary report into retail electricity pricing. This article notes the headline
findings and the key recommendations of the final report.
Background to the inquiry
Just
to recap, in March 2017 the ACCC was instructed to inquiry into the retail
supply of electricity and the competitiveness of the retail markets in the NEM.
The inquiry’s terms of reference are very broad, and required the ACCC
to examine inter alia retail market
entry barriers, vertical integration and the possibility of anti-competitive
behavior as well as retail cost components and how they have changed over time.
Headline findings of final report
The
final report’s headline findings are…
· High prices and bills have placed
enormous strain on household budgets and business viability.
· Those current prices are unsustainable.
· The approach to policy, regulatory
design and promotion of competition has not worked well for customers.
· The NEM needs to be reset.
Key recommendations of the final report
The key recommendations of the
final report include…
· Amend the National Electricity Law to prevent any generator owning
or controlling more than 20% of the generation capacity in either the NEM or
any NEM region, other than through building new generation.
· Queensland should split its generation into three similarly sized
and mixed generation businesses to reduce market concentration.
· Establish a program of fixed price off-take agreements for the
later years (eg. years 6 to 15) to make new generation bankable.
· Amend the NEL to require reporting of all over-the-counter trades
to a body administered by the AER.
· Require large, vertically-integrated retailers in South Australia
to offer to buy and sell hedges each day in order to boost hedging activity.
· Amend the rules so that a retailer is only notified of a quitting
customer on the day of transfer, particularly to limit the ability of the quit
retailer to make better offers to stay.
· Amend the rules to quicken retailer swapping, including allowing
customers to do a final meter read themselves.
· Support the removal of the limited merits review, with a
recommendation that they not be re-introduced.
· Address the past over-investment in the Queensland, NSW and
Tasmania networks, including by a voluntary RAB write-down of the networks that
are still state-owned.
· Accelerate the up-take of cost-reflective network pricing.
· Encourage the roll-out of smart meters.
· Introduce a mechanism for third-parties to offer demand response
directly into the wholesale market.
· The small-scale renewable energy scheme should be wound down, and
abolished by 2021.
· Monitoring of retail prices should be strengthened and
streamlined.
So … an interesting mix of
recommendations some of which look a bit familiar.
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.
A potted history of electricity
transmission
I’ve
recently compiled a potted history of electricity transmission. Pick here to download.
Video series – Powering NZ
The
team at Whiteboard Energy are compiling a series of cool 20 minutes videos on
the history of electricity in NZ, which are now on YouTube…
· Episode #1 – The Powerboard Of Fame.
· Episode #2 – The Power Of The State.
The
series eventually will run to 5 episodes … an opportunity to fund Episode #5 is
here.
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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