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
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.
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
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.
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.
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
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.
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.
The AER expected to release its Final ROR Guideline in December 2018.
NZ – avoiding transmission grid investment
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…
· Grid owners simply built more copper and concrete.
· Often designed and built the works in-house.
· Still building more copper and concrete.
· Works designed and delivered by external contractors.
· Occasionally considered.
· Often designed and delivered in-house.
· 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
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
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…
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
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.
Aus – the final report on retail electricity prices
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.
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…
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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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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