Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #183 … hopefully those in the southern hemisphere have had
a decent break and kept cool (and those in the northern hemisphere have managed
to stay warm). We start this issue by examining the prohibition on distributors
owning batteries in Europe and the pruning of an EV charger roll-out in the US.
We then examine some network access decisions in NZ and Australia, and then
examine progress on two mergers in the US. This issue closes with a look at
security of supply margins in the US in preparation for the northern summer.
So …
until next month, happy reading…
What we’re seeing…
· Mounting concern over the structural
integrity of many hydro dams, including the ability to fully de-water.
· What seems like regulatory push-back
against the large transmission lines required to interconnect wind-farms.
· Heightening concern around foreign
ownership of essential infrastructure.
· A possible emerging trend of regulators
squeezing fixed monthly charges which are increasingly seen as interfering with
renewable energy policy objectives.
· 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.
· 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.
· 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.
· 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-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…
· Development of an asset management
journey aligned to ISO 55001 for two electric distribution companies.
· Identifying learnings from the RIIO –
ED1 reset on behalf of an Australian distributor.
· Developing a smart metering strategy.
· Advising on likely available electrical
contractors.
· Undertaking a customer survey to
identify customer preferences for off-peak EV recharging.
· Developing a strategy for complying
with the related party transaction provisions.
· Advising on the regulatory implications
of an aging timber transmission pole fleet.
· Compiling some introductory thoughts on
digital transformation and blockchain.
· 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.
· Developing a risk-based tree trimming
strategy.
· Developing an EV charging strategy.
· Developing a best-practice guideline
for smart metering.
Subscribe to Pipes & Wires
If
you’re receiving this second-hand, pick this link to subscribe.
Regulating emerging technologies
Europe – prohibiting distributors from owning
batteries
Introduction
Which electricity
market participants can and can’t own or operate batteries was one of the hot
issues of 2018, and shows no signs of cooling off. This article examines the EU
prohibition on distributors from owning or operating batteries, and then
quickly summaries the various policies on ownership preferences and
prohibitions from recent PW articles.
Background and regulatory framework
Battery storage is
increasingly viewed as a critical aspect of decarbonisation, decentralisation
of energy supply, improving customer choices, increased transparency of costs
and reducing network costs. Accordingly, in November 2016 the EU updated its energy policy framework which has emerged as the Clean Energy For All
Europeans package.
The prohibition on owning storage
Early indications from June 2018 were that transmission grid owners would be
prohibited from owning, managing or operating energy storage facilities (not
just batteries), and from controlling assets that provide ancillary services,
and that similar prohibitions may also apply to distribution system operators.
Article 36 of the draft Clean Energy Package Directive sets out the following…
· Distributors shall not be allowed to own, develop,
manage or operate energy storage facilities.
· Member countries may allow distributors to own,
develop, manage or operate energy storage facilities only if (i) no other
parties offer to provide energy storage following a transparent tendering
procedure, (ii) such facilities are necessary for the distributor to fulfil its
obligations, and (iii) the regulator has assessed the necessity for it, and has
granted approval.
Battery ownership around the world
Some of the
emerging preferences and prohibitions on battery ownership around the world are
as follows…
|
Jurisdiction |
Preference /
prohibition |
|
EU |
Strong preference
for prohibiting distributors from owning batteries unless demonstrably
necessary for system operation. |
|
Possibly that
transmission and distribution companies could be allowed to own batteries as
an alternative to grid investment, but be prohibited from participating in
the energy market. |
|
|
Possible that
grid security plans will allow networks to contract with batteries to provide
FCAS (frequency control ancillary services). |
|
|
Proposed to amend
electricity distribution licenses to prohibit operation of storage. |
|
|
NZ |
Not clear,
arguments from energy retailers that distributors shouldn’t be allowed to own
batteries, with counter-arguments that batteries could usefully avoid or
defer network investment but should have to be owned by third parties. |
US – Maryland prunes EV charging
program
Introduction
Many
US states have adopted bold EV goals that have a consequential EV charger
roll-out requirement. This article examines a recent decision by the Maryland Public Service
Commission to significantly prune the proposed roll-out of 24,000
chargers, and tries to reconcile that decision with Maryland’s goals.
Maryland’s public policy goals
In
2013 Maryland committed to the following ambitious EV goals…
· 60,000 EV’s by 2020.
· 300,000 EV’s by 2025.
These
targets represent a significant step-up from Maryland’s 10,000 EV’s and 1,200
chargers at the end of 2017.
The proposed EV charger program
A proposed 5 year roll-out of 24,000 chargers by BG&E, Delmarva Power &
Light, Potomac Edison and PEPCO has been under consideration by the PSC for
most of 2018. A key feature of the filing was the conclusion that the benefits
to the state would outweigh the $104m cost to customers, which were estimated
to be between $0.25 and $0.42 per month respectively for customers of each of
the 4 electric companies.
The PSC’s decision
In
January 2019 the PSC approved the installation of 5,000 chargers, significantly
short of the 24,000 proposed. Key features of that decision include…
· The PSC believed it is in the public
interest to approve a limited EV charging program at a reduced cost to
customers, but which will provide valuable insights (Editor’s note – the
proposed $0.25 to $0.42 per month tariff increase is yet to be recalculated).
· An extensive discourse on whether
Maryland law gives the PSC jurisdiction over all aspects of the proposal, on
the basis that the Maryland Public Utilities Act purportedly excludes EV
charging from regulation (The PSC concluded that it does have jurisdiction).
· The PSC notes their statutory role of
balancing electric reliability, costs, customer impact and state policy goals.
· An economic study estimated an NPV of
annualized benefits of $230 per charger by 2030. This was supported by the
electric companies own analyses, of which inter
alia BG&E estimated that if 300,000 EV’s is achieved by 2025 the
additional distribution revenue will exceed the proposed additional customer
monthly charge by about 2x, with PEPCO claiming 3x.
Reconciling the PUC decision with state
policy
Such
a significant pruning of this proposal might seem inconsistent with state
policy, however it is important to note the PSC is required to balance a wide
range of potentially competing and conflicting goals, including customer price
impact. So it would seem that the PSC has given significant weight to the price
aspect of its decision.
Long-time
readers might recall from PW #93 that the Maryland PSC also rejected
BG&E’s smart meter program on the basis that the “proposal asks BG&E's ratepayers
to take significant financial and technological risks and adapt to categorical
changes in rate design, all in exchange for savings that are largely indirect,
highly contingent and a long way off".
Network regulatory decisions
NZ – setting the next Transpower price-quality path
Introduction
Transpower recently submitted
its final
proposal (rate
case) that will apply for the RCP3 control period commencing on 1st
April 2020. This article examines the key features of that proposal along with
the independent verifiers report.
Regulatory framework
The regulatory framework for
Transpower’s IPP is set out in Subpart
7 of Part 4 of the Commerce Act 1986.
Key features of the RCP3 decisions
Key features of the RCP3 decisions
to date include…
|
Parameter |
RCP2 |
RCP3 draft proposal |
RCP3 final proposal |
RCP3 final decision |
|
Revenue |
$4,731m |
$4,666m |
$4,419m |
|
|
OpEx |
$1,300m |
$1,333m |
$1,343m |
|
|
CapEx |
$1,253m |
$1,341m |
$1,337m |
|
The independent verifiers’ conclusions
The role of the independent
verifier is to provide independent assurance to the Commission that the
applicant’s proposal meets the expenditure outcome test (which is a slight
variation to the expenditure objective test that customised price-quality path
(CPP) applications are assessed against). The independent
verifiers’ conclusions include…
|
Spend category |
Value |
Percent subject to verification |
Verifiers’ conclusion |
|
Base CapEx |
$1,202m |
86%
($1,036m) |
100% (of the 86% subject to
verification) satisfied the criteria for Good Electricity Industry Practice. |
|
OpEx |
$1,343m |
100%
($1,343m) |
Approximately 92% of the OpEx
satisfied the criteria for Good Electricity Industry Practice. |
Next steps
Pipes & Wires will pick up
this story again once the Commission publishes its final decision.
Aus – Final Decision from the ROR review
Introduction
Pipes
& Wires #178 examined
the Australian Energy Regulator’s (AER) Draft Guidelines for the allowable rate
of return (ROR). This article examines the AER’s Final
Decision that
was released just before Christmas 2018.
Regulatory framework
The ROR Guidelines reference
the National
Electricity Rules and
the National
Gas Rules.
Comparing the key features of the Draft and Final Decisions
The key features of the Draft
and Final Decisions are compared below…
|
Draft Decision |
Final Decision |
|
Specified how the allowed ROR
must be calculated. |
Specified how the allowed ROR
must be calculated, including a gearing ratio of 0.6. |
|
Specified how the ROE must be
calculated, including an equity beta of 0.6. |
Specified how the ROE must be
calculated, confirmed an equity beta of 0.6. |
|
Specified how the risk-free
ROR must be calculated based on 10 year government bonds. |
Specified the risk-free ROR
as the simple average of the daily 10 year yield to maturity of Commonwealth
Government Securities converted to an effective annual rate. |
|
Specifying the value of
imputation credits as 0.5. |
Amended the value of
imputation credits to 0.585. |
Aus - the Northern Territory electricity distribution revenue
reset
Introduction
The electricity distributor in
the Northern Territory, the Power
& Water Corporation,
recently submitted its Revised
Proposal (rate
case) for the 5 year period commencing on 1st July 2019. This
article examines the key features of that Revised Proposal.
A bit about NT Power & Water
The electricity supply chain in
the NT comprises 3 entities owned by the NT Government…
· Power & Water Corporation provides inter alia electricity network services. Jurisdiction for
regulating Power & Water’s electricity networks has recently transferred
from the (NT) Utilities
Commission to the
Australian Energy Regulator.
· Jacana Energy retails electricity to about 80,000 customers.
· Territory Generation generates about 2,000GWh per year.
Regulatory framework
The basis of the regulatory
framework is Chapter
6 of the National Electricity Rules, which are made pursuant to the National
Electricity Law.
Key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$347m |
$316m |
$339m |
|
|
OpEx |
$358m |
$329m |
$377m |
|
|
Opening RAB |
$975m |
$966m |
$967m |
|
|
Post-tax nominal WACC |
6.62%* |
5.22% |
6.08% |
|
|
Depreciation |
$145m |
$132m |
$134m |
|
|
Smoothed revenue |
$928m |
$759m |
$864m |
|
* Noted as a placeholder.
Pipes & Wires will comment
further once the AER publishes its Final Determination.
Merger & acquisitions
US – update on the Dominion – SCANA merger
Introduction
Pipes
& Wires #173, #175 and #181 examined Dominion Energy and SCANA’s all stock merger, and noted
that various legislative and regulatory manoeuvers in North Carolina and South
Carolina threatened to gazzump the merger. This article notes the approval from
the South Carolina Public Service Commission (SCPSC), effectively clearing the
way for the merger to proceed.
Approvals to date
The merger has previously
received approvals from the Federal Energy Regulatory Commission (FERC), the
Federal Trade Commission (FTC), the Nuclear Regulatory Commission (NRC), the
Georgia Public Service Commission, and the North Carolina Utilities Commission.
The proposed price cut
Dominion also submitted an updated
proposal to the
SCPSC that would reduce South Carolina Electric & Gas’ prices by about $22
per month, or about 15%. This is a long way short of the 33% that customer
advocates were wanting.
The SCPSC approval
The long-awaited approval from the
South Carolina Public Service Commission was obtained in mid-December 2018,
however Dominion said it wait for the final order to be published before
closing the deal.
Settling the Summer class action suit
SCANA has also reached a settlement in the class action suit that sought a $2b refund to SCG&E
customers over the abandoned VC Summer nuclear plant. This will inter alia provide $2b of future price
cuts.
Next steps
Pipes & Wires will comment
further as the final order emerges from the South Carolina Public Service
Commission.
US / Canada – progress on Hydro One’s bid for Avista
Introduction
Pipes
& Wires #175
introduced Hydro
One’s
proposed acquisition of Avista. This article recaps the proposed deal and notes various recent
regulatory and political decisions.
Recapping the proposed deal
Hydro One will pay US$53 for
each Avista share in all-cash deal, which valued Avista at US$5.3b. 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 the various Washington (state) authorities to accelerate the
closure of Colstrip.
The regulatory denial
In early December 2018 the Washington
Utilities & Transportation Commission (WUTC) denied Hydro One’s bid as it became apparent that Hydro
One may not be the passive investor it claimed to be.
The background to the WUTC’s
decision was the intervention of newly elected Ontario Premier Doug Ford who called for the resignation of Hydro One’s directors and the
retirement of the its’ chief executive. Ontario subsequently passed legislation
that (i) calls for a 12% reduction in Hydro One’s prices, and (ii) gives the
Ontario government a direct role in setting executive salaries. The WUTC
concluded that such political intervention could directly or indirectly harm
Avista customers, and stated that they had no confidence that Hydro One would
defend Avista on the face of interference from the Province.
Hydro One and Avista’s request for reconsideration
In mid-December 2018, both
Hydro One and Avista asked the WUTC to reconsider its denial, on the basis that
the WUTC misapprehended the political risk to Avista’s customers. For its part,
Hydro One and Avista note that the deal includes a commitment of US$42m in
customer benefits and a further US$29m in charitable commitments.
Next steps
Pipes & Wires will comment
further as the WUTC considers Hydro One and Avista’s request for
reconsideration.
The wider issue of foreign ownership and public interest
The WUTC’s decision reflects a
trend of governments and regulators becoming increasingly nervous about foreign
ownership (and potentially control) of essential infrastructure, as Pipes &
Wires #182 noted the Australian government’s veto of CK Infrastructure’s bid for the APA
Group.
Energy mix and grid security
US – keeping cool in the Lone Star State
Introduction
Pipes & Wires #177 examined how the Electric Reliability Council of Texas was coping with the 2018 summer peaks, and noted a steady decline in
forecast reserve capacity margin that depended on over 4,400 MW of new (secure)
generation being commissioned out to 2023 to restore that margin to historical
levels. This article examines ERCOT’s recently released Capacity, Demand &
Reserves (CD&R) Report
which seems to tell an even more concerning story.
Key features of the December 2018 CD&R Report
Key features of the December 2018 CD&R
Report include…
· Summer peak demand forecasts that are significantly
higher than the May 2018 CD&R forecasts, out to a difference of 1,700 MW by
2023.
· Approval of 1,714 MW of generation by ERCOT since the
May 2018 CR&R Report.
· Cancellation of 1,763 MW of gas-fired generation and
1,069 MW of wind generation.
· A further 2,845 MW of gas-fired, wind and solar
generation being delayed.
Further reading of the December 2018
CD&R Report reveals that meeting forecast demand from 2021 onwards depends
on planned generation actually being commercially available.
Comparing the May 2018 and December 2018 CD&R
forecasts
The following comparison of forecast
capacity, demand and available reserve from the May and December 2018 CD&R
Reports indicates an overall decline in available reserve out to 2023.
|
Year |
2019 |
2020 |
2021 |
2022 |
2023 |
|
Forecast capacity May 2018 |
79,585 |
82,385 |
84,100 |
84,815 |
84,815 |
|
Forecast demand May 2018 |
74,200 |
75,880 |
77,595 |
79,030 |
80,430 |
|
Available reserve May 2018 |
5,385 |
6,505 |
6,505 |
5,785 |
4,385 |
|
Forecast capacity December 2018 |
78,555 |
82,652 |
86,016 |
85,958 |
85,958 |
|
Forecast demand December 2018 |
74,853 |
76,845 |
78,824 |
80,455 |
82,101 |
|
Available reserve December 2018 |
3,702 |
5,807 |
7,192 |
5,503 |
3,857 |
Pipes & Wires will pick this story up
again in mid-2019 when the May 2019 CD&R Report is published.
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.
· Episode #3 – The People Want More.
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.
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.