Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 184 – February 2019

 

From the editor’s desk…

 

Welcome to Pipes & Wires #184. We start this issue by examining the significant pruning of a grid modernization proposal, followed with a look at 2 revenue resets in Australia.

 

We then look at 2 mergers, one in the US and the other in Europe followed by a quick look at the planned Snowy Hydro augmentation in Australia. This issue concludes with a look at how batteries and solar might be deployed in the future. So … until next month, happy reading…

 

What we’re seeing…

 

·     Increasing regulatory rejection of grid modernization, EV charger and smart meter proposals (rate cases).

 

·     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.

 

·     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.

 

·     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.

 

Subscribe to Pipes & Wires

 

If you’re receiving this second-hand, pick this link to subscribe.

 

Regulating emerging technologies

 

US – regulator prunes Dominion’s grid modernisation plan

 

Introduction

 

The pruning back of grid modernisation plans by regulators seems to be an emerging theme (refer to Pipes & Wires #183). This article examines the Virginia State Corporation Commission’s severe pruning of Dominion’s $6b grid modernisation program.

 

Regulatory framework

 

The regulatory framework for Dominion’s grid modernisation plan includes Virginia’s Grid Transformation and Security Act 2018, which requires a utility to seek Commission approval of a plan for electric distribution transformation which shall include integration of DER’s and enhancing reliability and security.

 

Dominion’s modernisation plan

 

Dominion’s modernisation plan proposed to spend $6b over 10 years, approximately as follows…

 

Plan element

Phase 1 (first 3 years)

Total

1. Cyber and physical security

$154m

$910m

2. Advanced metering

$697m

$1,300m

3. Intelligent grid devices

$157m

$776m

4. Grid hardening

$486m

$3,000m

Total

$1,494m

$5,986m

 

Dominion’s rate case filed in July 2018 sought approval for Phase 1.

 

The SCC’s final order on Phase 1

 

The SCC’s final order states inter alia…

 

·     Agreement that the requirement for grid transformation costs to be reasonable and prudent is not nullified or subordinated by the statutory declaration that such projects are in the public interest ie. fulfilling obligations must still be prudent and reasonable.

 

·     An emphasis that Dominion’s customers will need to receive adequate benefits.

 

·     That the costs of plan element 1 are reasonable and prudent, and are therefore approved.

 

·     That Dominion has not demonstrated the costs of plan elements 2, 3 and 4 to be reasonable and prudent, and are therefore not approved.

 

·     Objections to plan element 3 include arguments that DER penetration is still too low to justify widespread deployment of intelligent grid devices, and that Dominion has no documented evidence that DER’s are causing voltage or reliability problems.

 

Some wider reflections

 

The Dominion decision follows a wider trend of regulators hesitating over the cost of smart metering, grid intelligence and EV chargers on the basis that the customer benefits are unclear. This is leading to a disconnect between state energy and transport policies on the one hand, and policy outcomes on the other hand.

 

Network regulatory decisions

 

Aus – the NSW revised electricity distribution revenue proposals

 

Introduction

 

The 3 electricity distributors in the Australian state of NSW (Ausgrid, Endeavour Energy and Essential Energy) recently submitted their Revised Proposals for the 5 year period commencing on 1st July 2019. This article examines the key features of those Revised Proposals.

 

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.

 

Ausgrid - key features of the revenue reset process

 

Key features of the process to date include…

 

Parameter

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$3,084m

$2,209m

$2,690m

 

OpEx

$2,402m

$2,344m

$2,285m

 

Opening RAB

$15,716m

$15,683m

$15,684m

 

WACC

6.33%

5.96%

5.99%

 

Depreciation

$713m

$726m

$793m

 

Smoothed revenue

$8,918m

$7,940m

$8,032m

 

 

Endeavour Energy - key features of the revenue reset process

 

Key features of the process to date include…

 

Parameter

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$2,166m

$1,700m

$1,740m

 

OpEx

$1,486m

$1,468m

$1,453m

 

Opening RAB

$6,512m

$6,512m

$6,529m

 

WACC

6.11%

5.96%

5.74%

 

Depreciation

$504m

$631m

$529m

 

Smoothed revenue

$3,892m

$4,413m

$3,686m

 

 

Essential Energy - key features of the revenue reset process

 

Key features of the process to date include…

 

Parameter

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$2,100m

$2,081m

$2,081m

 

OpEx

$1,698m

$1,718m

$1,718m

 

Opening RAB

$8,215m

$8,215m

$8,146m

 

WACC

6.34%

5.96%

5.96%

 

Depreciation

$632m

$716m

$645m

 

Smoothed revenue

$5,142m

$5,292m

$4,853m

 

 

Pipes & Wires will revisit this story when the AER publishes its Final Determinations.

 

Aus – the Evoenergy revenue determination

 

Introduction

 

Evoenergy recently submitted its revised regulatory proposal (rate case) to the Australian Energy Regulator (AER) that will apply to the electricity distribution networks in the Australian Capital Territory for the 5 year period commencing on 1st July 2019. This article examines the key features of that Revised Proposal.

 

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

$330m

$261.4m

$316.5m

 

OpEx

$309m

$297.1m

$299.5m

 

Opening RAB

$966m

$965m

$974m

 

Nominal vanilla WACC

6.42%

5.80%

6.16%

 

Depreciation

$248m

$244.6m

$250m

 

Smoothed revenue

$952m

$871.5m

$928m

 

 

Pipes & Wires will revisit this story when the AER publishes its Final Determination.

 

Merger & acquisitions

 

US – NextEra completes Gulf Power acquisition

 

Introduction

 

Pipes & Wires #173 and #176 examined NextEra’s reshuffling of its business platform that included selling its Canadian renewables business and acquiring inter alia Gulf Power. This article notes the successful completion of the deal.

 

The acquisition proposal

 

NextEra agreed to purchase a suite of assets from Southern Co that includes Gulf Power, which supplies 450,000 electric customers in north-west Florida. The acquisitions will be financed in cash by NextEra raising $5.1b in debt, and by assuming $1.4b of Gulf Power’s debt.

 

NextEra expects the deal to increase its earnings by $0.15 per share in 2020 and by $0.20 per share in 2021.

 

The completed deal

 

The acquisition was completed on 1st January 2019 for a total consideration of $6.4b. This will extend NextEra’s electric customer base to about 5,500,000.

 

Europe – progress on the Innogy acquisition

 

Introduction

 

Pipes & Wires #174 examined E.On and RWE’s reshuffling of which the biggest bit was E.On acquiring RWE’s stake in Innogy. This brief article examines progress on the deal.

 

Re-capping the deal

 

Key features of the reshuffling are…

 

·     E.On proposed to buy RWE’s entire 77% stake in Innogy.

 

·     E.On would then sell Innogy’s renewable business back to RWE, along with its own renewable business (representing about 17% of E.On’s equity).

 

The deal valued Innogy’s equity at about €22b, but the final value of the complex asset swap, cash and share issue is expected to be about €43b.

 

Progress on the deal

 

The deal is on track to be completed by the originally proposed mid-2019 following EU competition clearance.

 

The re-shaped businesses

 

The completed transaction will leave E.On focusing on regulated networks, and RWE focusing generation and retail.

 

Energy mix and grid security

 

Aus – Snowy 2.0 gets conditional approval

 

Introduction

 

Pipes & Wires #167 examined the proposed Snowy 2.0, a massive extension to the existing Snowy Hydro scheme in south-eastern Australia. This article recaps the key features of Snowy 2.0 and notes its conditional approval in December 2018.

 

The planned extensions

 

Snowy 2.0 will add 2,000 MW of generation capacity and 350 GWh of storage to the NEM, noting a primary role of buffering intermittent renewables. This is expected to be in the form of a single 2,000 MW underground station that would require a new 26km tunnel between Tantangara and Talbingo.

 

The originally touted cost of about $2b now seems to be more like $3.8b to $4.5b, and that apparently excluded an estimated further $2b of transmission grid investment.

 

The strategy behind the planned extensions

 

The strategy is ostensibly to increase the available peak MW’s available to the NEM (which of itself presumes a policy of increasing wind and solar in the NEM and is forecast to be generating about 44% of Australia’s energy by 2050), but also to counter competition from batteries and other pumped storage proposal and also to reduce Snowy’s market price risk exposure.

 

Federal energy minister Angus Taylor recently stated that “while gas and batteries both have an important role to play, pumped hydro provides relatively low cost storage and can run for extended time frames to match volatile supply with volatile demand”, and further expressed the view that “pumped hydro is superior to batteries”

 

Board approval

 

In December 2018 Snowy Hydro’s board confirmed the decision to proceed subject to the approval of its major shareholder (the federal government). Preferred contractors have been announced (subject to obtaining shareholder approval)

 

Next steps

 

The next step is obviously major shareholder approval, at which point Pipes & Wires will comment further.

 

US – batteries versus gas turbines

 

Introduction

 

One of the latest battles to emerge is whether batteries are better than gas turbines. This article examines the engineering and grid operation aspects of this issue, and then looks at some emerging thinking around disaggregating the peak requirements.

 

The engineering and grid operation aspects of peak demand

 

The key requirement for meeting peak demand is generation plant that can quickly ramp up from zero to full load in 2 to 3 minutes, which pretty much rules out steam turbine generation. This leaves hydro (often pumped storage) and gas turbines, with an inherent trade-off with quick start capability being a lower efficiency (gas turbines are typically about 27% efficient, compared to about 35% for a steam turbine).

 

The spectrum of views on meeting peak demand with batteries

 

The end points of the spectrum are…

 

·     That batteries are the perfect solution and will always be better than gas turbines. The arguments include instant response (which the Hornsdale battery in South Australia has amply demonstrated), no CO2 emissions (which will be false if any fossil-fired electricity has somehow sneaked in), and the ability to store up unused solar generation. All good stuff, but somewhere it seems to overlook the need for batteries to be charged.

 

·     That batteries are in fact very limited, and gas turbines will always be better. The strong point is that gas turbines don’t “run flat” in the sense that batteries do. Some might try to argue that increasing solar and wind generation requires quicker response times that gas turbines can’t meet, however that is more an intermittency issue than a peak demand issue.

 

Disaggregating the peak demand requirements

 

Emerging thinking is that if demand peaks were disaggregated so that the duration of the peak was better understood, both batteries and gas turbines could be better targeted. It may be that batteries are the cheapest answer for the top of the peak that lasts about 2 hours.

 

Emerging regulatory thinking

 

There are a couple of angles on regulatory thinking around batteries…

 

·     There is a spectrum of regulatory views on who can own and operate batteries (refer to Pipes & Wires #183), but the overall view is that battery ownership be competitively tendered third party ownership.

 

·     Preference for batteries to help meet emission targets. An example of this is the California Public Utilities Commission directive that PG&E solicit third party offers to replace gas turbines with batteries.

 

Pipes & Wires will comment further as this issue emerges.

 

US – curtailing solar as a cheaper option ?

 

Introduction

 

Most of us hate to see primary energy going to waste. This article examines the recent Solar Potential Analysis report that challenges the emerging wisdom of simply adding batteries, and suggests that curtailing solar might actually be cheaper.

 

Avoiding spill

 

Traditionally primary energy going to waste meant hydro spill, however that is rapidly extending to “solar spill” and “wind spill” in which there is insufficient demand to absorb solar and wind generated electricity. The emerging wisdom is simply to add more battery storage (for which a loose analogy might be building a weir on top of a dam to enable heavy rain to be stored instead of spilled), however recent work is also revealing that battery costs increase significantly as storage duration increases into hours and potentially days. This leads to one of the key conclusions of the Solar Potential Analysis report that curtailing solar is cheaper than storage.

 

Key features of the Solar Potential Analysis report

 

The wider context of the Solar Potential Analysis report is to examine how to achieve Minnesota’s renewable energy goals of 10% of generated electricity from solar by 2025 increasing to 70% from solar and wind by 2050 at the lowest risk and best value.

 

Key conclusions of the report are…

 

·     That forecast declines in the installed cost of wind and solar to less than $20 per MWh will make it cheaper to (i) overbuild to meet peaks, and (ii) curtail generation rather than install batteries.

 

·     That Minnesota’s goal of 70% wind and solar could be achieved at a cost of about $50 per MWh with a capacity overbuild of about 100%. Lesser overbuilds require huge storage costs (around $100 per MWh with a 50% overbuild), whilst greater overbuilds require escalating wind and solar costs.

 

This could prove to be very seminal to the emerging mix of solar and batteries, so Pipes & Wires will closely follow this issue.

 

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.

 

House-keeping stuff

 

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.