Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #185. This issue starts with a look at some early ideas
from the New Zealand electricity price review, and then shifts half a world
away to examine an acquisition in the Czech Republic. We then examine the unfolding regulatory
framework around EV charging and rooftop solar tariffs in the United States.
We
then examine some solar issues in New Zealand and the United States, and close
with two electricity revenue determinations in Australia. So … until next
month, happy reading…
What we’re seeing…
· Policy makers exhibiting specific
technology biases, particularly between batteries and gas turbines.
· A possibly diminished role for gas
turbines as grid peaks are de-layered to allow more insightful use of
batteries.
· Increasing regulatory rejection of grid
modernization, EV charger and smart meter proposals.
· 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.
· 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.
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Energy markets
NZ – early ideas on improving the
electricity sector
Introduction
Pipes & Wires #174 and #180 examined the Terms Of Reference and the First Report respectively of the Electricity Price
Review. This article examines the recently released Options Paper.
Key themes of the Options Paper
The
Review team’s preferences include…
· More community level support and
funding to address unaffordability.
· Prohibiting prompt payment discounts
(with a key argument being that poor people often don’t have the option of
paying bills early), but allowing reasonable late penalties.
· Require distributors to offer standard
network access terms to retailers.
· Not introducing retail price caps
· Requiring retailers to disclose profit
information.
· Allowing vertically integrated
companies to continue.
· Issue government policy statements on
transmission and distribution pricing.
· Phase out the low fixed charge tariff
regulations.
· Strengthen the Commerce Commission’s
powers to regulate distributor performance.
· Not forcing small distributors to
amalgamate.
· Giving the Electricity Authority
greater powers to regulate network access for distributed energy services.
· Not transferring the Electricity
Authority’s transmission and distribution regulator functions to the Commerce
Commission.
· Examine the security and resilience
implications of a low-carbon future.
Next steps
Submissions
on the Options Paper will be received until midday on Friday 22nd
March 2019.
Mergers and acquisitions
Czech – Innogy transfers shareholdings
to RWE
Introduction
Pipes & Wires #174 and #184 examined E.On and RWE’s asset
reshuffling. This article continues along that theme by examining RWE’s recent intra-group
transfer of a 50.04% stake in Czech grid company IGH from Innogy.
Re-capping the E.On – RWE asset reshuffling
Key features of the reshuffling are…
· E.On proposes 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 values 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. The deal reflects the following strategies…
· RWE expanding its renewables portfolio, making its European wind energy
business second only to Iberdrola.
· E.On expanding its retail and distribution businesses as it sells
47% of its fossil generation business Uniper to Fortum.
The IGH share acquisition
Innogy
subsidiary Innogy Grid Holdings owns electricity and gas networks and
retail businesses in the Czech Republic. This intra-group transaction sees
Innogy transfer its 50.04% holding in IGH to RWE, which in the fullness of the
asset reshuffling will eventually be owned by E.On. The purchase price has not
been publically disclosed.
Regulating emerging technologies
The editor comments - making sense of it all
The broad topic of
regulating emerging technologies seems to have got a lot broader than perhaps
many of us would’ve imagined, as evidenced by the number and breadth of media
articles. The following points might help frame these and future articles in
readers minds…
· Re-visiting the legacy definitions of electric plant
in many statutes specifically to exclude EV chargers from the definition of
electric plant, public utility or similar. This will hopefully resolve issues
ranging from inclusion in the RAB to tariff setting authority.
· Getting further clarity on the importance of fixed
tariff components to enable electric companies to recover their fixed costs.
This will hopefully encourage electric companies to invest in supporting
infrastructure.
US – redefining the legal basis for EV charging
Introduction
One of the key barriers to EV charger roll-out
that Pipes & Wires has examined is whether EV charging falls within the
definition of public utility services (as defined in various states). This
article examines a proposed rule change in the state of Iowa that would inter alia remove EV charging from the
definition of public utility services.
A quick summary of EV charging regulations
A quick summary of pertinent legal bits
from recent Pipes & Wires articles is set out below…
Jurisdiction |
Pertinent legal bits |
Pipes & Wires ref. |
Missouri |
·
Whether EV
charging is a service, or the supply of electricity ·
This in turn
determines whether an EV charger falls within the definition of electric
plant, which in turn brings it within the jurisdiction of the state regulator ·
Whether EV
chargers can be included in the rate base. ·
Whether EV
charging tariffs can be regulated by the state. ·
Regulator ruled
that operating EV chargers is fundamentally different from operating an
electric company, and that electric companies cannot offer EV charging as a regulated
service which would inter alia
enable them to recover the cost from all customer through the rate base
(which was overturned by a court ruling). |
#180, #181 |
Michigan |
·
Regulator
recommended that the capital cost of EV chargers should be excluded from the
rate base. ·
Regulator recommended
that the cost of residential EV charger rebates should be treated as a
regulated asset. |
#162 |
Kansas |
·
Regulator
concluded inter alia that the capital cost of EV chargers should not fall on
KCPL’s customers. |
#157 |
The proposed rule change in Iowa
In early February the Iowa Utilities Board issued a rule proposing that Chapter 199-20 of the Iowa Administrative Code be amended to inter
alia state that “electric energy sold for the purpose of electric vehicle
charging at a commercial or public electric vehicle charging station
constitutes neither the furnishing of electricity to the public nor the resale
of electric service”. The primary intent of the proposed rule is to remove EV
charging stations from the definition of public utility under Iowa Code 476.1 and 476.25.
The editor comments
It would seem that disputes over whether
EV charging is a service or whether it is the supply of electricity (with
consequent disputes over state regulator jurisdiction, inclusion in the rate
base and recovery of capital costs through regulated tariffs) seem to have
slowed EV charger roll outs in some states. Hopefully the proposed Iowa rule
will eliminate these disputes.
US – solar, nett metering and feed-in tariffs
Introduction
Nett metering seems to be one of the fringe fire
fights in the bigger battle between electric companies and solar providers.
This article uses recent legislation in the US state of Kentucky as a starting
point for re-examining the key issues around solar, nett metering and feed-in
tariffs.
Re-examining the key issues around nett metering
The single biggest issue around nett metering is that most
electric companies variable tariff assumes a certain annual consumption (about
8,000 kWh in New Zealand) to recover the fixed and variable costs of operating
the distribution network. The associated issues are…
· Rooftop solar reduces the nett kWh consumption.
· This reduces the variable revenue from solar customers, which in turn
reduces both the overall revenue and the contribution from customers with
rooftop solar.
· Restoring overall revenue can be done in two ways. The first is by
increasing variable charges which strengthens the incentive to increase solar
generation and penalises those without solar. The second is to re-balance
variable and fixed tariffs, which the solar industry claim creates entry
barriers to solar (which it undoubtedly does, but it also ensures that solar
customers don’t receive a subsidy).
That final issue of increasing fixed tariffs got a lot
of air time from the solar industry a few years ago especially in Nevada and
California, but seems to have quietened down a bit (but not totally gone away).
The Kentucky legislation
Senate Bill 100 will require
various amendments to Kentucky Statute 278.467 to inter alia…
· Increase the maximum capacity for an eligible electric generation
facility to 45kW.
· Redefine nett metering
· Require the PSC to set feed-in tariffs using their rate making process.
SB 100 was approved by the Senate, and at the time of
writing had proceeded to the House.
The various views on SB 100
The solar industry seems very unhappy with
SB 100, especially with allowing the PSC (who they claim will side with the
electric companies) to set feed-in tariffs which they claim will be reduced
from the current 1:1 ratio. The electric companies are arguing that the current
regulations require them to buy solar at prices greater than they can generate
electricity.
Pipes & Wires will pick up this story
again as SB 100 progresses through the House.
Energy mix and grid security
NZ – solar scenarios out to 2050
Introduction
During 2018 Transpower published its Te Mauri Hiko – Energy Futures white paper which set out a range of energy supply, demand and technology
scenarios. This article examines The Sun Rises On A Solar Future addendum to Te Mauri Hiko.
Context and main thesis of The Sun Rises
Te Mauri Hiko set out various grid-scale and rooftop
solar scenarios, from which the large solar uptake scenarios generated the most
interest (Transpower also quite rightly notes the challenges of large solar
uptake in a predominantly winter-loaded country). The main thesis of The Sun
Rises is that meeting New Zealand’s ambitious CO2 emission reduction
targets will require a doubling of generation by 2050, and that solar
represents a good approach.
Examining the doubling of demand
The following analysis is mine (not Transpower’s) and
excludes transmission and distribution losses to simplify the calculations. The
numbers were correct as of mid-2018.
New Zealand currently consumes about 38,000 GWh per
year. The decarbonisation goals will require…
· Half of the 50,000 GWh per year of oil-based transport energy to convert
to electricity (25,000 GWh per year).
· About half of the 14,000 GWh per year of coal-based stationary energy to
convert to electricity (7,000 GWh per year).
That’s an additional 32,000 GWh per year of electricity,
so an almost doubling of annual energy consumption from 38,000 GWh to about
70,000 GWh (broadly in line with Transpower’s estimates). Our current annual
capacity factor is about 50% from about 9,500 MW of installed capacity. The
additional energy would require an annual capacity factor of about 84% which
seems unlikely, so additional generation capacity will be required.
The Sun Rises scenarios
The Sun Rises sets out a range of scenarios of solar
generation, ranging from the Roaring 40’s scenario in which solar maxes out to
about 5,000 GWh per year of rooftop solar plus 5,000 GWh of grid-scale solar,
to a Mass Solar scenario of 26,000 GWh of rooftop solar plus 6,000 GWh of
grid-scale solar.
The Sun Rises conclusions
The Sun Rises concludes the following…
· The price of grid-scale solar will decline sharply by 2020 and be very
similar to wind by about 2040.
· Most parts of New Zealand are “sunnier” than regions where solar uptake
has been high (especially Germany and Spain), with about 1,500 kWh / m2
/ year.
· Correct integration of batteries and inverters with solar could enable
about 9,000 MW of solar before voltage constraints appear.
· Correct integration of batteries with solar should allow about 4,000 MW
of solar before the intermittent nature of solar becomes problematic.
· The cost of rooftop solar without batteries is now approaching the price
of grid-supplied electricity, which opens up possibilities for large day-time
consumers such as supermarkets.
· That an off-grid house would need 51kW of rooftop solar (at a cost of
over $100,000) and a Nissan Leaf to use as a battery to maintain supply. This
underscores the increasingly important role of the grid in providing diversity.
· Solar panels may help protect roofs from deterioration, and also lower the
inside temperature.
· The pitch of most house roofs is about 30o, which is much
less than the 50o pitch needed for optimal winter generation. This
would require additional tilt rather than flush mountings.
Pipes & Wires will re-examine the unfolding solar
frontier as Transpower’s work evolves
US – in pursuit of steady power
Introduction
Wind and solar are inherently intermittent, and their
promoters are going to great lengths to either make the power steady or to
match demand to generation (eg. by throttling EV chargers). This article
quickly examines a wind-solar-storage project in the US to set some context for
discussing the relative mix of wind, solar and batteries that might be required
to create steady power.
The Wheatridge proposal
The Wheatridge Renewable Energy Facility proposed jointly by Portland General Electric and NextEra Energy
Resources will combine 300 MW of wind, 50 MW of solar and 30 MW of batteries. So
some approximate ratios might be…
Battery capacity as a percent
of total capacity |
9% |
Battery capacity as a percent
of wind capacity |
10% |
Battery capacity as a percent
of solar capacity |
60% |
Solar capacity as a percent
of total capacity |
14% |
Wind capacity as a percent of
total capacity |
86% |
The pursuit of steady power
To set some wider context, the pursuit of steady power
has been the goal of power system engineers for decades, from the longer
timescales such as the “months” associated with hydro storage which has now
contracted to the “minutes” associated with wind and solar. Long-time readers
might remember back in 2007 that Contact Energy’s proposed 650 MW windfarm on
the Waikato coast would be developed in parallel with 100 MW of gas turbines,
and of course now we have proposed HVDC super-grids interconnecting wind farms
to capture diverse weather streams. And now the pursuit of steady power moves
its attention to batteries.
The following table examines the high-level features
of these three approaches to generating steady power against the three limbs of
the energy trilemma…
|
Gas turbines |
HVDC interconnection |
Batteries |
Cost |
· Modest fixed costs. · On-going fuel costs. |
· High fixed costs, greater than gas turbines. · Minimal on-going costs. |
· Modest fixed costs for short generation, but escalates rapidly for
longer generation. |
Security of supply |
· High, only dependent on fuel supply. |
· Still depends on intermittent generation. |
· Limited duration |
Emission reduction |
· Does create emissions |
· Minimal |
· Minimal if charged with renewables. |
Like most trilemmas, choosing two parameters fixes the
third. It would seem fair to say that emission reduction is generally the first
choice followed by low costs which invariably fixes security of supply. So
perhaps this is a good example of be careful what you wish for…
Network regulatory decisions
Aus - the Northern Territory electricity distribution revenue
reset
Introduction
The Power
& Water Corporation
recently submitted its revised Revenue
Proposal (rate
case) to the Australian Energy Regulator 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 |
$339.3m |
|
OpEx |
$358m |
$329m |
$377.9m |
|
Opening RAB |
$975m |
$966m |
$967.4m |
|
Post-tax nominal WACC |
6.62%* |
5.22% |
6.08% |
|
Depreciation |
$145m |
$132m |
$135m |
|
Smoothed revenue |
$928m |
$759m |
$863.5m |
|
* Noted as a placeholder.
Pipes & Wires will comment
further once the AER publishes its Final Determination.
Aus – the TasNetworks revised proposal
Introduction
TasNetworks
recently submitted its revised proposal (rate case) to the Australian
Energy Regulator that will apply for the 5 years commencing on 1st July
2019. This article examines the key features of that revised proposal.
Regulatory framework
The regulatory
framework is based on the National Electricity (South Australia) Act 1996, which provides for the making of the National Electricity Rules (version 111 at the time of writing).
Electricity distribution determinations are principally made pursuant to Chapters 6 and 6A of the Rules.
The transmission determination process to date
The
transmission determination process to date includes the following…
Parameter |
Proposal |
Draft
determination |
Revised proposal |
Final
determination |
CapEx |
$260.6m |
$222.6m |
$260.4m |
|
OpEx |
$206.7m |
$206.6m |
$124.2m |
|
Opening RAB |
$1,467.4m |
$1,459.4m |
$1,455.0m |
|
WACC |
6.15% |
5.77% |
$5.77% |
|
Regulatory
depreciation |
$124.9m |
123.5m |
$124.2m |
|
Total
smoothed revenue |
$799.6m |
$787.5m |
$785.9m |
|
The distribution determination process to date
The
distribution determination process to date includes the following…
Parameter |
Proposal |
Draft
determination |
Revised
proposal |
Final
determination |
CapEx |
$738.8m |
$550.9m |
$705.9m |
|
OpEx |
$441.5m |
$441.5m |
$480.6m |
|
Opening RAB |
$1,755.8m |
$1,747.0m |
$1,801.8m |
|
WACC |
5.89% |
5.51% |
5.51% |
|
Regulatory
depreciation |
$345.4m |
$341.8m |
$346.8m |
|
Total
smoothed revenue |
$1,392.7m |
$1,308.3m |
$1,346.6m |
|
Pipes &
Wires will continue this story when the AER releases its final determination.
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.
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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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