Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 185 – March 2019

 

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.

 

House-keeping stuff

 

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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 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.