Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #186, which starts with a re-formatted “What we’re seeing”
update to make individual themes more visible.
We
then look at some battery and EV charging tariff issues in the US, followed by
some security of supply and thermal generation closures in the Netherlands and
Australia. We then quickly examine the European Commission’s scrutiny of the
E.On – RWE asset swap, and conclude this issue with a look at 3 regulatory
decisions in Australia, the UK and Canada. So … until next month, happy
reading…
What we’re seeing…
|
Energy mix & grid security · Legal moves challenging the treatment
of forest bio-mass as renewable. · Heightened anxiety to get the carbon
price more precisely determined to unleash the next wave of decarbonisation
investment. · Diverging and seemingly inconsistent
views on the role of coal for dry-year security (less frequent, but more
critical). · Emerging battle between storing
solar, or over-building and curtailing · Charging EV’s with solar during the
day, and then use them to flatten the peaks. · 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. · Heightened appreciation of
coal-firing capability during gas supply interruptions. |
General stuff · A potential decoupling of electricity
prices from gas prices. · A possible need for a managed market
to strengthen certainty of gas supply. · The possibility of gas becoming
industry’s transition fuel away from coal. · More investment signals moving faster
and in different directions. · Increasing political awareness of the
need for a smooth transition that will minimise price shocks. · Mounting concern over the structural
integrity of many hydro dams, including the ability to fully de-water. · Heightening concern around foreign
ownership of essential infrastructure. · 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). · A shortage of skilled project
managers and electricity network designers. |
|
Regulating emerging technologies · Policy makers exhibiting specific
technologies 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. · Regulators defining multiple classes
of services and payment categories for battery storage. |
Network access and price regulation · Increasing regulatory rejection of
grid modernization, EV charger and smart meter proposals. · What seems like regulatory push-back
against the large transmission lines required to interconnect wind-farms. · A possible emerging trend of
regulators squeezing fixed monthly charges which are increasingly seen as
interfering with renewable energy policy objectives. · 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 (refer to this article). · A mixed bag of revenue determinations
… some tougher than expected, some easier. |
Recent client projects
Recent
client projects include…
· Identifying best customer engagement
practices for an Australian distributor.
· 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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Regulating emerging technologies
US – simplifying market access for battery storage
Introduction
Requiring market operators to amend rules to
accommodate new technologies and policy preferences are nothing new. This
article examines FERC Order #841 which aims to
simply market access for batteries.
Requirements of FERC Order #841
The purpose of FERC Order #841 is to remove barriers
to the participation of electric storage resources in the capacity, energy and
ancillary services markets operated by RTO’s and ISO’s. This requires each RTO
or ISO to establish market rules that inter
alia…
· Ensures that a resource is eligible to provide all the capacity, energy
and ancillary services that it is technically capable of providing.
· Ensures that a resource can be dispatched and can set prices.
· Account for the physical and operational characteristics of the resource.
· Establish a minimum size that is less than 100kW.
In order to meet the just and reasonable requirement
of s206 of the Federal Power Act 1920, the RTO or ISO must specify that the sale of energy from a market to a
storage resource that is then sold back to the market must be at the wholesale
locational market price.
Key issues arising from Order #841
Some of the issues arising from Order #841 (or at
least discussed as part of the implementation) include…
· Requirements for storage to run for specified durations creates entry
barriers for participation, including trying to apply standards for non-storage
devices to storage.
· Automatic de-rating of storage as it runs down was seen as artificially
limiting storage dispatch.
· Requests for clarification of how behind-the-meter storage can
participate, and a storage provider could participate in both retail and
wholesale storage programs
· Concern that transmission access charges represent entry barriers.
· Potentially different treatment of energy depending on whether it is
charging or supplying load.
· Concern that Order #841 oversteps federal authority.
Pipes & Wires will revisit this story as the RTO’s
and ISO’s amend their market rules.
US – rethinking EV charging tariffs
Introduction
There seems to be a growing disconnect
between EV uptake policy, and allowing the fair and full cost recovery of EV
chargers. This article examines recent thinking from both electric companies
and regulators in California.
Recent changes to the regulatory framework
Senate Bill (SB) 1000 was enacted in 2018 to improve EV uptake by inter alia requiring the Public
Utilities Commission (CPUC) to consider a wide range of EV charging matters
including…
·
Facilitating the development of
technologies that promote grid integration, subject to it being in the
interests of electric customers.
·
Exploring policies that support rate
(tariff) strategies that can reduce the effect of demand charges on EV’s.
·
Adopting a tariff specific to heavy EV’s
that encourages charging stations in locations of excess grid capacity.
Recent events following the regulatory changes
The CPUC have acknowledged that recharging
heavy EV’s in particular (trucks and buses) can significantly increase the
demand charges on a customers’ bill, and therefore act as a barrier to EV
uptake. The states’ three investor-owned electric companies (PG&E, SoCalEd
and SDG&E) are all developing EV charging tariffs that embody the
following…
·
Time-of-use prices that encourage off-peak
charging.
·
Replacing demand charges with a fixed
monthly charge (likened to a subscription) aimed at recovering fixed costs.
Pipes & Wires will comment further as
experience with the new tariffs accumulates.
Energy mix and grid security
Netherlands – accelerating the closure of coal-fired generation
Introduction
The Dutch government requires closure of all
coal-fired power stations by 2030. This article examines the likely impact on
security of supply and prices.
Generation capacity closures
The Dutch
government’s coalition agreement requires the following scheduled closures…
· Hemweg #8 (650 MW) and Amercentrale #9 (640 MW) by 2024. It was recently announced that Hemweg #8 will now close
at the end of 2019.
· Rotterdam #1 (730 MW), Eemshaven A & B (1,560 MW) and Maasvlakte #3 (1,060 MW) will
close by 2030.
The Netherlands consumes about 2,120,000 GWh of
electricity per year of which about 70% to 80% is generated by thermal plant,
hence closing about 15% of the installed capacity is going to move the supply
curve.
Likely price implications
Any withdrawal of capacity from a market shifts the
supply curve to the left, and without any corresponding reduction in demand,
prices will rise.
Not surprisingly, the accelerated closure of Hemweg #8
has already increased Dutch base load forward prices for 2020/21 by about €0.5 / MWh. Further examples of wholesale price
rises include the Australian NEM when Hazelwood closed, and the EPEX when
Germany began closing its nuclear stations.
Aus –what became of the security of supply reviews
Introduction
About 2 years ago several states in Australia
encountered security of supply difficulties, which Pipes & Wires examined
in detail. This article quickly summarises those reviews, and examined what
became of each of them.
Summarising the reviews
The following table summarises the reviews…
|
Jurisdiction |
Date(s) |
Prompting event(s) |
Key conclusions |
|
Tasmania |
Mid-2016. |
· Decommissioning of the Tamar Valley combined cycle plant. · Low inflows on top of record low hydro storages. · A major fault on the Bass Link cable. |
· Defining
the level of hydro storage at which Hydro Tasmania must stop operating for
its own commercial interests and instead operate for the benefit of the
State. · Adopting
more conservative assumptions for rainfall variability and Basslink
availability. · That Tamar
Valley should remain available as backup generation, noting that although the
convergence of low inflows and a Basslink outage has a low probability it is
nonetheless a credible scenario. |
|
NSW |
Early 2017 |
· Extreme
high temperatures. · Closure of
Hazelwood. · An
increase in the number of “lack of reserve” notices issued in NSW in 2017,
despite an overall decline in the number of notices across the NEM since
2009. |
·
That during periods of high demand (typically hot
weather) the reliability of generation and thus system reserves may not be as
high as expected. ·
The closure of Hazelwood is
expected to exacerbate the noted risks of hot weather operation across Victoria
and South Australia and by implication, NSW. ·
The need to pick up the 10,000 GWh that Hazelwood
will now not be generating is likely to test the reliability and ability to
supply gas to other generators. |
|
NEM |
Late 2016 |
· Apparent ad-hoc closure of several coal-fired stations. |
· Development of a comprehensive energy
transition plan, including reform of the National Electricity Market rules. · Develop a mechanism for the orderly
retirement of coal-fired stations for consideration by the COAG Energy
Council. |
What became of the reviews ?
So what has become of each of the reviews ? The
following table sets out some of the progress to date…
|
Jurisdiction |
Progress to date |
|
Tasmania |
·
Tamar Valley combined cycle station has been re-commissioned. ·
Feasibility studies for a second Bass Strait
cable are underway. ·
Closer monitoring of hydro storage levels. |
|
NSW |
·
The former Turnbull
government asked AGL to either keep Liddell open beyond 2022, or to sell it
to Alinta Energy who had indicated they would keep it open. AGL declined to
sell to Alinta and remains committed to its closure. ·
AGL has, however, committed to spend $200m to
keep Bayswater operating until 2035. ·
Forced outages at both Liddell and Eraring in
January 2019 that removed 1,300MW from the supply curve have continued to
high-light possible supply shortages. |
|
NEM |
·
Seems to be some movement
towards closure of coal-fired stations, but not clear how orderly that is. ·
New renewables seem
likely to beat coal on price, but large energy users are still backing coal for
reliability. ·
Key issue will be
retaining coal for renewable buffering whilst those very same renewables are
squeezing coal out of the market. |
Overall the focus seems to be on retiring coal-fired
generation on the mainland, but with no obvious thought to security of supply
or price.
Mergers & acquisitions
Europe – scrutiny of the Innogy deal
Introduction
Pipes & Wires #174 and #184 examined the
complex asset swap between E.On and RWE that includes E.On buying RWE’s entire
77% stake in energy retailer Innogy. This article notes both the EC’s approval
of the generation aspect of the deal and the EC’s closer scrutiny of the Innogy
aspect of the deal, both under the EC’s Merger Regulation 139/2004.
Re-capping the deal
Key features of the deal 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.
Approving the generation asset swap
In late February 2019 the EC approved RWE’s acquisition of E.On’s renewable and nuclear assets, concluding that the incremental increase in RWE’s generation market
share of about 1% is unlikely to either hinder effective competition or
incentivise RWE to manipulate market prices.
Scrutinising the Innogy aspect of the deal
In early March the EC began investigating E.On’s
proposed acquisition of RWE’s 77% stake in Innogy. The EC has specific concerns
that the remaining competitors could be limited in their ability to restrain
price increases in key national electricity and gas markets given RWE and
E.On’s strong combined market share.
Next steps
The EC hopes to release a decision around mid-July
2019, after which Pipes & Wires will comment further.
Network regulatory decisions
Aus – the South Australia electricity distribution revenue reset
Introduction
SA Power Networks recently
submitted their Regulatory
Proposal (rate
case) to the Australian Energy Regulator (AER) for the 5 year regulatory
control period commencing on 1st July 2020. This article follows on
from Pipes
& Wires #180 which
examined the Draft Plan.
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 of the Rules.
Key features of the process to date
Key features of the process to
date include…
|
Parameter |
Draft Plan |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$1,850m |
$1,741m |
|
|
|
|
OpEx |
$1,468m |
$1,530m |
|
|
|
|
Opening RAB |
Not stated |
$4,418m |
|
|
|
|
Nominal WACC |
5.5% |
5.43% |
|
|
|
|
Depreciation |
$1,024m |
$1,144m |
|
|
|
|
Smoothed revenue |
Not stated |
$3,915m |
|
|
|
Pipes & Wires will comment
further once the AER releases its Draft Decision.
England & Wales – initial assessment of PR19 water business
plans
Introduction
Water and sewage regulator
Ofwat is currently compiling the PR19 revenue control that will apply to the
water and sewage businesses in England and Wales for the 5 year control period
commencing on 1st April 2020. This article examines Ofwat’s initial
assessment of the
water and sewage companies business plans.
Ofwat’s assessment methodology
Ofwat has adopted the following
categories for the business plans…
· Exception – receives higher financial rewards in addition to being
fast tracked.
· Fast track – plans are ready to implement, and provide the company
with financial benefit, early decisions and early certainty.
· Slow track – further work required.
· Significant scrutiny – substantially rework, will be subject to
increased scrutiny, and face reduced financial rewards.
Readers might have recognised this
as similar to the fast track method that Ofgem adopted for the RIO – ED1
electricity revenue reset back in 2014, in which Western
Power Distribution’s 4 business plans were fast tracked and their license conditions confirmed 9 months ahead of the
other 10 businesses.
Initial assessment of business plans
Ofwat’s initial assessment of
business plans is as follows (no business plans were considered exceptional)…
|
Fast track |
Slow track |
Significant scrutiny |
|
|
· Severn Trent · South West · United |
· Anglian · Bristol · Dŵr Cymru · Northumbrian · Portsmouth |
· South East · South Staffs · SES · Wessex · Yorkshire |
· Affinity · Hafren Dyfrdwy · Southern · Thames |
The 3 fast track companies will
receive financial rewards of £18m (Severn Trent), £6.5m (South West) and £22m
(United) respectively.
Next steps
Ofwat’s next steps include…
|
Fast track |
Slow track and significant
scrutiny |
|
· Submit updated business plans – Feb 2019 · Draft determinations published – April 2019 |
· Submit revised business plans – April 2019 · Draft determinations published – July 2019 |
|
· Final determinations published – December 2019. |
|
Pipes & Wires will comment
further as the draft determinations are published.
Canada – setting BC Hydro’s revenue
Introduction
The BC
Utilities Commission (BCUC) recently issued its decision for BC Hydro’s prices for the 5 year period starting on 1st April 2019. This
article examines that decision.
A bit about BC Hydro
BC Hydro is a vertically
integrated electric company owned by the BC Government, and supplies 1,800,000
customers throughout the province except for the City of New Westminster and
the Kootenay region. BC Hydro’s nameplate capacity is 11,000MW, and its annual
generation varies between 43,000GWh and 54,000GWh depending on hydro inflows
(about 95% of annual generation is hydro).
BC Hydro is regulated by the BC
Utilities Commission.
Regulatory framework
The regulatory framework for BC
Hydro’s revenue setting includes s60 of
the Utilities Commission Act. Some additional context to the regulatory framework was the NDP
Government’s request for a 1 year freeze of BC Hydro’s prices for the year
starting 1st April 2018 (BC Hydro duly reduced its rate case for 1st
April 2018 from 3% to 0%, however the BCUC rejected that).
The BCUC’s decision
The BCUC has approved rate
increases of 1.76% for the year starting 1st April 2019, 0.72% for
the year starting 1st April 2020, and a total rate increase of 8.1%
for the 5 year period starting 1st April 2019.
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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