Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #187, which starts with a look at regulating emerging
technologies in both New Zealand and the United States. We then look at two
grid security issues in the United States and a recommendation to abolish
rooftop solar subsidies in Australia.
This
issue finishes by examining three regulatory decisions, including the critical
issue of bankability of electric and gas companies. 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. · A mixed bag of revenue determinations
… some tougher than expected, some easier. |
Recent client projects
Recent
client projects include…
· Identifying best customer engagement
practices on behalf of 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
NZ – who should own emerging technologies ?
Introduction
The battle between
lines businesses and energy retailers over who should be able to own emerging
technologies has been bubbling away for a while. Pipes & Wires has previously
examined what other jurisdictions are thinking, so it’s probably timely to have
a look at what New Zealand is thinking.
What exactly is the issue ?
The issue is that
lines business are increasingly installing emerging technologies (particularly batteries)
that are arguably “energy devices”. Energy retailers, in turn, are arguing inter alia that allowing lines
businesses a completely free hand to install such technologies could (i) distort
any competitive markets for such technologies and (ii) allow inefficient
recovery of poor investments if emerging technologies are simply rolled into
the RAB.
A middle ground emerges
Work by industry
bodies and regulators seems to be heading towards a potentially promising middle
ground in which lines businesses might be allowed to invest in some emerging
technologies but not too much.
Wider arguments
include that lines businesses are well placed to identify specific network
features such as constraints and capture the value of mitigating those
features, but that third parties should be able to provide those technology
solutions via a competitive framework. The specific concern of energy retailers
and indeed of regulators is that third parties should be able to offer to
provide inter alia storage solutions
that compete with both (i) traditional network investment by the lines
business, and (ii) storage solutions by the lines business. We note that the related
party transaction amendments to the Input Methodologies and the Information
Disclosure Requirements in New Zealand require lines businesses to publically
disclose constraints and by implication opportunities for third parties to
proposed storage solutions.
Possible lessons from Europe
Pipes & Wires #183 noted that the Clean Energy For All Europeans package proposed prohibiting both transmission and
distribution companies from owning or operating energy storage facilities (not
just batteries, presumably also pumped storage, compressed air etc.) in all but
extreme circumstances. This is represents an extreme position on the spectrum
of possibilities, and probably an unhelpful position that will see worthwhile
opportunities foregone.
Options going forward
Some options (at
different positions on the spectrum) include…
Option |
Implications |
|
1. |
Allow lines
businesses to own emerging technologies, with few restrictions and full
inclusion in the RAB. |
· Likely to avoid the costs of creating and managing a
competitive market for every network constraint or opportunity that emerges. · Would potentially allow recovery of inefficient
costs. · Risk of asset stranding collapses to nil. |
2 |
A middle ground
in which lines businesses are allowed some combination of owning and
operating emerging technologies, possibly with a few other regulatory
constraints like specific disclosure, ring-fencing out of the RAB, own but
must be independently operated (like an RTO), allowing increased ROI,
allowing a finite period for third party offers to come forward etc. |
· Would require lines businesses to re-think their
risk appetites. · Likely to be complicated to administer, eroding the
benefits of avoiding conventional network investments. · Whoever defines the parameters, thresholds and
settings will need to adopt an investor mind-set otherwise lines businesses
won’t be interested. · Allowing a finite period for third parties to offer
solutions after which the lines business can invest with few limitations. |
3. |
Prohibit lines
businesses from owning emerging technologies (similar to the proposed
European view on storage). |
· Forcing lines businesses to be the provider of last
resort may prevent worthwhile storage investments. · Despite the best intentions of requiring lines
businesses to disclose opportunities for investment such as constraints, they
will always have an information advantage that positions them well to make
those investments. · Requires the on-going effort and cooperation of a
third party |
My thoughts on the
above options include…
· Whilst Option 3 might come close to theoretically
efficient market outcomes, it might also prove very ineffective … a kind of a
“100% of nothing” sort of thing.
· Option 2 has some promise. However there would need to
be many opportunities to offset the administrative costs, and it might only be
a short step from morphing into Option 3.
· Option 1 has the potential to be inefficient (although
I’ll stick my neck out and say that many of the claims of potential
inefficiency are probably overstated), but probably quite effective
Next steps
It will therefore be
critical for the industry as a whole and for regulators in particular to
firstly identify what the objective is (presumably to minimise costs to the
customer), and then to thoughtfully compile some regulatory settings that will…
· Promote efficient investment up to a specified point
(or fuzzy region).
· Discourage or possibly prohibit investment past that
specified point (or fuzzy region).
· Prohibit inefficient investment.
Pipes & Wires
will continue this story as various jurisdictions progress their thinking.
US – clarifying the definitions around EV recharging
Introduction
A key theme of recent Pipes & Wires articles has
been the widening legislative interpretation gap around whether EV recharging
is a “service” or whether it is “energy sales”. This article examines proposed
rule changes in several more US states aimed at clarifying the definition.
Further state-by-state clarifications
This article augments the table from Pipes & Wires #185 with recent updates from Iowa and Pennsylvania…
Jurisdiction |
Pertinent legal bits |
Pipes & Wires ref. |
Iowa |
· Iowa Utilities board (IUB) files notice in
February 2019 to amend Chapter 199-20 of the Iowa Administrative Code, with
the Intent of remove EV charging stations from the definition of public
utility under Iowa Code 476.1 and 476.25. ·
The amendment states
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 amendment
goes on to state that “if the electricity used for electric vehicle charging
is obtained from a rate-regulated public utility, the terms and conditions of
the service to the electric vehicle charging station shall be governed by and
subject to the utility’s filed tariff”. |
|
Pennsylvania |
·
Pennsylvania
Public Utilities Commission (PUC) approved tariff supplements for MetEd,
PennElec, Pennsylvania Power and West Penn Power (all First Energy
subsidiaries) to specify that… ·
Charging at a charger
owned by a third-party will not be considered resale of electricity. ·
Such chargers
will be excluded from the pricing requirements of Pennsylvania’s Utilities Code. |
|
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 |
Energy mix and grid security
US – forecast record demands in the Lone Star State
Introduction
Pipes & Wires #177 and #183 examined the declining
reserve capacity margins in the ERCOT supply area, and in summary noted that it
had declined to about ½ of its target level of 13.75%. This article a series of
recent announcements from ERCOT in preparation for the 2019 summer
Forecast demand
ERCOT’s preliminary Seasonal Assessment of Resource Adequacy (SARA) for the 2019 summer includes the following summary…
· Forecast capacity of 78,154 MW.
· Forecast summer peak demand of 74,853 MW
This suggests that the reserve capacity margin be as
low as 4.4%
Forecast generation
Analysis of successive Capacity, Demand & Reserves
(CD&R) Reports late last year revealed the troubling picture that there
were more MW being either delayed or cancelled than were being approved.
ERCOT’s expected responses
Whilst ERCOT is not expecting to impose rolling
blackouts, it is expecting an increased chance of emergency alerts (which gives
ERCOT access to resources such as about 3,000 MW of demand response, voluntary
conservation and generation that wouldn’t normally be available) due to any
combination of low wind and high ambient temperatures. In particular,
comparison of the expected weather conditions for the 2019 summer against the
record demand of the 2011 summer weather conditions suggests that a higher
reserve capacity margin might be necessary. Pipes & Wires will pick up his
story again later in 2019 to see exactly what happened.
US – setting an end date for gas turbines ?
Introduction
The Arizona Public Service (APS) recently announced
plans for some significant battery storage as a result of soliciting between
400 MW and 800 MW of peaking capacity for between 3pm and 8pm during summer.
This article examines the inclusion of a 7 year agreement for gas turbine
peaking to set some context for considering whether gas turbines have an end
date.
APS’s plans for battery storage
APS’s plans include two tranches of battery
installation…
Date |
Capacity |
Configuration |
2021 |
200 MW / 600 MWh |
Retrofit to existing solar |
150 MW / 300 MWh |
Stand alone |
|
100 MW / 300 MWh |
In conjunction with new solar |
|
2025 |
400 MW |
Stand alone |
The role of the gas turbines
In addition to the above battery installations, APS
also signed a 7 year agreement with Calpine to provide 463 MW of gas turbine
peaking which resulted directly from the RFP requiring at least ½ of the
peaking capacity to come from new gas-fired stations. A key feature of the
agreement with Calpine is that it is only for 7 years, much shorter than the
typical 20 years.
APS has made the following comments…
· Inclusion of the gas-fired generation requirement is necessary for
reliability and diversity.
· It still needs time to get comfortable with using batteries for peaking.
· Gas turbine technology is improving, so a 7 year contract gives APS the
flexibility to capture cost and efficiency improvements through new or renegotiated
contracts a lot sooner.
The wider issue of gas turbines – the editor comments
Battery storage is improving along a couple of key
dimensions…
· The capacity and energy densities are increasing.
· Commercial thinking is de-layering peaks into durations.
· Policy in some jurisdictions is deliberately favoring battery storage
(ie. is not technology indifferent).
Deep down inside I have an uneasy feeling that the
finite duration of battery discharge is being understated, and hence would
applaud APS’s cautious approach.
Energy markets & tariffs
Aus –abolishing solar panel subsidies
Introduction
Subsidies
for solar panels are a politically controversial issue, and are always likely
to be. This article examines the Australian Competition & Consumer Commission’s
(ACCC) recent first Monitoring Of Supply In The National Electricity
Market report which reiterated its previous recommendation to abolish
the Small-scale Renewable Energy Scheme.
The SRES
The SRES is a rebate arrangement that
subsidises small-scale renewables such as solar panels, small wind turbines,
small hydro generators, solar water heaters and air-source heat pumps on the
principal that non-renewable generation will be displaced.
The
precise mechanism of the subsidy is through the creation of small-scale technology certificates which liable entities (including energy retailers) are
required to buy and then surrender to the Clean Energy Regulator. The
certificates are provided up-front for expected generation to either (i) 15
years, or (ii) a final date of 2030.
The ACCC’s report
Key
features of the Monitoring Of Supply report include…
· Reiterates that the Retail Electricity Pricing Inquiry (REPI) recommended that the SRES
should be wound down and abolished by 2021.
· Notes that the SRES will cost the
average residential customer in the NEM about $36 during the 2020/21 year, up
from $19 during the 2017/18 year.
· The view that subsidy of small-scale
installations is no longer required due to the significant drop in the cost of
solar panels in particular since the SRES began in 2011.
The
ACCC’s recommendation seems at odds with both major political parties. Pipes
& Wires will comment further as this issue progresses.
Network regulatory decisions
UK – bankability of regulated network businesses
Introduction
The ability to attract both
equity and debt finance is critical for any business, but becomes arguably more
complicated when revenue is regulated. This article examines Ofgem’s proposals on how the UK’s electricity and gas networks should
assess bankability heading into the RIIO-2
price controls.
Regulatory framework
The regulatory framework
includes
· s3A of
the Electricity Act 1989.
Both of these Acts require
Ofgem to inter alia have regard to
the need for license holders (the network businesses) to finance the activities
which are the subject of the obligations imposed.
Ofgem’s proposals
Ofgem has proposed the following considerations…
· A notional efficient operator.
· Bankability at the individual license holder level.
· A suite of financial ratios, including 5 year averages.
· Setting the notional gearing at the start of RIIO-2, and allowing
the modelled gearing to fluctuate with cash flows.
· Model the sensitivity of gearing ratios under different cash flow
scenarios.
· Possible inclusion of actual company data in the business plan
templates and models.
The following expectations have
been emphasised…
· Networks are responsible for their own capital structure
decisions.
· The risks of those decisions will be borne by shareholders, not
customers.
· Licenses will continue to require networks to maintain an
investment grade credit rating.
Pipes & Wires will comment
further as the RIIO-2 framework evolves.
Aus – the Directlink electricity transmission revenue reset
Introduction
Directlink recently submitted
its revenue
proposal to the
Australian Energy Regulator (AER) or the 5 year control period commencing on 1st
July 2020. This article sets some context for examining the AER’s draft and
final decisions.
A bit about the Directlink
Directlink is a +80kV,
220MW HVDC interconnector between Bungalora and Mullumbimby in the Australian
state of New South Wales. Directlink connects to the Queensland 110kV grid
(which overlaps into northern NSW) at Bungalora, and to the NSW 132kV grid at
Mullumbimby.
Directlink began life as an
unregulated market service in April 2000, but became a regulated network
service in March 2006.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which is made pursuant to the National Electricity Law.
Key features of the process to date
Key features of the Directlink
process to date include…
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
CapEx |
$40.5m |
|
|
|
OpEx |
$24.3m |
|
|
|
Opening RAB |
$148.4m |
|
|
|
Nominal WACC |
5.18% |
|
|
|
Depreciation |
$23m |
|
|
|
Smoothed revenue |
$89.8m |
|
|
|
Pipes & wires will comment
further once the AER releases its draft decision.
Aus – the Queensland electricity distribution revenue reset
Introduction
Energex and Ergon
Energy
recently submitted their Regulatory Proposals (rate cases) to the Australian Energy Regulator (AER) for the 5 year regulatory control period commencing on 1st
July 2020. This article examines those Proposals to provide some context for
the Draft and Final Decisions over the next year or so.
A bit about Energex and Ergon
By way of explanation, Energy Queensland was formed in June 2016 to consolidate the Queensland
government’s electricity businesses. The network businesses Energex and Ergon
Energy Network remain the entities for disclosure.
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 Energex
process to date include…
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
CapEx |
$2,327m |
|
|
|
OpEx |
$1,806m |
|
|
|
Opening RAB |
$12,917m |
|
|
|
Nominal WACC |
5.46% |
|
|
|
Depreciation |
$804m |
|
|
|
Smoothed revenue |
$6,541m |
|
|
|
Key features of the Ergon
process to date include…
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
CapEx |
$2,905m |
|
|
|
OpEx |
$1,835m |
|
|
|
Opening RAB |
$11,634m |
|
|
|
Nominal WACC |
5.46% |
|
|
|
Depreciation |
$1,052m |
|
|
|
Smoothed revenue |
$6,516m |
|
|
|
Pipes & Wires will comment
further once the AER releases its Draft Decisions.
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.
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