Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 187 – May 2019

 

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.

 

·     s4AA of the Gas Act 1986.

 

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.

 

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.