Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 189 – July 2019

 

From the editor’s desk…

 

Welcome to Pipes & Wires #189, which starts with a look at some distribution regulatory decisions in NZ and South Africa. We then examine how emerging technologies are being regulated in the US and Canada, and conclude with a look at some security of supply issues in the US, France and Australia. 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 step change in direction from the previous trend of regulators squeezing fixed monthly charges to legislation specifically allowing solar tariffs.

·  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.

 

 

 

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Network regulatory decisions

 

NZ – progress on the distribution pricing principles

 

Introduction

 

Efficient pricing underpins much of a regulators work. This article examines the Electricity Authority’s recent decision paper on more efficient distribution pricing principles.

 

Background to the EA’s work stream

 

The EA’s work stream on efficient distribution pricing dates back to January 2009. The work stream has also considered other matters such as the Electricity (Low Fixed Charge Tariff Option For Domestic  Consumers) Regulations 2004 and the need for consistency with the Electricity Information Disclosure Requirements.

 

Key features of the decision paper

 

Key features of the decision paper include…

 

·     A reiteration that recovering high fixed costs through kWh-based tariffs creates inefficient outcomes.

 

·     A reiteration that the potential for such inefficient outcomes is growing as emerging technologies continue to emerge.

 

·     The EA’s belief that industry-led pricing reform will not go far enough.

 

·     A set of Distribution Pricing Principles.

 

·     A requirement for EDB’s to describe their consistency with those Principles by 1st April 2020 and each subsequent year.

 

·     A refining of the originally intended Principles to acknowledge the view that the originally intended Principles favored economic theory rather than practical considerations.

 

·     The introduction of a scorecard using a star rating to assess the efficiency and alignment of the 3 to 5 largest pricing plans by revenue, along with a guideline of how features would be translated into star ratings.

 

EDB’s should check the EA’s website to ensure compliance with these expectations.

 

South Africa – setting Eskom’s fourth price determination

 

Introduction

 

Pipes & Wires #182 examined Eskom’s application to the National Energy Regulator (NERSA) for the fourth Multi-Year Price Determination (MYPD4) for the period 1st April 2019 to 31st March 2022. This article notes NERSA’s decision to significantly reduce Eskom’s allowable revenue.

 

Regulatory framework

 

The over-arching regulatory framework is the Electricity Regulation Act 2006, which inter alia provides for the recovery of efficient costs by the licensee and approval of tariffs by NERSA.

 

Key features of the MYPD4 process

 

Key features of the MYPD4 process include…

 

Parameter

Proposal

Decision

Revenue

R763b

R661b

 

Unfortunately there is no corresponding detail for the Decision as there was for the Proposal, however the head line of NERSA’s decision is to prune R102b of allowable revenue over 3 years.

 

Regulating emerging technologies

 

US – proposing a solar fee in Wisconsin

 

Introduction

 

Whether or not to charge customers with rooftop solar an additional monthly fee seems to be one of the on-going battles in the emerging technology space. This article follows on from PW #188’s examination of solar tariffs in the US state of Iowa by examining a similar proposal to establish a solar fee in the state of Wisconsin.

 

The issue of adding fixed charges to offset lost revenue

 

Readers will undoubtedly be familiar with the principle that most electric companies variable tariffs assume 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.

 

We Energies rate case

 

We Energies recently filed a rate case with the Wisconsin Public Service Commission proposing to add an additional fee of $3.53 per kW per month from 1st January 2021 for customers with rooftop solar.

 

This represents We Energies second attempt to rebalance its tariffs to address inter alia declining revenue from rooftop solar customer. Back in late 2014 the WPSC decided that WE Energies proposed increase in fixed charges of about $7 per month was justified, however this decision was over-turned by a Circuit Court Judge in 2015 who concluded that the WPSC didn’t have sufficient evidence to justify the increase.

 

Pipes & Wires will re-examine this story when the WPSC returns its decision.

 

Canada – clarifying planning restrictions for renewable generation

 

Introduction

 

Clarifying continually evolving legislation provides certainty for investors. This article examines 2 recent regulations in the Canadian province of Ontario that aim to provide certainty to renewable generators by clarifying the authority of councils to regulate the location of renewable generation.

 

The regulations

 

The regulations are…

 

Regulation

Principal Act

Commentary

Ontario Regulation 121/19: Transitional Matters – Renewable Energy Generating Facilities.

 

Planning Act

·   The Green Energy And Green Economy Act 2009 exempted renewable generation developers from council location approval.

·   The Green Energy Repeal Act 2018 restored the requirement to obtain council approval, but created uncertainty over whether renewable generation either under construction or already in operation required council approval.

·   Regulation 121/19 provides clarity by affirming that such generation will remain exempt if it meets 1 of several criteria.

 

Ontario Regulation 122/19: Renewable Energy Approvals Under Part V.0.1 Of The Act.

 

Environmental Protection Act

·   Part V.0.1 of the Environmental Protection Act sets out the requirements that renewable generation or existing generation seeking an increase in nameplate capacity must meet.

·   Regulation 122/19 establishes further requirements including the requirement for written confirmation that the proposed generation will not violate any zoning by-laws or orders.

 

 

The editor comments

 

Legislative changes and repeals can create uncertainty, which spooks investors. So it’s pleasing to see officials identifying those uncertainties and providing certainty through legislative amendments.

 

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”, whether it is “energy sales”, or whether it is neither. This article examines recent ruling from the US states of Kentucky and Vermont.

 

Further state-by-state clarifications

 

This article augments the table from Pipes & Wires #188 with recent updates from Kentucky and Vermont…

 

Jurisdiction

Pertinent legal bits

PW ref.

Kentucky

·   The Kentucky Public Service Commission noted that the defining characteristic of a public utility is service to, or readiness to serve, an indefinite public, which has a legal right to demand the utility’s service.

·   Because EV charging is “limited to a specific defined class of persons”, the criteria to be a public utility is not met, and therefore the KPSC does not have jurisdiction over the chargers.

·   Kentucky Power dissented, claiming that electricity supplied from a charger “constitutes retail electric service”.

 

 

Vermont

·   The Vermont Public Utility Commission concluded that chargers should not be regulated like electric companies, and that charger owners should have the freedom to set their own pricing.

 

 

Wisconsin

·   Wisconsin Public Service Commission has begun a public investigation into a range of issues, including…

·   What limitation should be placed on ownership of public EV chargers ?

·   How might public ownership impact on access and prices ?

·   What is the proper role of electric companies in deploying EV chargers ?

·   Pipes & Wires will comment once the PSC’s investigations are completed.

 

#188

Montana

·   House Bill 456 provides that…

·   A public utility may provide electric service to an EV charger at prices approved by the PSC that enable full cost recovery without subsidy.

·   Entities operating EV charges are not public utilities.

·   The Bill passed the Senate with a vote of 30 to 19 in early April 2019, and was passed by Governor Steve Bullock on 10th May 2019.

 

#188

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”.

·   The IUB issued an order in late April 2019 that EV chargers are not considered public utilities.

 

#187

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.

 

#187

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, emissions and grid security

 

US – supply tightens in the Lone Star State

 

Introduction

 

Pipes & Wires #170, #171, #177, #183 and #187 have examined the tightening supply in the ERCOT market in the US state of Texas. This article examines recent concerns heading into the 2019 summer.

 

Background

 

Key features of the background include…

 

·     Historically low wholesale prices in the ERCOT of around $25 per MWh (down from $78 per MWh in 2008) led to the closure or sale of generation capacity.

 

·     Successive forecasts of reserve capacity margin showed significant short-term declines due to capacity retirements and construction delays as well as long-term declines due to demand growth.

 

·     Of particular concern was the halving of forecast reserve capacity margin for the 2018 summer, from 18.9% in the May 2017 forecast down to 9.3% in the December 2017 forecast.

 

·     Meeting forecast 2023 summer demand (just demand, not including reserve) would require over 4,400 MW of new, secure, summer-capable generation.

 

·     Forecasts that the reserve capacity margin could decline as low as 4.4% for the 2019 summer.

 

Events heading into the (northern) 2019 summer

 

ERCOT’s Seasonal Assessment of Resource Adequacy (SARA) forecasts for the 2019 summer notes the following…

 

·     Forecast peak demand of 74,853 MW (1,300 MW higher than the 2018 summer peak).

 

·     Forecast available capacity of 78,929 MW, suggesting a reserve capacity margin of about 5.4%.

 

·     All modelled scenarios identified the possible need to enter Energy Emergency Alert.

 

·     Reserve capacity margins from summer 2020 are expected to be restored as about 10,000 MW of new capacity becomes available.

 

Pipes & Wires will revisit this story again later in 2019.

 

France – progress on Flammanville #3

 

Introduction

 

Pipes & Wires #145, #151, #155 and #170 examined the metallurgical difficulties encountered during construction of the third reactor at Flammanville in north-western France. This article examines progress 4 months out from the revised commercial start date of November 2019

 

Some background on Flammanville

 

The existing Flammanville station near the village of Flammanville in the Manche area of north-western France has two 1,300 MW Pressurised Water Reactors (PWR’s) that were placed into commercial operation in 1986 and 1987 respectively. The third reactor being installed is a 1,600 MW European Pressurised Reactor (EPR) designed by Areva. Construction began in December 2007 with an expected completion of about April 2012. Then came a series of cost escalations and completion delays that pushed the estimated start date out to late 2018.

 

Where the story got to

 

Key features of the story to date include…

 

·     Tests performed in 2014 revealed that some zones of the steam generator channel heads included significant concentrations of carbon, which could reduce the resilience of the steel and its ability to resist cracking. Concern spread to a further 18 reactors at 9 stations that could have similar difficulties. Multiple malfunctioning relief valves on the reactor vessel were also discovered.

 

·     The ASN concluded that Flammanville #3 can be started, but the head of the reactor pressure vessel will need to be replaced by the end of 2024.

 

·     EDF subsequently announced that construction would continue, fuelling would begin at the end of 2018, and that full commercial load of 1,630MW was expected to be achieved by November 2019.

 

Recent events

 

Recent events include…

 

·     Continuing the weld repairs until mid-2019.

 

·     Delaying the fuel loading to the 4th quarter of 2019.

 

·     Delaying grid connection to the 1st quarter of 2020 and full commercial load to the 2nd quarter of 2020 (about 8 years behind schedule).

 

·     An expected completion cost of about 10.9b, about 3x the originally budgeted 3.3b.

 

Pipes & Wires will examine this story further in early 2020.

 

Aus – amending the Rules to improve security of supply

 

Introduction

 

Electricity markets around the world seem to be increasingly concerned about security of supply. This article examines a recent change to the Reliability and Emergency Reserve Trader (RERT) mechanism that aims to improve security of supply in Australia’s National Electricity Market (NEM).

 

The RERT mechanism and its regulatory framework

 

The RERT is 1 of the NEM’s emergency mechanisms that allows the Australian Energy Market Operator (AEMO) to contract for resources such as generation or demand response that would ordinarily be outside of the market. The regulatory framework for the RERT is set out in Section 3.20 of the National Electricity Rules.

 

Reasons for amending the RERT

 

The AEMC began consulting on amendments to the RERT in 2018. Its reasons included the following…

 

·     Increased penetration of renewable generation, which provides little or no rotational inertia to the grid.

 

·     Withdrawal of aging steam turbine generation, leading to a declining reserve capacity margin.

 

·     Increasing numbers of hot days that are (i) driving air conditioner demand to new heights, and (ii) making the demand profile more peaky so that the legacy business model based on recovering the cost of peak kW from kWh revenue is breaking down.

 

The recent AEMC determination

 

The AEMC released its Final Determination in May 2019 under the title of the National Electricity Amendment (Enhancement to the Reliability and Emergency Reserve Trader) Rule 2019 No 3. Key features include…

 

·     Giving the AEMO greater flexibility to purchase resources by linking the RERT procurement trigger to the reliability standard.

 

·     Giving the AEMO greater flexibility around incorporating the reliability standard into its day-to-day operations.

 

·     Increasing the procurement lead time from 9 months to 12 months.

 

·     Clarifying the out-of-market provisions so that security resources can be provided at minimal cost and with reduced risk of gaming.

 

·     Guides the AEMO on what the appropriate cost of entering into security contracts should be.

 

·     Where possible, aligning the cost of security resources with those customers who caused the RERT.

 

Recent client projects

 

Recent client projects include…

 

·     Identifying best practices in EV charging for an Australian distributor.

 

·     Recommending amendments to a security of supply standard for a NZ distributor.

 

·     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.

 

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.

 

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.