Pipes & Wires
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.
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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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