Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #190, which starts with a look at some market and tariff
issues in New Zealand, the US and the UK. We then continue PW’s examination of
the “solar” tariffs with a look at a tariff rejection in the US state of
Michigan. We then examine progress on the Hinkley Point C nuclear station in
the UK and solicitation of peaking capacity in the US state of California. This
issue then concludes with a look at some network regulation decisions in the US
state of Ohio and in Nigeria. 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 · Increasing numbers of US state
regulators removing EV chargers from the definition of public utility. · 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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Energy markets & tariffs
NZ – the draft Transmission Pricing
Methodology
Introduction
Pricing
of transmission grid access seems to be a contentious issue, with many if not
most connected users arguing that they shouldn’t have to pay for investment at
the other end of the country. This article examines the key features of the
Electricity Authority’s recently released a consultation paper on its draft transmission
pricing methodology (TPM).
The Electricity Authority’s thinking
The
Electricity Authority’s thinking is as follows…
· The current TPM encourages inefficient
use of and investment in the grid.
· Customers should pay for the
transmission assets they benefit from, and not pay for the assets that they do
not benefit from.
· In contrast, the current TPM spreads
the cost of regional grid investments across all customers (making those
investments look cheaper at a regional level than they really are).
Key features of the draft TPM
Key features
of the draft TPM include…
· An overall “benefits based” approach in
which customers who benefit from specific investments would pay for them.
· Two new charges to replace the existing
RCPD (regional coincident peak demand) and HVDC (high voltage direct current)
charges…
· A benefits-based charge that will
recover the cost of (i) the 7 major existing investments and (ii) any new investments.
· A residual charge to recover any
remaining costs in a way that does not distort incentives to invest in or use
the grid.
· Making the new charges hard to avoid.
· Aligning the approach to the recently
released distribution pricing principles.
Not
surprisingly, those who face higher transmission charges are concerned by the
proposed changes.
Next steps
The
Electricity Authority will receive submissions on the draft until 1st
October 2019.
US – denying recovery of stranded
assets
Introduction
Pipes
& Wires #173, #175 and #181 have
examined Dominion Energy’s acquisition of SCANA
Corporation and its regulated subsidiary, South Carolina
Electric & Gas. This article examines a recent court decision confirming a
refund to customers that relates inter
alia to the abandoned VC Summer nuclear station.
The wider context of the SCE&G
acquisition
Dominion Energy launched its
all-stock bid for SCANA, and received approvals from the Federal Energy
Regulatory Commission (FERC), the Federal Trade Commission (FTC), the Nuclear
Regulatory Commission (NRC), the Georgia Public Service Commission, and the North
Carolina Utilities Commission. Approval from the South Carolina Public Service
Commission took a bit longer, and required an updated
proposal to the
SCPSC that would reduce South Carolina Electric & Gas’ prices by about $22
per month, or about 15%. This was a long way short of the 33% that customer
advocates were wanting.
The specifics of the VC Summer
abandonment
The Virgil C. Summer nuclear
station was a joint venture between SCANA and the state-owned Santee-Cooper
electric company. In 2008 plans were announced to construct two AP1000 reactors adjacent to the existing reactor which began operation in 1984.
In July 2017 SCANA and Santee-Cooper abandoned the construction after spending
$9b when further studies revealed that the likely cost of completion would be
about $25b, more than double the originally budgeted $12b.
SCANA reached a settlement in the class action suit that sought a $2b refund to SCG&E
customers over the abandoned VC Summer plant, which would inter alia provide $2b of future price cuts.
The recent court ruling
A
South Carolina court recently approved a $2b refund to SCE&G customers that
includes $146m of customer bills related to VC Summer (average customer bills
included almost $30m per month to cover the VC Summer construction costs).
The editor comments
The
court ruling embodies a clear message that nuclear generation development risks
will lie with the shareholders, and not with the customers (and we’ve seen
obvious parallels with the UK Government stating that any cost overrun risk at
Hinkley Point C will lie with the contractor). So perhaps the burning question
is whether and indeed how shareholders (and contractors) will be compensated
for taking that risk.
UK – trade union proposes nationalising
retailers
Introduction
Despite
evidence that nationalising energy and infrastructure provides benefits to
customers, it remains popular with some segments of the community. This article
examines the recent Power To The People report from the British trade union
UNISON which suggests nationalising the retail arms of the Big Six electricity
retailers.
The Power To The
People report
Key
views expressed by the Power To The People report
include…
· That a future government should
nationalise the retail arms of Centrica, Scottish & Southern Energy, E.On,
EDF Energy, Innogy and Scottish Power.
· That such a nationalization could be
achieved for between £6b and £9b.
· It would ensure security of energy
supply.
· It would keep energy costs affordable.
· It would assist decarbonisation and
meeting climate change targets.
The editor comments
Many
readers have probably already formed a view on the Power To
The People report. Pipes & Wires makes the following comments…
· Electricity costs what it costs to
generate, transmit, distribute and retail. Sure we could decouple prices from
costs (the opposite of what most regulators want), but that will simply
discourage investment in an industry that needs all the investment it can get.
· It is far from clear what role retail
plays in securing energy supply, much less how changing the ownership of retail
will improve security. Several aspects of the report suggest that a single
large retailer might also end up playing a policy role.
· A large part of a retail businesses
operating costs will be labor. It seems rather odd that a trade union would
seem to be promoting lower labor costs.
Regulating emerging technologies
US – denying a proposed solar charge
Introduction
This article examines a recent regulatory
decision in the US state of Michigan denying DTE Energy’s
proposed solar charge, and notes the contrary decision in the state of
Wisconsin that was examined in Pipes & Wires #189.
DTE Energy’s proposed solar charge
As part of its 2018 rate case, DTE
Energy proposed the following tariffs…
·
An increase of its residential monthly fixed
charge from $7.50 to $9.00.
·
A new System Access Contribution (SAC) of
between $2.28 and $2.31 per kW based on the rating of the solar panels, which
would only apply to new rooftop solar customers.
Solar advocates are not surprisingly upset
by these proposed tariffs, with some questioning the argument that solar
customers are not supporting the cost of the network required for their
service.
Michigan Public Service Commission’s decision
The MPSC approved $273m
of the $477m revenue increase sought by DTE Energy. Key denials of the MSPC’s
decision included…
·
DTE’s proposal to credit rooftop solar
customers based on the average monthly average real-time locational marginal
price for energy (the MPSC determined that the credit should be based on the
retail price of the energy less the transmission cost).
·
DTE’s proposed SAC (the MPSC determined
that it is not equitable because it is not based on a customers’ use of the
distribution system).
·
DTE’s proposed increase of the residential
monthly fixed charge (the MPSC determined that it shall remain at $7.50).
The editor comments
Pipes & Wires makes the following
comments…
·
While the Michigan decision will
undoubtedly please the rooftop solar lobby, it is hard to understand why solar
customers’ use of the distribution network should be subsidised by non-solar
customers.
·
While the principles of fairness and
equity embodied in the various utilities legislation are timeless and enduring,
perhaps the interpretation and practical application of those principles needs
to be revisited.
·
Given policy makers and regulators liking
for cost-reflective real-time pricing, the preference for calculating solar
credits on a simplistic retail price minus transmission costs is hard to
understand.
Energy mix, emissions and grid security
England – progress on Hinkley Point C
Introduction
Following on from Pipes & Wires examining of the
progress on Flamanville #3, this month we
examine progress on Hinkley Point C in England.
Background to Hinckley Point C
Hinkley Point is the only 1 of the 10 originally
proposed new generation of nuclear stations to proceed, and readers will know
that it has had a difficult path to date that included…
· Agreeing on a price of £92.50 per MWh, including allegations that such a
price constituted state aid and therefore violated EU law.
· Concern over China General Nuclear’s 33.5% stake, which has seen the Office of
Nuclear Regulation’s (ONR) role extend to national security considerations.
· Concerns over the specific engineering features of the adopted European Pressurised Reactor occurring at Flamanville #3 in France and at Olkiluoto in Finland.
Progress and current issues
Progress is as follows …
· An expected cost to completion is still about £20b, up from previous
estimates of about £18b.
· An expected commissioning date around the end of 2025, compared to the
original estimates of late 2017.
The unsurprising issues of cost, sustainability,
foreign investment, national security and taxpayer subsidies continue to ebb
and flow, but no new issues are apparent.
US – securing supply in the Golden State
Introduction
Several factors seem to be squeezing peak generation
capacity. This article examines the recently launched California Public
Utilities Commission’s procurement track to bring 2,000 MW
of new peak generation into the market by 1st August 2021.
The problem
Forecasts indicate a sharp
decline of about 4,000 MW in California’s reserve capacity from 2020 to 2021,
mainly due to the withdrawal of thermal generation. A further decline is
forecast for 2026 as the remaining nuclear generation is withdrawn.
The CPUC’s procurement track
The overall theme of the procurement track is that
load serving entities (electric companies) procure 2,000 MW of new peak generation
by 1st August 2021 to assist near-term and medium-term renewable
integration. Key features of the procurement include…
· Electric companies will have to procure peak capacity in proportion to
their share of the Integrated Energy
Policy Report forecasts of February 2019.
· In-state resources can include renewables, storage, demand response,
energy efficiencies, other distributed generation, and conventional thermal
generation.
· Firm out-of-state resources will be multiplied by 67% to reflect the
risk of increasing imports to California.
· Wind and solar will also be subject to multipliers to reflect expected
seasonal availabilities.
· A requirement for each electric company to show it will deliver its
share of the 2,000 MW by 1st August 2020, along with detailed
timelines
· Exclusion of any procurement already included in the 2019/20 Integrated
Resource Plan baseline assumptions.
· The possibility of a back-up mechanism if each electric company doesn’t
procure their share.
The editor comments
There seem to be a couple of issues here worth
commenting on…
· An apparent inability of the market to deliver peak generation, which
has prompted an intervention. This suggests that the investment signals for
peak generation are not strong enough.
· Applying a multiplier to out-of-state generation seems wise.
· Applying multipliers to wind and solar also seems wise.
We might expect to see similar managed market
interventions as more and more jurisdictions seem to have declining capacity
margins.
Network regulatory decisions
US –
rejecting grid modernisation charges
Introduction
Pipes
& Wires #184 examined the Virginia State
Corporation Commission’s severe pruning of Dominion’s $6b grid modernisation program. This
article continues that theme by examining a recent Ohio Supreme Court decision
that has disallowed FirstEnergy’s grid modernisation charges.
First
Energy’s grid modernisation charges
Back in 2016 the Ohio
Public Utilities Commission allowed FirstEnergy to
recover an additional $133m per year for 3 years to fund distribution system
modernisation, which was significantly less than the $558m per year for 8 years
that FirstEnergy originally sought. Comments from various stakeholders include…
· FirstEnergy
says the allowance fails to recognise their significant challenges (and
expected to spend about $204m per year instead).
· The PUC
stated that the allowance is to ensure that FirstEnergy retains sufficient
financial health and creditworthiness to invest in modernisation.
· Consumer
advocates claim that the allowance is simply a bailout for aging coal and
nuclear stations.
The
Court decision
The Ohio Supreme Court ruled inter alia that there were insufficient
conditions attached to the tariff increase to ensure that the funds were spent
on distribution modernisation as intended. The ruling did not, however, require
the funds already collected to be refunded.
The
editor comments
These 2 decisions send the following strong
messages to those preparing rate cases…
· That the
benefits of distribution modernisation need to be accurately described and
realistically valued.
· That
funds gathered for distribution modernisation need to be visibly ring-fenced
and have strong accountabilities attached.
Nigeria
– informing the tariff decisions
Introduction
Regulators are increasingly relying on
long-term business plans or asset management plans to inform regulatory
decisions. This brief article notes the Nigerian Electricity Regulatory
Commission’s (NERC) recent requirement for electricity distributors to submit
Performance Improvement Plans (PIP’s).
The
Nigerian distribution sector
The Nigerian distribution sector comprises 11 distribution
companies. The overall
industry structure includes competing generators, a monopoly transmission grid,
the 11 distributors, and a regulator.
The
requirement to submit PIP’s
As part of improving the robustness of its
tariff setting, NERC has recently requested each of the 11 distribution
companies to submit PIP’s covering the 5 year tariff period starting in 2020.
The priority focus for the PIP’s is the CapEx, which will underpin the revenue
projections.
Recent client projects
Recent
client projects include…
· Identifying best practices in EV
charging on behalf of an Australian distributor.
· Recommending amendments to a security
of supply standard to better reflect demand density.
· 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.
Utility
Consultants Ltd accepts no liability for action or inaction based on the
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