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.
· 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
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.
The Electricity Authority will receive submissions on the draft until 1st October 2019.
US – denying recovery of stranded assets
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
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
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
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.
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
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.
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
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
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.
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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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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