Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 191 – September 2019


From the editor’s desk…


Welcome to Pipes & Wires #191, which starts with a look at some regulatory decisions in NZ and the UK. We then examine some wide-ranging grid security issues in the US, Australia and Europe, and then conclude by examining a review of smart metering costs in the UK.


So … until next month, happy reading…


What we’re seeing…



Energy mix & grid security

·  Increasing interest in nuclear to provide both reliable and low emission generation.

·  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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Network regulatory decisions


NZ – setting the WACC’s for Transpower, gas distribution and airports




The Commerce Commission recently released its cost of capital decisions for the 2020 disclosure year for…


·     Transpower (electricity transmission).


·     GasNet and Vector (gas distribution).


·     Auckland and Christchurch Airports.


This article examines the key features of that determination.


Regulatory frameworks


The regulatory frameworks are set out in…


·     Clauses 2.4.1 to 2.4.9 of the Transpower Input Methodologies Determination 2010 (consolidated to 10th June 2019).


·     Clauses 2.4.1 to 2.4.9 of the Gas Distribution Services Input Methodologies Determination 2012 (consolidated to 3rd April 2018).


·     Clauses 5.1 to 5.7 of the Commerce Act (Specified Airports Services Input Methodologies) Determination 2010.


Key features of WACC’s


Key features of the Transpower WACC’s include…



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






Key features of the GasNet and Vector WACC’s include…



25th percentile


67th percentile

75th percentile

Vanilla WACC





Post-tax WACC






Key features of the Auckland and Christchurch Airport WACC’s include…




Vanilla WACC


Post-tax WACC



UK – setting the context for RIIO – GD2




Britain’s 8 gas distribution networks (owned by 4 companies) are currently subject to the RIIO – GD1 price control, which ends on 31st March 2021. This article examines Ofgem’s recently published expectations of how those gas companies will approach the RIIO – GD2 price control.


The RIIO regulatory framework


The RIIO regulatory model is based on setting the outputs that Ofgem believes a regulated supplier needs to provide for its customers, and provides strong incentive mechanisms for regulated suppliers. This is in contrast to the former CPI – X model which focused on inputs and details.


Ofgem’s expectations


Ofgem set out its expectations for RIIO – GD2 in a recent open letter to gas industry participants, which are broadly as follows…


·     Companies can provide bespoke outputs that are justified by stakeholder engagement.


·     On-going engagement with Ofgem to refine incentive proposals.


·     Competitive provision of capital projects, such as relieving constraints.


·     Allowing companies to treat issues for which competitive solutions are unlikely as non-contestable.


·     The depth and extent of customer and stakeholder engagement will be a key factor in Ofgem’s assessment of the business plans.


·     Stakeholder engagement to consider scenarios of network requirements, and how uncertainties and risks will be managed.


·     Provide clear evidence that customers are willing to pay for the specified outcomes.


·     Include learnings from RIIO – GD1.


Next steps


The next steps include…


·     Submission of business plans to the RIIO – 2 Challenge Group for 1st October 2019


·     Submission of final business plans by 9th December 2019.


UK – draft water decisions




Pipes & Wires #186 examined the PR19 water price control and noted that 3 companies (Severn Trent, South West and United) had their business plans fast tracked and received a collective £18m financial reward. This article examines Ofwat’s recently announced determinations of the other water companies which were either slow-tracked or marked out for significant scrutiny.


Re-capping Ofwat’s initial assessments


Ofwat’s initial assessment of business plans is as follows (no business plans were considered exceptional)…


Fast track

Slow track

Significant scrutiny

·      Severn Trent

·      South West

·      United

·      Anglian

·      Bristol

·      Dŵr Cymru

·      Northumbrian

·      Portsmouth

·      South East

·      South Staffs

·      SES

·      Wessex

·      Yorkshire

·      Affinity

·      Hafren Dyfrdwy

·      Southern

·      Thames


Examining the slow track and significant scrutiny draft decisions


Key features of the slow track and significant scrutiny draft decisions across Ofwat’s priority areas include…


Priority area

Key features of decision

Affordable bills

·      A general expectation that prices will decline further than the national average of 12% before inflation.

·      Insufficient customer engagement and agreement specifically around willingness to pay.

·      An expectation of a step improvement in efficiency, including adoption of best practices.


Great customer service

·      Expected maturing of the customer engagement practices from the current (operative) price control.

·      Introducing new customer experience measures that will benchmark customer experiences against both other water companies and against other industries.

·      Improve assistance to vulnerable customers, including requiring at least 7% of each company’s customers to be on the vulnerable customers register by 2025.

·      Expecting all companies to set more stretching targets in critical areas such as water interruptions and sewer flooding.


Resilience in the round

·      Allowing £2.3b specifically to protect against extreme weather an against asset failures.

·      Requiring increased commitments to resilient outcomes, including ensuring that customers do not pay extra for resilience that is considered business-as-usual.

·      Requiring a more coordinated view of individual resilience projects.

·      Improving financial resilience by reducing debt levels.

·      Increased scrutiny against asset health indices.



·      Setting stretch targets that require companies to adopt innovative practices.

·      Including innovation incentives.

·      Possible inclusion of a competitive funding mechanism.

·      Expecting companies to improve scale and scope by entering markets associated markets for environmental services.

·      Allowing third parties to competitively finance, build and own water assets (very similar to the electricity sector), including instructing Dŵr Cymru and Anglian to allow third parties to build assets.



·      Allowing £4.6b to efficiently deliver projects aligned to the UK and Welsh Governments’ environmental priorities of reducing sewage spills, restoring habitats and protecting specific animal species.

·      Emphasising reduced water leakage.

·      Emphasising reduced carbon intensity.

·      Requiring some (specified) companies to adopt more challenging water consumption targets.

·      Reducing allowable water takes during droughts.



Next steps


After consultation and revision of business plans, Ofwat will publish its final decisions in mid-December 2019.


Energy mix, emissions and grid security


US – grid emergency in the Lone Star State




Pipes & Wires has been following the Electric Reliability Council Of Texas’ (ERCOT) heightened concern heading into the 2019 summer, for which an unprecedented demand of 74,853 MW was forecast. This article examines ERCOT’s recent grid emergencies in mid-August 2019.




Key features of the background include…


·     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.


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


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


The EEA1 alert


ERCOT issued the first of several Energy Emergency Alert Level One on 12th August 2019 when temperatures across Texas reached a (humidity adjusted) 104oF and demand reached 74,531 MW, meaning that…


·     Operating reserves have dropped to below 2,300 MW (about 2.9% of available generation), and


·     Are not expected to recover within 30 minutes.


ERCOT’s available responses


The escalating responses available to ERCOT are…


Alert level

Reserve margin falls below

Available ERCOT response(s)


2,300 MW

Call upon all available supplies, including from other grids.


1,750 MW

Activate industrial demand response (targeted load shedding)


1,000 MW

Instruct TSO’s to implement rolling black-outs.


Looking beyond this year


ERCOT expects that the reserve capacity margin for the 2020 summer will be restored to about 10,000 MW as additional generation enters the market. A key concern is how much of that generation will be secure … Pipes & Wires will re-examine this issue as news emerges.


Aus – closing coal-fired generation




One of the key inputs to the Australian Energy Market Operator’s (AEMO) recently released Victorian Annual Planning Report (VAPR) is the expected staged retirement of Yallourn over the 2029 to 2032 period, which is a bit different to the official closure date of 2032. This article examines this rumor and comments more widely on the issue of coal-fired closures.


Rumored closure of Yallourn


The VAPR assumes a staged withdrawal of 1 of Yallourn’s brown coal-fired steam turbines in each of the 2029, 2030, 2031 and 2032 years. It appears the Victorian Renewable Energy Target of 50% may have prompted this speculation. Yallourn’s owner, EnergyAustralia, has publicly stated that…


·     it intends to operate Yallourn until 2032 unless regulation, policy or market conditions change, and


·     Australia’s shrinking capacity to generate reliable energy has been a major cause of rising household power prices.


Wider context of coal-fired closures


One of Pipes & Wires enduring themes has been the system security risks of closing coal-fired generation. Pipes & Wires #166 examined this in detail and noted that about 11,800 MW of coal-fired generation could be withdrawn from the NEM by about 2035 with no obvious replacement, which is concerning.


Finland – difficulties at Olkiluoto #3




Several previous Pipes & Wires articles have examined the European Pressurised Reactors (EPR) at Flammanville #3 and Hinkley Point C. This article examines similar difficulties at Olkiluoto #3 in Finland, which is another of the 4 sites that are building EPR’s (the fourth is Taishan #1 and #2 in China).


A bit about Olkiluoto #3


The original Olkiluoto nuclear station on the shores of the Gulf Of Bothnia comprises 2 boiling water reactors, rated at 880 MW and 890 MW respectively. These reactors commenced commercial operation in October 1979 and July 1982 respectively.


Construction of a third reactor rated at 1,600 MW was approved by the Finnish Government in February 2005, with the original commissioning date planned for 2010.


The difficulties at Olkiluoto #3


Olkiluoto #3 has encountered many construction delays and cost over-runs that have seen the original commissioning date of 2010 delayed 10 years and the original cost estimate of 3.7b climb to at least 8b. These delays include…


·     Quality problems arising from insufficient oversight of inexperienced subcontractors.


·     Alleged difficulties in approving technical aspects.


·     Discovery of safety concerns and manufacturing deficiencies.


·     Further reinforcement of the reactor building.


The associated cost overruns strained both the relationship and finances of the owner TVO and the builder Areva.


Comparisons with Flammanville #3


A quick comparison of Olkiluoto #3 with Flammanville #3 reveals the following…



Flammanville #3

Olkiluoto #3

Start date



Original completion date



Estimated completion date

2019 (7 year delay)

2020 (10 year delay)

Original cost estimate



Likely cost to completion




Pipes & Wires #192 will examine the Taishan #1 and #2 program and provide a similar comparison.


Aus – exploring nuclear power




Readers might recall that back in 2015 South Australia held a Royal Commission into the nuclear fuel cycle. This article examines the Standing Committee on the Environment and Energy’s inquiry into the prerequisites for nuclear energy in Australia.


Terms of reference of the inquiry


The terms of reference of the inquiry include…


·     Waste management, transport and storage.


·     Health and safety.


·     Environmental impacts.


·     Energy affordability and reliability.


·     Economic feasibility.


·     Community engagement.


·     Workforce capability.


·     Security implications.


·     National consensus.


The inquiry will have regard to the 2015 Royal Commission and also to the 2006 Uranium Mining, Processing and Nuclear Energy Review.


The editor comments


I must confess that I have been hastily dismissive of smaller nations trying nuclear power, mainly because of the eye-watering billions of $, € and £ involved but also because of the unit sizes (up to 1,600MW) relative to overall demand.


A pause for further thought on my part recalled that naval propulsion has developed compact reactors of about 200 MW rating, which led me to a bit of a read up on small modular reactors. It would seem that the critical issue for small modular reactors will be the installed cost, which will require many tens of individual reactors to be ordered to offset the cost of the factory.


Next steps


The Standing Committee will receive submissions on the terms of reference until Monday 16th September 2019.


Regulating emerging technologies


UK – reviewing efficient smart metering costs




It seems that battery charging (both mobile and stationary) are getting most of the regulatory attention. This article examines Ofgem’s on-going review of efficient smart metering costs.


Ofgem’s initial consultation paper


The wider context to this review was Ofgem’s introduction of the default tariff cap on 1st January 2019. On 30th April 2019 Ofgem published an initial consultation paper on its approach to reviewing the Smart Metering Nett Cost Component (SMNCC) in the default tariff cap. Ofgem recognised that the cost of smart meter roll-outs would change over time, hence the SMNCC were only set for the first 2 cap periods (1st January to 30th September 2019).


Ofgem proposed to update its SMNCC model based on the new smart metering implementation program cost benefit analysis to better reflect the purpose of tariff setting.


Stakeholder responses to the initial consultation


Ofgem has published stakeholder responses to the initial consultation in several reports. Key responses include…


·     Suppliers broadly support Ofgem’s proposal to use a new cost benefit analysis as the starting point of the review.


·     Some suppliers, however, were concerned that the new cost benefit analysis may not provide an appropriate estimate of the efficient costs.


·     Some concern over exactly how efficient costs would be defined.


·     How the cost of premature replacement of an existing meter would be estimated.


·     Dealing with localised variations from the national average smart meter roll-out rate and costs.


Next steps


Ofgem will receive submissions on the 3rd report until 13th September 2019.


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.


House-keeping stuff


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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.


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.