Pipes & Wires
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
Introduction
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 |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
3.75% |
4.43% |
4.87% |
5.11% |
|
Post-tax WACC |
3.36% |
4.04% |
4.49% |
4.72% |
Key features of the GasNet and Vector WACC’s include…
|
|
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
4.08% |
4.79% |
5.25% |
5.50% |
|
Post-tax WACC |
3.69% |
4.40% |
4.86% |
5.11% |
Key features of the Auckland and Christchurch Airport WACC’s include…
|
|
Mid-point |
|
Vanilla WACC |
5.60% |
|
Post-tax WACC |
5.44% |
UK – setting the context for RIIO – GD2
Introduction
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
Introduction
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. |
|
Innovation |
· 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. |
|
Environment |
· 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
Introduction
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.
Background
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) |
|
EEA1 |
2,300 MW |
Call upon all available supplies, including from
other grids. |
|
EEA2 |
1,750 MW |
Activate industrial demand response (targeted load
shedding) |
|
EEA3 |
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
Introduction
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
Introduction
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 |
2007 |
2005 |
|
Original
completion date |
2012 |
2010 |
|
Estimated
completion date |
2019 (7 year delay) |
2020 (10 year delay) |
|
Original
cost estimate |
€3.3b |
€3.7b |
|
Likely
cost to completion |
€10.9b |
€8b |
Pipes
& Wires #192 will examine the Taishan #1 and #2 program and provide a
similar comparison.
Aus – exploring nuclear power
Introduction
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
Introduction
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.
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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
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