Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #192, which includes a re-formatted “What we’re seeing” so
it looks better in MailChimp.
In
amongst a strong focus on tightening supply and grid security in the Australian
NEM, this issue starts with a look at the context for the second RIIO
electricity distribution price control in Britain and then examines the
recently announced costs of capital for electricity wires in New Zealand. We
then examine the use of Reliability Must-Run agreements
in California, the possibility that Commonwealth Edison might be taken over by
Chicago, and then conclude with an examination of yet another challenge to
fixed network charges. So … until next month, happy reading…
What we’re seeing…
|
Energy mix & grid security · Many events revealing that high
penetration of renewables is undermining 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. |
|
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. |
|
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. |
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Network regulatory decisions
Britain – setting the context for RIIO
– ED2
Introduction
Pipes & Wires #191 examined Ofgem’s proposed approach to
the RIIO – GD2 price control that will apply to Britain’s
8 gas
distribution networks from the 1st
April 2021. This parallel article examines Ofgem’s
recent open letter consultation on the
RIIO – ED2 price control that will apply to Britain’s
14 electricity distribution networks from 1st
April 2023.
The RIIO 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.
Proposed features of RIIO – ED2
RIIO
– ED2’s key objectives are to enable electric distribution companies to go
further with decarbonisation whilst also keeping customer costs as low as
possible. Proposed features include…
· A return to a 5 year price control
(from the current 8 year period for RIIO – ED1) which provides the opportunity
to reset prices in a rapidly changing industry.
· Additional customer engagement and
Ofgem challenge, including independent public reporting.
· Outputs will need to clearly
distinguish inter alia between
customer-facing outputs and license requirements.
· Inclusion of further requirements
around asset risk management, cyber security and workforce resilience.
· The use of indexation to at least
partially address cost movements.
· Expectations the competition around
specific parts of the network will increase.
· Replacement of the fast-track process
that enabled early settlement of high quality business plans (rate cases) with
an incentive framework similar to the former IQI approach.
Next steps
Ofgem
will receive submissions until 15th October 2019.
NZ – setting the WACC’s for Transpower,
electricity distribution
Introduction
The Commerce Commission recently released its cost of capital
decisions for the 2020 disclosure year for…
· Electricity
transmission (IPP from 1st April 2020).
· Electricity
distribution (DPP3 from 1st April 2020).
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 Electricity
Distribution Services Input Methodologies Determination 2012 (consolidated to 31st
January 2019).
Key features of WACC’s
Key features of the electricity transmission and distribution WACC’s
include…
|
|
Mid-point |
67th percentile |
|
Vanilla WACC |
4.13% |
4.57% |
|
Post-tax WACC |
3.78% |
4.23% |
Cool video clip
Electric cables the way they used to be
(1944)
This
15 minute video clip provides an interesting, if somewhat
patronising, view of the way electric cables were made in the UK in the 1940’s.
It’s probably worth remembering that cables of this vintage are still in use
around the world.
Energy mix, emissions and grid security
Aus – supply tightens in the NEM
Introduction
Previous issues of Pipes & Wires have examined the
tightening supply in the US state of Texas. This article moves half a world
away to examine the Australian Energy Market Operator’s (AEMO) recently
released Electricity Statement of Opportunities (ESOO) for the National Electricity Market (NEM) to set some context
for future analysis.
ESOO’s headline conclusions
The ESOO’s headline conclusions are…
· There is a continued elevated risk of expected unserved energy over the
next 10 years.
· There is a greater risk of load shedding than was forecast in last
year’s ESOO.
· That targeted action must be taken now to provide additional
dispatchable capacity.
Wider conclusions of the ESOO
The ESOO’s wider conclusions include…
· All regions within the NEM except Victoria are expected to meet the
current reliability standard (unserved energy less than 0.002%) for the 2019/20
summer.
· Victoria faces a significant risk if the planned outages at Loy Yang A
#2 and Mortlake run over their planned completion dates. The expected
additional generation to cover this risk is between 125 MW and 560 MW.
· Only slight improvements are forecast for summers beyond 2020 until new
transmission, dispatchable generation, and demand response becomes available.
· The gradual closure of Liddell is forecast to increase the risk of
supply interruption in NSW, but within the current reliability standard.
However, unplanned outages could leave between 135,000 and 770,000 households
without power for up to 3 hours.
· Snowy 2.0 (expected commissioning in 2025) will improve the outlook
provided sufficient new transmission lines to Sydney and Melbourne are built.
Pipes & Wires will comment further as the summer
months heat up.
Aus – restoring grid inertia
Introduction
Increasing the mix of non-rotating renewable
generation reduces grid stability. This article examines the Australian Energy
Regulators’ recent approval for ElectraNet to recover the efficient cost of installing 2 synchronous condensers near Port Augusta by mid-2020 and a
further 2 near Robertson by late 2020.
Background
Key background issues include…
· Over the last decade the South Australian grid has seen traditional
high-inertia generation (such as gas turbines and steam turbines) replaced by
renewables with virtually no inertia, resulting in reduced grid stability.
· In September 2017 the Australian Energy Markets Commission (AEMC)
amended the National Electricity Rules to inter
alia manage the rate of grid frequency change by requiring minimum levels of
grid inertia.
· In October 2017 the AEMO declared a Network Support and Control
Ancillary Service (NSCAS) gap for system strength in South Australia, and
specified that system strength services were required from 30th
March 2018.
· The interim solution was for the AEMO to direct synchronous generators
to operate until a permanent solution was installed. This involves instructing
gas turbine and steam turbine generation to fire up and synchronise to provide
rotating inertia, which obviously comes at a cost of fuel, water, life
consumption and additional maintenance (old readers might remember that Unit 2 at Marsden was reconfigured with 1 of the feed-pump motors and a hydraulic drive
so that it could be synchronised without firing the boiler – from memory, I
wrote a story about this for my engineer’s registration in 1993).
Installing the
synchronous condensers
Analysis by ElectraNet
indicates that the least-cost, long-term solution is for ElectraNet to install
and own dedicated synchronous condensers rather than continuing to instruct
generators to provide inertia. Key features of this analysis are…
· In addition to the high
costs of instructing generators to provide inertia, there are risks as to
whether this would continue into the long-term (presumably the risk that
generators will be further marginalised and decide to shut down altogether).
· Indicative tenders for
contracted support suggested even higher costs.
· An estimated cost of between
$140m and $180m for ElectraNet to install 2 lots of 2 synchronous condensers by
the end of 2020.
· That installation of
synchronous condensers by ElectraNet instead of requiring generators to provide
inertia would save the average South Australian customer between $3 and $5 per
year.
The regulatory approval
The approval process by the Australian Energy
Regulator (AER) comprised 2 distinct components…
· Acknowledgement by the AER that ElectraNet’s economic analysis was
equivalent to a Regulatory Investment Test – Transmission (RIT-T).
· A further requirement for ElectraNet to seek approval for the synchronous condensers as a contingent project.
Key features of the AER’s Final Decision include a
reduction of the $34.8m adjustment of allowable revenue sought by ElectraNet for
the 5 year control period to $31.7m, which the AER believes is the efficient
cost.
US – approving must-run generation agreements
Introduction
Increasing renewable penetration is making grid
stability and security more of a challenge. This article examines the
California Independent System Operator’s (CaISO) recent request to the Federal
Energy Regulatory Commission for broader authority to use Reliability Must-Run
(RMR) agreements.
What exactly is an RMR agreement ?
Broadly, an RMR agreement is an agreement between a
grid operator (in this case CaISO) and a generating unit that is expected to be
withdrawn from the market to keep that generation available to meet grid
security standards. Key issues with RMR agreements include…
· Is an RMR agreement the cheapest way to meet the grid reliability standards ?
· Will the use of an RMR agreement distort the efficient costs of a market ?
Readers might recall that Pipes & Wires #177 noted several RMR generation plants that are critical to Pacific Gas
& Electric’s grid security.
Basis of the CaISO’s request
The basis of the CaISO’s request is that increasing
penetration of renewables requires new ways for ensuring grid reliability,
which in turn requires wider consideration of operating features such as
dispatch ability, ramping rate and load following ability.
Key features of the CaISO’s request
Key features of the CaISO’s request include…
· The need to provide stakeholders with greater clarity by further
differentiating RMR from the capacity procurement mechanism (CPM), which acts
as next-level backstop.
· The need for a more orderly withdrawal of generation (in anticipation of
further withdrawals).
· Re-aligning the 20 year old RMR Tariffs with the CaISO’s current needs.
Pipes & Wires will examine this story further once
the FERC releases its decision.
Aus – examining the impact of the planned Liddell closure
Introduction
The intended closure of Liddell is never far from any
discussion of grid security in the bottom-right corner of Australia. This
article notes the establishment of a joint task force by the Federal and the
NSW Government’s to set some context for the task force’s recommendations later
in 2019.
A bit about Liddell
Liddell is located near
Muswellbrook in the Hunter Valley, and originally comprised 4 x 500 MW black
coal fired steam turbines commissioned between 1971 and 1973. It is currently
owned by AGL and now has a recognised capacity of about 1,680 MW.
The planned closure
AGL originally planned to close Liddell in 2022, but
has since agreed to delay closure by 1 year.
The task force’ concerns
A key concern of the task force is wholesale price
spiking and security decline in the NEM similar to what happened when Hazelwood
was closed. Energy Minister Angus Taylor expects all options for Liddell to be
considered, including taxpayer-funded life extension or replacement. Pipes
& Wires will comment further when the task force releases its conclusions.
Industry structural changes
US – Chicago considers municipalising
Commonwealth Edison
Introduction
Long
time readers might remember Pipes & Wires examination of the City Of Boulder, Colorado’s, proposal to municipalise the portion
of Xcel Energy’s business within the city limits. This article examines a
recent Order by the City Of Chicago to conduct a
feasibility study into municipalising Exelon’s subsidiary Commonwealth Edison
(ComEd) when ComEd’s franchise with the City expires on 31st
December 2020.
Background to the ComEd franchise
ComEd
has supplied electricity to Chicago under a franchise agreement since 1947, and
which was last renewed in 1992 for a 29 year period. The agreement includes a
monthly franchise fee paid to the City, which along with electricity taxes
generates about $183m per year for the City. A key element of the City’s
municipalisation proposal is the ability to renegotiate that fee (which
previous mayors have done to pay into municipal workers’ pension plans). ComEd
currently supplies about 4,000,000 customers and has annual revenues of about
$15b, so it is a huge entity.
Regulatory framework
The Illinois Municipal Code provides inter alia for a municipality to acquire any public utility for the
purpose of providing utility services to its residents, to fix the rates and
charges, and to make all necessary rules and regulations.
What Chicago hopes to achieve by
municipalising
The
headline statement from City Councilor Ramirez-Rosa is that Chicago has an
opportunity to define its energy future … through municipalisation, Chicago
could accelerate decarbonisation and implement a progressive rate structure
that ensures better rates for working-class Chicagoans. Seems very similar to
Boulder’s claims, so lets’ unpack those claims and see how workable they might
actually be…
· Decarbonisation … ComEd’s environmental disclosure for 2018 reveals that only 3% of its
electricity was from wind, whilst 36% was from nuclear and 59% from coal and
gas. Given that wind generation in the Midwest has historically
dropped during the really hot months when air conditioning demand
peaks, it’s not clear how this might be achieved.
· Progressive rates … presumably the low
price (possibly less than the cost of supply) paid for the first few hundred
kWh per month will be recovered with high prices for increasing numbers of kWh
ie. a rebalancing of tariffs. Which is fine except
that higher prices provide stronger incentives to avoid, and customers
consuming lots of kWh are most able to install solar plus batteries. So it is
possible that revenue might decline.
In broad terms, it is hard
to see how a simple change of ownership will allow a significant repositioning
of ComEd on the energy trilemma.
Next steps
The
completed feasibility study is to be submitted to the City Council by 1st
December 2019, after which Pipes & Wires will comment further.
Regulating emerging technologies
US –
further challenges to network access charges
Introduction
Challenges to re-balancing of network
charges in favor of fixed charges on the basis that it discriminates against
roof-top solar is nothing new. This article examines a recent law suit to see
if we can get any closer to an analytically sound answer, and to set some
context for examining any further court decisions.
Recapping
the arguments for and against increasing fixed charges
The single biggest issue around nett metering is that
most electric companies variable tariff assumes 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).
The sequence
of events
The approximate sequence of events is…
· The
Tennessee Valley Authority (TVA) amended its tariff structure in 2018,
specifically by reducing its energy charges and increasing its fixed charges.
The amended tariffs were financially neutral.
· Five
environmental groups from Alabama sought declaratory
and injunctive relief in the US
District Court for the Northern District of Alabama.
· The TVA
sought to have this application for relief dismissed.
· The
District Court denied
the TVA’s application (noting that this
denial of the TVA’s application for dismissal was not a ruling on the
plaintiffs’ case itself).
The
basis of the law suit
The basis of the law suit was 3-fold…
· The
tariff reduction for large commercial customers would remove the financial
advantages of DER (distributed energy resources) investment.
· The
tariff changes would have imposed a Grid Access Charge on the local electric
companies own residential and small commercial customers, impeding DER.
· Discounting
of price for greater consumption, discriminating against customers who use less
(and by implication, those with DER).
The plaintiffs argue that, collectively,
these 3 tariff amendments obstruct DER investment across all customer classes
in order to maximise sales from the TVA’s own generation, which the plaintiffs
further argue is from coal.
Next
steps
These most recent Court events don’t reveal
anything beyond the “fixed charges discriminate against DER’s” versus “fixed
charges are necessary to fund the network” clash. However, Pipes & Wires
will comment further as the substance of the plaintiffs’ case is examined.
Recent client projects
Recent
client projects include…
· Assisting an energy trust with its
ownership review.
· 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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