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.
· 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
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.
Ofgem will receive submissions until 15th October 2019.
NZ – setting the WACC’s for Transpower, electricity distribution
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.
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…
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
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
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.
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
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
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
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.
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.
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
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.
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.
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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