Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 193 – November 2019

 

From the editor’s desk…

 

Welcome to Pipes & Wires #193, which has been delayed 1 week to include analysis of the Transpower revenue decision as the lead article. We then look at a gas pipeline regulatory decision from Australia, and then it’s back to New Zealand to examine the final report from the Electricity Price Review.

 

We then examine a range of energy mix and grid security issues, including Australia’s mounting concern about closing coal-fired stations (which will hopefully be followed an article in December about the Liddell Task Force’s conclusions).

 

This issue concludes with a look at efforts to buy PG&E’s distribution networks around the San Francisco bay area, and a regulatory decision approving lower feed-in tariffs. 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

 

NZ – finalising the next Transpower price-quality path

 

Introduction

 

The Commerce Commission recently published its Final Decision for the RCP3 control period that will apply to Transpower for the 5 year period commencing on 1st April 2020. This article examines the key features of that Decision.

 

Regulatory framework

 

The regulatory framework for Transpower’s IPP is set out in Subpart 7 of Part 4 of the Commerce Act 1986.

 

Key features of the RCP3 decisions

 

Key features of the RCP3 decisions to date include…

 

Parameter

RCP2

RCP3 draft proposal

RCP3 final proposal

RCP3 draft decision

RCP3 final decision

Revenue

$4,731m

$4,666m

$4,419m

$4,267m

$4,045m

OpEx

$1,300m

$1,333m

$1,343m

$1,304m

$1,428m

 

This concludes Pipes & Wires coverage of the Transpower price-quality decision.

 

Aus – gas under pressure

 

Introduction

 

The National Gas Rules require gas pipeline operators to submit a Reference Service Proposal (RSP) to the Australian Energy Regulator (AER) at the start of the revenue reset process. This article examines the Amadeus Gas Pipeline’s RSP submitted as part of the APT Pipelines (NT) revenue reset for the 5 year period starting on 1st July 2021 to set some context for future analysis.

 

A bit about the Amadeus Gas Pipeline

 

The Amadeus Gas Pipeline runs 1,630km from the Amadeus Basin in central Australia to Darwin, with several laterals and 4 compressor station. The diameter varies from 355mm down to 275mm.

 

Regulatory framework

 

The regulatory framework includes…

 

·     The National Gas (South Australia) Act 2008.

 

·     The National Gas (Northern Territory) Act 2008.

 

·     The National Gas Rules v49, of which Part 8 deals with Access Arrangements (revenue reset).

 

Key features of the Reference Service Proposal

 

Essentially the RSP sets out what services the pipeline operator will provide. The Amadeus pipeline’s reference services include…

 

·     Interconnection service – providing a new receipt point.

 

·     Firm transportation services – commitment to capacity.

 

·     Interruptible transportation service – provides additional capacity when firm capacity is not available.

 

·     In-pipe trade service – provides users with flexibility for their transportation services.

 

·     Operational capacity transfer service – provides users with flexibility for their transport services.

 

·     Parking and loan services – provide users with flexibility for their transportation services.

 

Pipes & Wires will comment further as the revenue reset process continues.

 

Energy markets & tariffs

 

NZ – concluding the Electricity Price Review

 

Introduction

 

The Electricity Pricing Review team submitted its final report to the Minister in late May 2019. This article follows on from previous introductory articles by examining the Review’s Final Report.

 

Background to the Review

 

The primary objective is to ensure that the electricity market delivers efficient, fair and equitable prices as technology evolves and we transition to a lower emissions future, taking into consideration environmental sustainability and security of supply. So … a simple matter of figuring out where we are on the energy trilemma, where we want (or can afford to be) to be, and how do we get there.

 

The Review’s conclusions

 

The following table compares the Review’s First Report with its Final Report…

 

Issue

First Report

Final Report

Reliability

The electricity system is broadly reliable. Investment is sufficient to meet demand, at least for now.

 

The Security & Reliability Council should investigate the potential impact of technology advances and other changes on long-term security and resilience.

 

Emissions

About 80% of demand is already being met by renewable generation. This will help move towards zero emissions.

 

Confirmed that NZ is well placed to reduce emissions, but great energy efficiency will be essential to migrate to a low-carbon economy. This will require clearer, coordinate government planning. More innovation from the energy sector is required.

 

Affordability

Overall, the picture is not so good. Since 2000, residential prices have risen faster than most other OECD nations, and about 103,000 households spend more than 10% of their household income on energy.

 

Consumers who don’t shop around are paying more than they need to.

Fair pricing

Again, not so good. Residential prices have risen 79% since 1990, whilst industrial prices have risen 18% and commercial prices have fallen 24%.

 

No further comments.

Retail market

This seems to be diverging into 2 quite separate segments of those who enjoy low prices from shopping around and capturing the prompt payment discounts, and those who don’t.

 

The Big Five have over 90% market share, so that independent retailers face barriers to growing their market share. New energy products has increased competition and led to lower prices for those who shop around, but reiterated that two tiers are definitely developing.

 

Subsidising emerging technologies

Current pricing structures will result in subsidies from those who don’t have rooftop solar or EV’s to those who do (long-time Pipes & Wires readers will recognise that such subsidies are not new, and have long been a feature of air conditioners). Moreover, the cost of any additional capacity for peak-time charging of EV’s is likely to fall disproportionately on low-income customers.

 

Reiterates previous comments that distribution pricing is likely to be a barrier to uptake of emerging technologies.

Generation market power

Some concerns have been expressed about generators ability to exercise market power when supply is tight.

 

Wholesale prices appear reasonable compared to the cost of building new generation, but the contract market isn’t working well (limited ability of independent generators and retailers to manage price risk).

 

Decarbonisation

This will obviously require a lot more annual generation (almost double by my reckoning, requiring the annual capacity factor to increase from about 50% to about 85%), but that current market and industry arrangements should be able to meet demand growth provided there are strong incentives to invest.

 

Confirmed that NZ is well placed to reduce emissions, but great energy efficiency will be essential to migrate to a low-carbon economy. This will require clearer, coordinate government planning. More innovation from the energy sector is required.

Transmission

Decarbonisation will require significant grid investment. These was no evidence that Transpower is making excessive profits.

 

Emphasised that delays in agreeing on a fair, efficient and lasting transmission pricing methodology risks undermining confidence and investment, and hence recommended a government policy statement. Reiterated that profits are not excessive.

 

Distribution

Several factors are thought to be holding things back, including outdated pricing structures, aging assets, the quality of governance, short planning horizons, access to meter data, and the small size of distributors. There was no evidence that distributors are making excessive profits.

 

Confirmed the factors identified in the first report, and recommended issuing a government policy statement on distribution pricing. Ensure that smart meter data is available to distributors on reasonable terms. Give the ComCom greater powers to regulate distributors.  Confirmed that distributors are not making excessive profits.

 

Retailers

Competition has generally increased, but not all customers have been able to take advantage of that.

 

Phase out the low fixed charge regulations, as the regulations are pushing some families into greater hardship.

 

 

The Government proposed to adopt most of the Final Report’s 32 recommendations. This concludes Pipes & Wires coverage of the Electricity Price Review.

 

Cool video clips

 

Steam turbines made simple (1946)

 

This 8 minute video clip explains how a steam turbine works, especially how the fixed blades re-direct the steam on to each subsequent set of rotating blades. I could’ve really used this video back in 1991 when I started at Huntly.

 

Energy mix, emissions and grid security

 

Aus – increasing concern over coal-fired closures

 

Introduction

 

There seems to be increasing concern around the closure of coal-fired generation, particularly in the number, frequency and increasingly official nature of those concerns. This article continues Pipes & Wires’ on-going theme of the proposed closing of Australia’s coal-fired generation using a recent speech by the AEMO as a starting point.

 

The key concern of the recent AEMO speech

 

The key concern expressed by the AEMO is not so much extending their lives beyond their original design lives, but rather ensuring that they continue to operate for the remainder of their design lives in the face of declining wholesale prices.

 

Key technical features of this specific issue include…

 

·     Increasing penetration of wind generation is forcing down wholesale prices for individual half-hours, often to near zero or even negative.

 

·     Steam-turbine generators have a lot of delicate components that operate at very high temperatures (about 600oC).

 

·     Repeated cycling of those high temperatures can cause cracking, which increases maintenance costs, consumes design life, and increases the risk of catastrophic failure.

 

·     Steam turbine operators face the difficult choice of either incurring those costs to remain in the market (and get paid), or exit the market. Either way grid security is reduced.

 

Wider context

 

The wider context to this issue includes…

 

·     The closure of Hazelwood back in 2017 and the consequent wholesale price rises pushed this issue firmly on to the center stage (Pipes & Wires #175), noting that Hazelwood was actually the tenth coal-fired station to exit the NEM since 2012, and the largest to exit since 1998.

 

·     Then the planned closure of Liddell in 2022 emerged, which is of course now the subject of a joint Federal and NSW Government task force (Pipes & Wires #192) that is expected to report back later in 2019.

 

·     Most recently, the future of Yallourn W seems doubtful either from low wholesale prices in the NEM or from the Victorian Government’s recently announced CO2 reduction targets.

 

Possible remedies

 

Possible remedies to the specific issue of early closures due to low wholesale prices include introducing a specific market mechanism to pay coal stations to remain available, through to a wider market overhaul. The AEMO’s preference appears to be to introduce an additional market mechanism similar to the coal-fired reserve that was introduced in Germany in 2015.

 

Pipes & wires will comment further once the Liddell task force reports back.

 

Global – WEC trilemma rankings

 

Introduction

 

The World Energy Council recently released its 2019 Energy Trilemma Index. This article examines the underlying principle of the Trilemma and notes the top performers.

 

The trilemma rating

 

The trilemma is basically a triangle model that depicts how well a country is balancing the trade-offs between the three important dimensions of…

 

·     Security of energy supply.

 

·     Accessibility and affordability of energy.

 

·     Environmental sustainability, including both supply and demand side efficiencies and uptake of renewables.

 

Key features of the Index report

 

The WEC’s website has a cool interactive graphic which is worth having a muck about with to see which countries are ranked best in each of the indices. Picking the country names jumps to a screen detailing that country’s energy supply arrangements and also (perhaps equally important) that country’s political, societal and economic performance. Not surprisingly the top performers have a long history of stable and consistent energy policy that has encouraged investment in security of supply, and perhaps also has historically priced energy at a sustainable level that doesn’t require steep price increases to recover the full cost of energy and energy supply.

 

The top performers

 

The top performers for 2019 are…

 

Index rank

Country

Score

Rank - security

Rank - equity

Rank - sustainability

1.

Switzerland

85.8

11th

11th

1st

2.

Sweden

85.2

1st

40th

3rd

3.

Denmark

84.7

2nd

28th

2nd

4.

United Kingdom

81.5

28th

19th

6th

5.

Finland

81.1

3rd

33rd

28th

 

What are the top performers of each dimension doing ??

 

Let’s consider what the Trilemma report has to say about the top performer in each dimension…

 

Dimension

Country

Score

What that country is doing well

Security

Sweden

79%

·     Reduced dependency on imported energy.

·     Diverse energy supplies.

·     Stable transmission grid.

Equity

Luxembourg

100%

·     Strong grid interconnections to manage energy prices.

Sustainability

Switzerland

89%

·     Optimising emissions across all energy sub-sectors.

 

A bit closer to home

 

The rankings a bit closer to home are…

 

Country

Index rank

Score

Rank - security

Rank - equity

Rank - sustainability

New Zealand

10th

79.4

20th

26th

29th

Australia

28th

74.7

43rd

24th

57th

 

China – continuing the EPR story

 

Introduction

 

This article continues Pipes & Wires coverage of the European Pressurised Water Reactors (EPR), this time at Taishan #1 and #2 in China. Taishan #1 was connected to the grid in August 2018, whilst Taishan #2 achieved criticality in May 2019.

 

A bit about Taishan

 

Taishan is in the Guangdong Province, and comprises two 1,750 MW reactors supplied by Areva. These are part of 11 reactors totalling 10,800 MW under construction in China, and will add to China’s fleet of 46 operational reactors totalling 42,800 MW.

 

Construction delays

 

Construction began in August 2008, and it was hoped that each unit would take about 3 years and 10 months to build. These expected build times were much less than Flammanville # and Olkiluoto #3, but were not achieved. At least part of the delays were due to cracking and deficient welding, which seems similar to Flammanville #3 and Olkiluoto #3.

 

Comparisons of costs and timing

 

A quick comparison of Taishan #1 and #2 with Olkiluoto #3 and Flammanville #3 reveals the following…

 

 

Flammanville #3

Olkiluoto #3

Taishan #1 and #2

Start date

2007

2005

2008

Original completion date

2012

2010

2012

Revised completion date

2019 (7 year delay)

2020 (10 year delay)

2018 (6½ year delay)

Original cost estimate

€3.3b

€3.7b

€8b

Likely cost to completion

€10.9b

€8b

Thought to be €15b

 

Pipes & Wires will continue examining Hinkley Point C, Flammanville #3 and Olkiluoto #3 as they progress.

 

Industry structural changes

 

US – San Francisco and San Jose offer to buy PG&E’s network

 

Introduction

 

The Cities of San Francisco and San Jose recently offered to buy the Pacific Gas & Electric (PG&E) assets that supply parts of the respective cities. This article examines the details of those proposals, and then considers some wider observations in conjunction with other recent Pipes & Wires articles.

 

Electricity supply within San Francisco

 

The San Francisco Public Utilities Commission* activities include supplying electric power from the Hetch Hetchy Power Scheme to the City & County of San Francisco and three of the wider Bay Area counties. Hetch Hetchy and other renewable energy programs supply about 80% of the City’s electricity. The precise commercial arrangement dates back to 1918 and is legally complex involving firstly sale and purchase agreements (up to about 1945) and then interconnection agreements (up to about 2015), but suffice to say energy is distributed to some parts of the City by PG&E.

 

* The SFPUC is a service delivery body, and is not to be confused with the state regulator, the California Public Utilities Commission.

 

San Francisco’s proposal

 

The headline story is that San Francisco has offered PG&E $2.5b for the PG&E distribution assets within the City. A recent report from the SFPUC identified 3 options…

 

·     Limited independence, in which the City will simply continue to press for what it claims is fairer treatment from PG&E. The SFPUC believes this option will represent a substantial barrier to its renewable energy goals.

 

·     Targeted independence, in which the City will reinvest in the network it owns. The SFPUC claims that this option would still leave many Hetch Hetchy customers dependent on PG&E, as well as representing a barrier to its renewable energy goals

 

·     Full independence, in which the City will purchase PG&E’s network assets (thereby removing any interposing). The SFPUC believes that this will reduce the barriers to its renewable energy programs.

 

The report recommends the full independence option by purchasing PG&E’s assets, which it acknowledges to be a lengthy process. PG&E and City officials met to discuss the City’s proposal in late September 2019, which PG&E subsequently declined in October 2019.

 

San Jose’s proposal

 

A similar proposal to PG&E from San Jose hoped to persuade other cities and counties to all agree to buy the respective assets of PG&E, effectively turning PG&E into a cooperative (or perhaps a muni). This offer was declined by PG&E in mid-October 2019.

 

Wider observations of proposed municipalisations

 

Pipes & Wires has examined proposed municipalisations in the cities of Boulder, Chicago and San Francisco, and has made the following observations…

 

·     The historical context leading to each of the 3 proposed municipalisations have a mix of common themes and quite different themes.

 

·     Each of the 3 municipalities believes that it can offer its citizens a “fairer” deal, presumably lower prices. San Francisco in particular has made some bold claims about giving priority to safety, efficiency and more affordable prices.

 

·     Each of the 3 municipalities also believes that owning the network will assist renewable energy goals. Given that embedded renewables are inextricably linked to the distribution network and hence require the cooperation of the distribution business, they may well be right. An obvious consequence is that fixed charges could be kept low as a matter of public policy, but as we have observed that will probably lead to subsidies and declining revenues.

 

·     It is not clear that any of the 3 cities have considered possible loss of scale from separating from huge electric companies (Xcel, Exelon and PG&E respectively). In fact, PG&E’s reply suggests that San Francisco has significantly underestimated the costs of separation.

 

Pipes & Wires will comment as further news emerges.

 

Regulating emerging technologies

 

US – paying less for injected rooftop solar electricity

 

Introduction

 

Arguments over how much rooftop solar owners get paid for injected energy will be a familiar topic for most readers. This article examines a recent regulatory decision in the US state of Louisiana approving lower prices for injected solar electricity to better understand the analytical basis.

 

Recapping the arguments

 

This specific issue is 1 strand of the wider argument around prices charged to electric customers who also have their own rooftop solar panels. The perspectives on the argument include…

 

·     Electric companies argue that an injected kWh is not the same as an imported kWh, and doesn’t have the same value. There are a range of technical and commercial arguments around avoided costs that include the additional costs of bi-directional energy and subsidies from non-solar customers.

 

·     Solar owners, installers and lobbyists claim that offering lower prices for injected kWh undermines the value of rooftop solar (which it certainly does), and continue to promote the view that there is no subsidy.

 

The Louisiana PSC’s decision

 

The wider context to this decision is the LPSC’s nett metering rules that inter alia required injected solar electricity to be priced at the electric company’s full retail price for all injected kWh up to 0.5% of each company’s monthly retail load, and at the avoided cost thereafter. Key features of the PSC’s decision include…

 

·     The 0.5% cap will be removed.

 

·     Solar installed prior to 31st December 2019 will receive the full retail price until 31st December 2034 (ie. a 15 year grandfathering), and the avoided cost thereafter.

 

·     Solar installed after 31st December 2019 will receive the avoided cost.

 

·     The avoided cost is the 12 month average locational marginal price for each electric company, and shall be publically disclosed.

 

Wider public comments from the PSC include…

 

·     The view that Louisiana’s 2,000,000 electric customers should not be subsidising the 18,500 rooftop solar customers

 

·     The view that rooftop solar shouldn’t subsidies after years of nett metering.

 

·     The view that subsidies, if any, should be directed towards grid-scale solar which (the LPSC claims) deliver about twice the value as rooftop.

 

Key features of the Rule

 

Key features of the rule include…

 

·     Payment for injected energy shall be at prices that are cost-based.

 

·     Those costs shall not be subsidised by nor socialised across other customer classes.

 

Those 2 features alone suggest a sound analytical basis.

 

Recent client projects

 

Recent client projects include…

 

·     Identifying best practices for community-scale and grid-scale batteries for an Australian distributor.

 

·     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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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 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.