Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 194 – December 2019

From the editor’s desk…

Welcome to Pipes & Wires #194, which starts with a look at the third electricity distribution price control in New Zealand. We then look at how the undersea cables between France and Britain might be regulated in a post-Brexit world, and examine the slowing progress with the Hinckley Point C nuclear power station. Following that we look at some industry structural changes in the USA and South Africa, and conclude with two tariff issues in the USA.

I’d like to wish you and yours a merry Christmas, and Pipes & Wires will return (probably) in February 2020.

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.

Subscribe to Pipes & Wires

If you’re receiving this second-hand, pick this link to subscribe.

Network regulatory decisions

NZ – finalising the third electricity distribution price-quality path

Introduction

The Commerce Commission recently released its final default price-quality path that will apply to all non-exempt EDB’s (that are not subject to a CPP) for the 5 year control period beginning on 1^st April 2020 (DPP3). This article compares the key features of the final decision with the draft decision.

Regulatory framework

Subpart 6 of Part 4 of the Commerce Act 1986 sets out the regulatory framework for default price-quality regulation in general, whilst Subpart 9 sets out specific provisions for EDB’s.

Key features of the final decision

Key features of the final decision include…

Feature	DPP2	DPP3 draft	DPP3 final
Average reduction in Year 1 revenue.		A decrease of 4.6%, down to $1.04b across the industry (ranging from a 9% increase for Aurora to a 34% reduction for Centralines).	A decrease of 6.7%, down to $1.01b across the industry (ranging from a 3% increase for Aurora to a 29% reduction for Centralines).
Total revenue	$5,146m	$5,436m, an increase of 6% from DPP2.	$5,259m, an increase of 2.4% from DPP2.
WACC	7.19%.	5.13%.	4.57%.
Control instrument	Price cap.	Revenue cap.	Revenue cap
Treatment of interruptions	Treat planned and unplanned similarly.	Treat planned and unplanned separately.	Treat planned and unplanned separately.
Recoverable innovation allowance	Nil.	Proposed innovation allowance, capped at 0.1% of revenue.	$150,000 per EDB, capped at 0.1% of revenue for total DPP3 period.
Re-openers	Nil.	Proposed re-opener for large unforeseen connections (in preference to including allowances for uncertain projects at the start).	Specific CapEx projects, including major industrial electrification or substantial growth.

As always, interested parties should read the full decision and accompanying papers. This concludes Pipes & Wires coverage of DPP3.

Europe – regulating in a post-Brexit world

Introduction

Interconnection of electricity transmission grids is something most people probably take for granted, and perhaps more so the body of international law that underpins those regulatory frameworks. This brief article notes various regulatory concerns over what Brexit could mean for 3 proposed electric transmission interconnectors between England and France.

The 3 proposed interconnectors

The 3 proposed interconnectors are…

· GridLink Interconnector, a 1,400MW HVDC link between Dunkerque and Kingsnorth.

· FAB, a 1,400MW link that includes several 400kV overhead lines and a 320kV HVDC cable between Siouville-Hague and Budleigh Salterton (with 1km of land cables across the island of Alderney).

· Aquind, a 2,000MW, 320kV HVDC link between Lovedean and Barnabos.

All together that’s about 4,800MW of new interconnection capacity.

The regulatory concerns

Much thought has already gone into the issues around importing and exporting electricity should Britain leave the EU, with those imports and exports currently being tariff-free as part of the EU’s Internal Energy Market (IEM). The key concern appears to be allocation of day-ahead transmission capacity, for which the French energy regulator CRE has already approved for the existing 2,000MW IFA. The CRE’s specific concern is that such arrangements could lapse if Brexit proceeds to completion.

NZ – setting the WACC for gas pipelines

Introduction

The Commerce Commission recently released its cost of capital decisions for the year ending on 30^th September 2020 for First Gas and Powerco’s gas distribution businesses. This article examines the key features of that determination.

Regulatory frameworks

The regulatory framework is set out in clauses 2.4.1 to 2.4.9 of the Gas Distribution Services Input Methodologies Determination 2012 (consolidated to 3^rd April 2018).

Key features of WACC’s

Key features of the First Gas and Powerco WACC’s include…

	25^th percentile	Mid-point	67^th percentile	75^th percentile
Vanilla WACC	3.70%	4.40%	4.87%	5.11%
Post-tax WACC	3.36%	4.07%	4.53%	4.78%

Cool video clips

Building the Hoover dam

This time-lapse video of the Hoover Dam being built is worth a look at, which appears to cover the period from June 1933 to May 1935. To give some perspective of the size of the dam, each 18 ton bucket of concrete raised the height only 1 inch.

If you do happen to be in Las Vegas, it’s well worth driving the 40 miles out to the dam. I’d suggest obtaining tickets from the official Bureau Of Reclamation website rather than from a commercial tour operator.

Energy mix, emissions and grid security

UK – progress slows on Hinkley Point C

Introduction

Pipes & Wires has recently examined the following nuclear power stations that have adopted the European Pressured Water Reactor (EPR) technology…

· Hinkley Point C – England.

· Flammanville #3 – France.

· Olkiluoto #3 – Finland.

· Taishan – China.

This article re-examines Hinkley Point C on news that construction has slowed.

Construction slows, costs rise

The builders of Hinkley Point C (Electricité de France and China General Nuclear Power Corporation) have recently reported that “challenging ground conditions” will increase the final construction costs by £2.9b (which the contract requires the builders to absorb, not the owners), to somewhere between £21.5b and £22.5b. It appears that the number of faulted zones through the mudstone and limestone is more than the original soil testing revealed.

Commissioning of Unit #1 is still planned for the end of 2025, however the probability of a 15 month delay has risen.

Implications for investment

Pipes & Wires #171 noted that EDF’s expected ROI was 9%, and that every £1b cost over-run would dilute that ROI by about 0.36%. This cursory analysis suggests that these challenging ground conditions will dilute the ROI to a bit less than 8%.

Summarising progress

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	Hinkley Point C
Start date	2007	2005	2008	Early 2018
Original completion date	2012	2010	2012	Late 2025
Estimated completion date	2019 (7 year delay)	2020 (10 year delay)	2018 (6½ year delay)	Early 2027 ?
Original cost estimate	€3.3b	€3.7b	€8b	£18b
Likely cost to completion	€10.9b	€8b	Thought to be €15b	£21.5b – £22.5b

Pipes & Wires will continue examining Hinkley Point C, Flammanville #3 and Olkiluoto #3 as they progress. Readers with an interest in UK infrastructure can subscribe to New Civil Engineer’s weekly news feed.

Industry structural changes

US – merger in the Sunshine State

Introduction

Against a backdrop of several cities wanting to form muni’s (Boulder, Chicago, San Francisco and San Jose to name just a few), the city of Jacksonville, Florida is selling its municipal electric and water business. This article examines that sale process.

A bit about the Jacksonville Electric Authority

JEA is based in Jacksonville, Florida. It supplies 478,000 electric customers, 357,000 water customers and 279,000 sewage customers, and has annual revenues of about $1.85b. JEA is the largest muni in Florida and the 8^th largest muni in the US.

The sale process

Back in August 2019 JEA sought competitive bids from investors aligned to its strategic goals, which are now being evaluated using a structured weighting method. The bidding documents valued JEA at about $5.4b, but indicated that bids would need to be in the range of $6.8b to $7.3b to even get consideration (external valuations seem to range from $7.5b to as much as $11b).

Selling a muni does seem to be against the current trend, and it appears that most Jacksonville residents and some city councilors oppose the sale process.

Known bidders

Known bidders include NextEra Energy (Florida Power & Light’s parent, which recently paid $5.75b for Gulf Power), Duke Energy, Macquarie and IFM Investors ... all very capable investors with deep pockets who understand how to capture amalgamation synergies.

Next steps

Pipes & Wires will comment further when a winner emerges.

South Africa – proposed break up of Eskom

Introduction

Many readers will be aware that South Africa’s state-owned, vertically integrated electric company Eskom has had a difficult few years. This article notes the various reports over the last year or so that Eskom will be broken up so we’ve got some context for examining any changes that may emerge.

The proposed break up

The proposed break up includes…

· The formation of 3 separate operating companies (generation, transmission and distribution) all owned by a holding company over a 3 to 5 year period.

· Spinning off the transmission business into a separate state-owned company, possibly as quickly as 18 months.

· Introducing competition from independent power producers (IPP’s).

· Shareholder support (ie. government bailouts) totaling R128b over the next 3 years.

· A commitment that “key assets of the government” will not be privatised.

The various views on the break up

Various views on the break up include…

· Not surprisingly the various electricity and coal mining unions are dead against any break up, despite assurances that it won’t continue through to privatisation.

· The Department of Public Enterprises seems hesitant with the details, including how debt will be apportioned between the 3 businesses.

· Treasury is of the view that some generation could be sold.

· Credit rating agency Moody’s seemed unimpressed, further cutting Eskom’s credit rating to below investment grade.

The editor comments

A few comments from me…

· Breaking up Eskom won’t fix the financial losses, but it could help focus attention on where (and perhaps why) the losses are occurring.

· Allocation of debt will be critical … it could be cynically argued that the debt could be allocated to the monopoly transmission and distribution businesses to avoid encumbering the competitive generation business (presumably sequestering Eskom’s debt into a separate state-owned company is not an option, as it was in Ontario, Canada).

· Eskom’s current generation fleet would seem to include some evenly-matched stations that could be broken into evenly-matched competing businesses … allocate some base-load coal along with some gas turbines, pumped storage and wind to form say 3 or 4 competing generation businesses, possibly allocate Koeburg to a slightly bigger thermal business to carry the eventual decommissioning costs (as was originally planned for National Power in the UK), or keep Koeburg as a separate state-owned company (similar to how the nuclear stations in the UK ended up).

Next steps

Pipes & Wires will comment further as the proposed break up progresses.

Regulating emerging technologies

US – rebalancing fixed charges to reduce solar subsidies

Introduction

Exactly how much non-solar customers are subsidising customers with solar is an ongoing debate. This article briefly examines an apparently big increase that San Diego Gas & Electric (SDG&E) recently proposed.

The proposed tariff increase

The proposed tariff increase will see an increase in SDG&E’s minimum monthly charge from about $10 to about $38. The underlying principle is a migration from variable (kWh) charges to a fixed daily charge, principally to ensure fairer recovery of the high fixed costs (readers should be very familiar with this argument).

The various views

Various views include…

· The California Solar & Storage Association claims that the existing tiered tariffs will save solar customers more than the move to TOU metering associated with the tariff rebalancing (required by the California Public Utilities Commission).

· PV Magazine is understandably dismissive of SDG&E’s approach, and claims that the argument of cost shifting lacks factual evidence.

· The California Public Utilities Commission acknowledges its requirement for electric companies to adopt TOU metering, and notes that timing will be critical to integrating renewables (suggesting a big role for batteries).

· Lawrence Berkeley National Laboratories claim that cost shifting could be negligible under some specific combinations of value of solar and cost to supply (it would seem that it is the value of solar that is heavily disputed).

Next steps

The CPUC is expected to decide on the proposal around March or April 2020.

Energy markets & tariffs

US – decoupling revenue from consumption

Introduction

Most of us will be well aware that electric companies have high fixed costs, and that Ramsey Pricing says inter alia the most efficient way to recover high fixed costs is through fixed tariffs. This article examines the movement towards increasing fixed costs and a corresponding reduction in variable costs using a recent article about First Energy as a starting point.

The trend towards fixed tariffs

Traditional electric tariffs have included both a fixed component and a variable (kWh) component, and as long as customers’ kWh consumption patterns didn’t vary too far from the annual kWh consumption underpinning the tariff calculation there was no decline in revenue.

The first squeeze on kWh consumption came from the move toward improved energy efficiency, which has been really overtaken by the rooftop solar movement. Not surprisingly, electric companies are wanting to bias their tariffs towards those fixed components, which gives an electric company less incentive to discourage energy efficiency and rooftop solar. Promoters of both energy efficiency and rooftop solar, in contrast, argue that reducing the kWh component of the tariff undermines their value proposition (which it certainly does).

Allowing revenue decoupling

Increased kWh consumption tends to be 1 of the few ways that an electric company can increase its revenue during a rate period, which obviously discourages promotion of energy efficiency. Regulators have devised a range of regulatory mechanisms to compensate electric companies for reductions in kWh consumption that include…

· Decoupling revenue from consumption, so that recovery of the high fixed costs is more certain.

· Lost-revenue adjustment mechanisms, which allow recovery of lost revenue based on the estimated decline in kWh throughput.

· Performance incentives that allow additional revenue for achieving specific targets such as energy efficiency programs.

Variations of these mechanisms have been adopted in 44 states and Washington DC.

FirstEnergy’s proposal

First Energy is in the process of filing rate cases with the Ohio Public Utilities Commission (PUC) for its 3 electric distribution businesses (Ohio Edison, The Illuminating Company and Toledo Edison). The key feature of the rate cases is the decoupling of revenue from kWh consumption, providing First Energy with greater revenue certainty.

Pipes & Wires will pick up this story again around March 2020 when the Ohio PUC releases it decisions.

Recent client projects

Recent client projects include…

· Identifying best practices in grid-scale and community-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

Opt out from Pipes & Wires

Pick this link to opt out from Pipes & Wires. Please ensure that you send from the email address we send Pipes & Wires to.

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.