Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #195. A bit of thought over the summer break has led me to
try to more formally cluster articles under the following 7 broad topics…
|
· Energy mix and grid security. |
· Network regulatory decisions. |
· Industry structural changes. |
|
· Regulatory thinking & policy. |
· Technologies and techniques. |
· Regulating emerging technologies. |
|
· Energy markets and tariffs. |
|
|
Over
time, we’ll try to get an even mix of 8 or 9 articles per edition across these
7 topics. So … until next month, happy reading…
What we’re seeing…
|
Energy mix & grid security · Capacity and configuration of legacy
networks are limiting renewable penetration and decarbonisation. · 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 as the influence of gas on the marginal electricity
price declines. · 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.
Energy mix and grid security
Aus – the draft Integrated System Plan
Introduction
Most electricity market operators are required to
annually compile a forecast of available generation for a specified period.
This article examines the Australian Energy Markey Operator’s recently released
Draft 2020 ISP.
Regulatory framework
The regulatory framework for the ISP includes…
· The AEMO’s general functions under s49 of the National Electricity Law.
· Rule 5.20 of the National Electricity Rules.
· Draft ISP Rules published by the Energy Security Board.
Key features of the Draft ISP
Key features of the Draft ISP include…
· The Draft ISP sets out a whole-of-system plan based on 5 scenarios and 6
sensitivities which aims to balance cost, security, resilience and emissions
reduction.
· A planning horizon of 20 years has been adopted.
· The central scenario is based around decarbonisation and transition
being determined by market forces and current federal and state policies.
· Variations to the central scenario include a low scenario of low
economic growth and emissions reduction, a high scenario of more rapid
distribution energy resources (DER) penetration, and a fast scenario of greater
grid-scale technology roll-out, and a step change scenario of aggressive customer
and technology led transitions.
· Sensitivities include earlier retirement of existing generation, delays
to Snowy 2.0, an earlier
commitment to the Battery Of the Nation project in Tasmania, a possible curtailing of the Queensland Renewable Energy Target (QRET), possible closure of large industrial loads in Victoria or
Tasmania, and early development of the Renewable Energy Zone in NSW.
· Key conclusions of the modelling include an expected doubling or even
tripling of DER by 2040, a need for over 30,000 MW of new grid-scale renewables
(in part to replace 15,000 MW of expected coal-fired closures by 2040 which
appears to treat the closure of Liddell as a near-term certainty), between 5,000 MW and 21,000 MW of new dispatchable generation, and
possibly 20,000 MW of new transmission grid capacity.
Next steps
The AEMO will receive written submissions until 21st
February 2020.
US – restoring reserve capacity margin in the Lone Star State
Introduction
Pipes & Wires closely
followed the decline in reserve capacity margin in the US state of Texas
heading into the northern summer of 2019. This article examines the restoration
of expected reserve capacity for the 2020 summer.
Recapping the decline in reserve capacity margin
Reserve capacity margin
declined sharply during 2019 to 8.6%, which was fortunately much greater than
the forecast decline to 4.4%. This required the Electric Reliability Council of
Texas (ERCOT) to invoke demand response to keep the lights on (Pipes & Wires #170, #171, #177, #183, #187 and #189).
Restoring reserve capacity
Restoration of the reserve
capacity margin is based on a mix of solar, smaller gas-fired stations and new
rules on how wind can be accounted for*, with about 4,600 MW of new capacity
being included in ERCOT’s Capacity, Demand & Reserves Report. ERCOT’s
latest forecast
for the next 5 years is…
|
Summer |
2020 |
2021 |
2022 |
2023 |
2024 |
|
Available capacity |
82,403 |
89,967 |
91,361 |
91,473 |
91,218 |
|
Firm peak load |
74,480 |
76,105 |
77,914 |
79,399 |
80,788 |
|
Reserve capacity margin |
10.6% |
18.2% |
17.3% |
15.2% |
12.9% |
* This includes approving new
rules for how wind peak contributions are accounted for, and establishing a new
zone in the panhandle to reflect the observed higher availability of wind.
The role of renewables in Texas
Solar and wind are expected to
provide 19% of installed capacity for the 2022 summer. Whilst many parties all
along the renewable spectrum have expressed at least some concern (along the
obvious theme that renewables are intermittent), at least one renewable lobby
has also pointed out that the predicted limitations of wind and solar
penetration haven’t occurred. Pipes & Wires will pick up this theme as the
northern summer approaches and ERCOT finalises its plans.
Regulatory thinking and policy
NZ –
regulating the transition away from copper phone lines
Introduction
For only about the third time in almost two
decades Pipes & Wires takes a look at telco regulation to see what (if
anything) we could learn about regulating electricity lines. This article
examines the Commerce Commission’s recently announced areas in which legacy
copper provide Chorus can
start shutting down.
Regulatory
framework
The regulatory framework for Chorus’
withdrawal from copper fixed line access services is set out in Part 2AA
of the Telecommunications Act 2001, which inter alia requires the compilation of a
Copper
Withdrawal Code by either the
Commission or by the Telecommunications Forum.
Commission’s
recent announcement
In December 2019 the Commission published
an interactive
map showing its
initial assessment of where Chorus will eventually be able to stop providing
copper. The conditions under which Chorus can stop providing copper include…
· Fiber
has to be available.
· Copper
service must remain until at least mid-2020.
· Certain
customer protections must be in place (these protections will be included in
the Copper Withdrawal Code’s first draft early in 2020).
Possible
learnings for electricity regulation
What might we learn from the copper
withdrawal ?? The technologies are obviously quite different, but conceptually
electricity lines are facing increasing competition from rooftop solar and batteries.
So a useful starting point might be to
consider at what point should a legacy electric company be (i) no longer
subject to price regulation, or (ii) be able to remove its copper services. The
emerging picture is that electric distribution lines probably have a good
future as interconnection rather than as connection (particular as home
charging of EV’s emerges), so the issue probably steers more towards relief
from price regulation rather than regulated removal of legacy assets.
Industry structural changes
US – the Boulder municipalisation saga
continues
Introduction
It’s
been a while since Pipes & Wires has examined the City of Boulder,
Colorado, attempts to purchase Xcel Energy’s distribution assets and run those
assets as a Muni (Pipes & Wires #126, #128, #137, #141, #154 and #159). This article examines recent
progress and examines whether there are any parallels from the similar articles
about attempts to municipalise Commonwealth
Edison (ComEd) in Chicago in Pipes & Wires #192 and PG&E’s network in San Francisco in Pipes & Wires #193.
Where the story got to
Way
back in 2014 the City of Boulder attempted to condemn* Xcel Energy’s
assets, which was dismissed because the City had failed to include
the Colorado Public Utilities Commission (PUC) in its deliberations. A critical
issue was the condemnation of assets outside the City limits which were deemed
critical to supplying the City.
*
Condemnation is the taking of private property by a government agency for
public use, with payment of compensation. It is also known as the power of
eminent domain or compulsory purchase.
Recent events
In
September 2019 a District Court granted Xcel Energy a further dismissal of condemnation, again because the City had failed to
include the PUC in its deliberations. The various views include…
· The Court concluding that it lacks
subject matter jurisdiction.
· The PUC concluding that the
condemnation filing was premature because the assets subject to the proposed
condemnation have not been finalised.
· The City believing that finalization of
the assets by the PUC, and the condemnation process could run partly in
parallel.
The
PUC, however, authorised the transfer of the Xcel assets both in inside and
outside of substations that are necessary to form a muni in two separate
rulings in September 2019 and October 2019 respectively. In late November 2019
the City of Boulder offered $94m for the Xcel assets (which follows two
previously unsuccessful offers of $68.5m and $82m respectively) in an effort to
avoid a condemnation hearing.
Are there any parallels with the
proposed municipalisation of ComEd and PG&E ?
Pipes & Wires #192 noted that the City of Chicago is
considering municipalising Exelon’s subsidiary Commonwealth Edison (ComEd) when
ComEd’s franchise with the City expires on 31st December 2020,
whilst Pipes & Wires #193 noted the City of San Francisco’s
efforts to effectively municipalise PG&E’s network. So while there are
similar aims of reducing tariffs and accelerating decarbonisation, the 3
efforts at municipalisation are quite different.
US – Avangrid and PPL propose giant
merger
Introduction
Pipes & Wires regularly examines mergers of large American electric
companies, however the recently announced merger of Avangrid and PPL is probably one of the largest
yet. This article examines that announcement.
A bit about
the merger partners
Key details of the merger partners are as follows…
·
Avangrid supplies about 3,100,000 electric customers throughout the New
England states and up-state New York. Spanish electric company Iberdrola is an 81% shareholder in
Avangrid (and also owns ScottishPower and MANWEB in the UK). An revenues are
about $6.4b.
·
PPL supplies 1,400,000 electric customers throughout 29 counties of
Pennsylvania and Kentucky, along with a further 7,900,000 electric customers in
the UK as Western Power Distribution. Annual revenues
are about $7.8b.
The
proposed merger
Details of exactly how the merger might be structured are scarce, however
the merged entity could be valued at about $67b.
Likely
regulatory approvals
In addition to the usual state (and possibly FERC, DOJ, SEC, NRC and FCC)
approvals, this merger may also require approval from Ofgem and possibly the
Monopolies and Mergers Commission in the UK as it would bring 6 DNO licenses
into common ownership.
Network regulatory decisions
UK – final water decisions
Introduction
Pipes & Wires has examined
the PR19 water price company (Pipes
& Wires #167, #186 and #191), and noted that Severn Trent, South West and United
had their business plans fast tracked and received a collective Ł18m financial
reward. This article examines Ofwat’s final
decisions for all water
companies.
Re-capping
Ofwat’s initial assessments
Ofwat’s initial assessment of
business plans is as follows (no business plans were considered exceptional)…
|
Fast track |
Slow track |
Significant scrutiny |
|
|
· Severn Trent · South West · United |
· Anglian · Bristol · Dŵr Cymru · Northumbrian · Portsmouth |
· South East · South Staffs · SES · Wessex · Yorkshire |
· Affinity · Hafren Dyfrdwy · Southern · Thames |
Comparison of draft and final decisions
A comparison of the slow track and
significant scrutiny draft and final decisions across Ofwat’s priority areas is
as follows…
|
Priority area |
Key features of draft decision |
Key features of final decision |
|
Affordable bills |
· A
general expectation that prices will decline further than the national
average of 12% before inflation. · Insufficient
customer engagement and agreement specifically around willingness to pay. · An expectation
of a step improvement in efficiency, including adoption of best practices. |
· Average
prices will decline by 12% (about Ł50) before inflation over the 2020 – 2025
price control period. · Over
1,400,000 customers will be placed on concessionary tariffs. · A
requirement that water prices are stable over the 2020 – 2025 price control
period to assist household budgeting. |
|
Great customer service |
· Expected
maturing of the customer engagement practices from the current (operative)
price control. · Introducing
new customer experience measures that will benchmark customer experiences
against both other water companies and against other industries. · Improve
assistance to vulnerable customers, including requiring at least 7% of each
company’s customers to be on the vulnerable customers register by 2025. · Expecting
all companies to set more stretching targets in critical areas such as water
interruptions and sewer flooding. |
· A
requirement for customer engagement practices to mature further. · Changes
to the Ofwat measures customer experiences. · Setting
stretching company-specific performance commitments across 13 aspects of
customer service. · Including
financial incentives to out-perform Ofwat’s standards. |
|
Resilience in the round |
· Allowing
Ł2.3b specifically to protect against extreme weather an against asset
failures. · Requiring
increased commitments to resilient outcomes, including ensuring that
customers do not pay extra for resilience that is considered
business-as-usual. · Requiring
a more coordinated view of individual resilience projects. · Improving
financial resilience by reducing debt levels. · Increased
scrutiny against asset health indices. |
· Allowing
Ł13b for new and improved services, including Ł469m for funding long-term
resilience to droughts. · Expecting
some heavily geared companies to reduce their debt, including a mechanism
that will pass benefits to customers until gearing is reduced. · Expecting
fewer burst mains. · |
|
Innovation |
· Setting
stretch targets that require companies to adopt innovative practices. · Including
innovation incentives. · Possible
inclusion of a competitive funding mechanism. · Expecting
companies to improve scale and scope by entering markets associated markets
for environmental services. · Allowing
third parties to competitively finance, build and own water assets (very
similar to the electricity sector), including instructing Dŵr Cymru and
Anglian to allow third parties to build assets. |
· Encouraging
innovation, including Ł200m of funding for an innovation competition to
encourage collaboration amongst water companies. · Acknowledging
individual companies efforts to innovate. · An
expectation of increased competition for the financing, design, construction
and operation of large projects. |
|
Environment |
· Allowing
Ł4.6b to efficiently deliver projects aligned to the UK and Welsh
Governments’ environmental priorities of reducing sewage spills, restoring
habitats and protecting specific animal species. · Emphasising
reduced water leakage. · Emphasising
reduced carbon intensity. · Requiring
some (specified) companies to adopt more challenging water consumption
targets. · Reducing
allowable water takes during droughts. |
· Including
Ł4.8b to deliver ambitious environmental programs. · Specific
performance targets around pollution, leakage and consumption. · Expectations
that CO2 emissions will be reduced. · Funding
of up to Ł469m for investigating alternative water sources. · |
This concludes Pipes &
Wires coverage of the PR19 water price control.
Aus – the South Australia electricity distribution revenue reset
Introduction
SA Power Networks recently
submitted their Revised
Regulatory Proposal (rate
case) to the Australian Energy Regulator (AER) for the 5 year regulatory control
period commencing on 1st July 2020. This article follows on from Pipes
& Wires #180 and #186.
Regulatory framework
The regulatory
framework is based on the National Electricity (South Australia) Act 1996, which provides for the making of the National Electricity Rules (version 111 at the time of writing).
Electricity distribution determinations are principally made pursuant to Chapters 6 of the Rules.
Key features of the process to date
Key features of the process to
date include…
|
Parameter |
Draft Plan |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$1,850m |
$1,741m |
$1,247m |
$1,712m |
|
|
OpEx |
$1,468m |
$1,530m |
$1,585m |
$1,442m |
|
|
Opening RAB |
Not stated |
$4,418m |
$4,393m |
$4,357m |
|
|
Nominal WACC |
5.5% |
5.43% |
4.95% |
4.79% |
|
|
Depreciation |
$1,024m |
$1,144m |
$1,188m |
$1,219m |
|
|
Smoothed revenue |
Not stated |
$3,915m |
$3,905m |
$3,916m |
|
Pipes & Wires will comment
further once the AER releases its Final Decision.
Cool video clips
The
power by which we live (1950)
This 23 minute video
examines the steam turbines that generated most of America’s electricity in the
post-WW2 era.
Regulating emerging technologies
US –
paying for rooftop solar
Introduction
Who should pay for rooftop solar and on
what basis has been an on-going issue for what seems to be many years. This
article examines a proposal from the New York Department of Public Service (DPS)
based on solar capacity.
The
wider context
The wider context for the proposal was an
agreement back in 2016 between several electric companies and solar providers
to migrate away from nett metering towards a set of sliding-scale fees. The New York
Public Service Commission (PSC) also
intended to start reducing the sole feed-in tariff from 31st
December 2019.
The
proposal
The DPS proposes that the PSC extend the
curtailing of mass market nett metering from 1st January 2020 to 1st
January 2021, allowing rooftop solar customers a further 12 months to enjoy the
full retail rate for solar injection. From 1st January 2021,
electric companies would be able to charge rooftop solar customers between
$0.69 and $1.09 per kW of solar capacity.
The DPS rejected a proposal from a group of
electric companies to replace nett metering with a customer demand tariff.
The
editor comments
This proposal suggests that the battle
lines can be drawn closer (perhaps much closer) than what might be implied by
other states, suggests that we might be getting closer to an agreed solar
tariff that reasonably encourages solar whilst also allowing the electric
company to fairly recover its costs.
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.
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.