Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 195 – February 2020

 

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 £18m 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 £50) 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 £2.3b 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 £13b for new and improved services, including £469m 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 £200m 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 £4.6b 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 £4.8b to deliver ambitious environmental programs.

·      Specific performance targets around pollution, leakage and consumption.

·      Expectations that CO2 emissions will be reduced.

·      Funding of up to £469m 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.

 

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.