Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 196 – March 2020

 

From the editor’s desk…

 

Welcome to Pipes & Wires #196. This issue starts with a look at some global trends in energy storage, and then how cost over-runs on capital works might be limited. We then look at some changing regulatory models, the rejection of an acquisition bid, and two regulatory determinations. This issue closes with a look at the draft report on closure options for Liddell Power Station in Australia.

 

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.

 

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Cool video clips

 

Building power stations (1940’s)

 

This 6 minute video examines the building and subsequent operation of thermal power stations in the 1940’s. The grid operating principles are still similar, just more automated.

 

Western Power Electricity Historical Society

 

This cool website has heaps of stuff about electricity and electric transport in the south-west of England for the last 120 years … articles, videos, audio casts etc. Thanks to Phil West (ex-WPD) for pointing this out.

 

Technologies and techniques

 

Global – gravity might challenge Lithium-ion for storage

 

Introduction

 

The idea of gravity storage isn’t new … we’ve been using pumped storage to store energy, but that seems to have been overtaken by improving battery technologies. This article takes a more conceptual look at the whole storage thing, and then examines mountain gravity storage.

 

The storage cycle

 

Until the last decade or so it wasn’t practical to store electricity in big lumps, so it had to be stored as primary energy. Pumped storage is an obvious example, which apparently began in Italy and Switzerland as far back as the 1890’s and improved as reversible turbines and variable speed drives were developed. Then came improved battery technologies (particularly Lithium-ion), which arguably combined with increased sensitivity around developing hydro sites led to the decline of pumped storage. Until now.

 

A look at mountain gravity storage

 

A key limitation of batteries is their ability to store energy for months on end to arbitrage seasons eg. store solar electricity for winter heating. It appears that mountain gravity energy storage (essentially boxes of sand hauled up a railroad track using off-peak electricity, and then generating peak-period electricity by running down hill) could have the following features…

 

·     Ability to store energy up to several years.

 

·     Possibly able to operate on a larger scale than batteries.

 

·     Potentially able to compete with Lithium-ion batteries on price, possibly as low as $50 to $100 per MWh of stored energy.

 

·     Assist the integration of variable renewables (using surplus wind and solar to haul up to the top).

 

·     Be more cost effective than pumped hydro storage in the 1 to 20 MW capacity range.

 

So … interesting … the cycle from storing primary energy to storing electricity back to storing primary energy.

 

Global – declining battery prices and emerging chemistries

 

Introduction

 

Most of us are well aware that batteries are rapidly shifting on 2 dimensions … prices ($/kWh) are declining, and chemistries are also rapidly changing with a key dimension being increasing energy density (kWh/kg). This article notes recent price declines and presents some views on where prices and chemistries might go.

 

The decline in battery prices

 

Battery prices have declined broadly as follows…

 

Year

Price ($/kWh)

2010

1,100

2013

800

2016

300

2019

156

 

Prices are expected to further decline as follows…

 

Year

Price ($/kWh)

2023

100

2025

87

2030

60

 

These prices show a diminishing decline in Lithium-Ion battery prices, however it wouldn’t be unreasonable to assume that Lithium-Ion will be overtaken by other chemistries ie. disrupting the disruptor.

 

Emerging battery chemistries

 

Within the broad Lithium-ion class, the following specific battery chemistries are being developed around the specific themes of anodes, cathodes, electrolytes and separators…

 

Specific chemistry

Feature

·     Lithium Nickel Manganese Cobalt Oxide.

·     Lithium Nickel Cobalt Aluminium.

 

Increasing energy density at an affordable cost.

·     Lithium Iron Phosphate.

·     Lithium Titanate.

 

Improving cycle life, but at the expense of higher cost and lower energy density (noting that rapid charging of conventional Lithium-ion batteries especially at high temperatures reduces the cycle life).

 

·     Silicon anodes.

Appears to be the key to improving energy density.

 

 

The following emerging battery chemistries are also noted…

 

·     Lithium Sulfur.

 

·     Various forms of Zinc-based batteries

 

·     Redox flow batteries.

 

·     Sodium ion

 

This article will be concluded in Pipes & Wires #197.

 

Regulatory thinking and policy

 

UK – limiting cost over-runs on capital works

 

Introduction

 

Most of us understand that many regulatory frameworks encourage the efficient delivery of capital works by only allowing the efficient cost to be recovered through the regulated tariff. This article examines a recent inclusion of a new clause in Heathrow Airport’s license that will directly penalise Heathrow if the expansion costs exceed an approved amount (as distinct from simply limiting their ability to recover the cost over-run).

 

The Heathrow expansion and wider stakeholder concerns

 

Heathrow’s expansion plans focus on the addition of a third runway by about 2028, as the current capacity constraint is encouraging airlines to fly to other European airports. Estimated costs are in the order of £14b (after about £2.5b of scope reductions).

 

Airport users concerns include a lack of incentives for limiting costs, the ability to recover inefficient costs, and an apparent unwillingness to consider alternative options.

 

The CAA’s new clause

 

Heathrow currently operates under a license from the CAA that includes a price control component. That license was amended in December 2019 to include a clause that will penalize Heathrow if it fails to build the expansion within the approved £14b.

 

The editor comments

 

From where I view the world there is no shortage of apparent cost over-runs on infrastructure projects ranging from trams to water to tunnels (although I suspect these aren’t so much over-runs, but simply costs exceeding the published low end of the cost estimates, but still within the estimated range). Anyway, pause for thought that perhaps many regulatory bodies are searching for stronger tools to specifically encourage efficient delivery of capital works.

 

US – changing the regulatory models

 

Introduction

 

Most of us are familiar with the 2 dominant regulatory models … cost-plus, and incentive (which seems to be morphing back into cost-plus). This article quickly examines some regulatory history, and then focuses on some regulatory models emerging in the US aimed at integrating distributed energy resources (DER’s).

 

A quick bit of regulatory history

 

A quick history of infrastructure regulation includes…

 

·     All passenger train operators in England were required to run at least 1 train per day offering a third-class fare of no more than 1d per mile around 1844.

 

·     Gas distribution tariffs became regulated in England around the 1860’s.

 

·     The familiar cost-plus regulation of electric distribution tariffs emerged in the US around the early 1900’s.

 

·     Incentive regulation emerged in England in the late 1980’s (but as noted above, has kind of morphed back into cost-plus).

 

·     Incentive regulation re-emerged as RIIO in England around 2012.

 

The emerging regulatory models

 

New regulatory models that seek what regulators consider to be a better balance between electric company revenues on the one hand, and customer demand for distributed energy resources (DER’s), lower prices and better value on the other hand are emerging in the US states of Illinois, Oregon and Hawaii. Key features of those emerging models include…

 

Illinois

·  Allowing electric companies to recover the cost of the step-up to cloud computing that is considered necessary to fully integrate DER’s into the grid.

 

·  Allowing electric companies to have a sand box to allow reasonable recovery of the costs of mucking about with new technologies (noting that other jurisdictions are also considering this).

 

Oregon

·  Stepping back from pricing individual technologies to pricing overall value.

 

·  Allowing price signals from specific services so that both customers and providers can understand value.

 

·  Better defining how specific technologies that provide capacity should be paid for.

 

Hawaii

·  Recognising the need to migrate away from very high prices and dependence on oil-fired generation, but also recognising the need for fair cost recovery.

 

·  Introducing energy efficiency standards (nothing remarkable about that).

 

·  Requiring electric companies to competitively request new capacity and storage investments.

 

·  Breaking the traditional link between capital investments and cost recovery.

 

 

Pipes & wires will continue to examine new regulatory models as they emerge.

 

Industry structural changes

 

US – Jacksonville rejects bids for electric and water business

 

Introduction

 

Pipes & Wires #194 examined the City of Jacksonville’s proposed controversial sale of its municipal electric and water business. This article notes the City’s rejection of bids, effectively terminating the sale process.

 

Recapping the proposed sale process

 

Back in August 2019 JEA sought competitive bids from investors aligned to its strategic goals. 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. In the end 16 bids were received (including bids from NextEra Energy, Duke Energy, Macquarie and IFM Investors) from which 9 bids were chosen to progress to the first round of negotiations.

 

Rejecting the proposed sale

 

In the days before Christmas 2019 the City asked the JEA board to end the negotiation process, which it did by unanimously voting to reject all 9 bids even though all 9 of those bids appear to have met the City’s minimum criteria. This rejection appears to have included the resignations of several JEA executives.

 

The termination of the sale process has included vague statements like “stakeholder trust has been lost”, so it appears that city politics rather than commercial reasons have ended the sale process.

 

Network regulatory decisions

 

Aus – the Queensland electricity distribution revenue reset

 

Introduction

 

Energex and Ergon Energy recently submitted their Revised Regulatory Proposals (rate cases) to the Australian Energy Regulator (AER) for the 5 year regulatory control period commencing on 1st July 2020. This article examines those Revised Proposals.

 

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 Energex process to date include…

 

Parameter

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$2,327m

$1,793m

$2,010m

 

OpEx

$1,806m

$1,942m

$1,938m

 

Opening RAB

$12,917m

$12,887m

$12,861m

 

Nominal vanilla WACC

5.46%

4.87%

4.67%

 

Depreciation

$804m

$756m

$822m

 

Smoothed revenue

$6,541m

$5,840m

$5,900m

 

 

Key features of the Ergon process to date include…

 

Parameter

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$2,905m

$2,151m

$3,007m

 

OpEx

$1,835m

$1,973m

$1,968m

 

Opening RAB

$11,634m

$11,553m

$11,513m

 

Nominal WACC

5.46%

4.87%

4.67%

 

Depreciation

$1,052m

$997m

$1,052m

 

Smoothed revenue

$6,516m

$5,788m

$5,997m

 

 

Pipes & Wires will comment further once the AER releases its Final Decisions.

 

UK – setting the framework for RIIO – ED2

 

Introduction

 

Pipes & Wires #173 and #179 set out the framework that the UK energy regulator Ofgem would adopt for the second RIIO price controls, whilst Pipes & Wires #191 set some context for the RIIO – GD2 gas price controls. This article examines Ofgem’s recently released framework decision for the RIIO – ED2 electricity distribution price controls that will start on 1st April 2023.

 

Key features of the decision

 

Key features of the decision include inter alia…

 

·     The stated objective of the RIIO – ED2 framework will be to ensure that DNO’s deliver value for money services that both existing and future customers need.

 

·     Adoption of a default period of 5 years (a return from the 8 years adopted for RIIO – ED1).

 

·     Requiring enhanced engagement to give customers a stronger voice.

 

·     Adoption of the output and incentive features that other sectors have adopted.

 

·     Adoption of the Network Asset Risk Metric as part of justifying and assessing proposed investment preferences.

 

·     Requiring DNO’s to properly manage cyber risk, physical risk and workforce resilience.

 

·     Supporting the transition to a low carbon economy.

 

·     Exploring the use of indexing to reduce the risk of forecasting errors.

 

·     Replacing the fast-tracking process for excellent business plans with another mechanism.

 

·     Calculating the baseline ROE similar to other sectors.

 

Next steps

 

Ofgem will continue more increasingly company specific work throughout 2020, culminating in the submission of initial business plans in Q2 of 2021 and final business plans in Q4 of 2021. Initial (draft) decisions will emerge around Q2 of 2022, with final decisions expected in Q4 of 2022.

 

Energy mix and grid security

 

Aus – the draft Liddell Task Force report

 

Introduction

 

Pipes & Wires #192 examined the Federal and NSW Government’s joint task force into the planned closure of Liddell. This article examines the task forces draft report.

 

Recapping the Liddell situation

 

Liddell is currently owned by AGL and now has a recognised capacity of about 1,680 MW from 4 black coal fired steam turbines. AGL originally planned to close Liddell in 2022, but has since agreed to delay closure by 1 year to 2023. Concern over declining security of supply in the NEM prompted the formation of a joint task force to examine the possibility of keeping Liddell open beyond 2023.

 

The draft conclusion

 

The task forces’ draft report (which appears to have been leaked) is that Liddell’s life could be extended by a further 3 years to 2026, at an apparent cost of $300m. Key concerns raised by the draft report include…

 

·     Liddell is likely to prove unreliable despite the proposed spend, and hence should not be relied upon.

 

·     Life extension of Liddell could curb gas expansion projects such as Tallawarra B.

 

·     It is expected that this life extension would need to be taxpayer funded, as AGL has previously indicated that it is unwilling to fund life extension.

 

·     That pumped storage, gas and batteries could feasibly replace Liddell.

 

The editor comments

 

Any decision to extend the life of coal-fired power station will be unpopular and politically difficult, and the draft Liddell conclusions are no exception. There does however remain the concern of blackouts expressed by the Energy Security Board which critics seem to either ignore or dismiss.

 

Pipes & Wires will comment further when the final report emerges.

 

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

 

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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.