Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 199 – August 2020

 

From the editor’s desk…

 

Welcome to Pipes & Wires #199, which starts with a look at transmission grid pricing in New Zealand and some market rule changes in Australia to allow trading of demand response.

 

We then examine whether nett metering might come to an end in the United States, followed by some electricity and gas distribution revenue decisions from Australia. We then jump back to the United States to examine competition concerns around an acquisition, and a possible exit from a bulk supply arrangement. This issue concludes with a look at the gas exploration moratoria in Australia under the broad theme of energy mix and grid security.

 

So … until next month, happy reading…

 

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Cool multimedia stuff

 

Power from the River (1947) PW 199

 

This 22 minute video examines the Waikato River catchment and the original North Island system control back when it seems that Wellington rather than Auckland was the center of New Zealand. It also seems that radio pick up (switching on the kettle) is nothing new.

 

CEGB Midland Region website

 

Any readers who worked for the CEGB in the 1960’s might be interested in the CEGB Midland Region website.

 

Asset management and asset strategy podcasts

 

My colleagues at the UMS Group have put together a series of podcasts on asset management and asset strategy, including an interview with me on how to make asset management happen in small companies.

 

Regulatory thinking and policy

 

NZ – reviewing the transmission pricing methodology

 

Introduction

 

Pipes & Wires #190 examined the Electricity Authority’s (EA) draft transmission pricing methodology (TPM). This article recaps the key features of the draft TPM, and then examines the recently released revised cost-benefit analysis.  

 

Recapping the draft TPM

 

Key features of the draft TPM include…

 

·     An overall “benefits based” approach in which customers who benefit from specific investments would pay for them.

 

·     Two new charges to replace the existing RCPD (regional coincident peak demand) and HVDC (high voltage direct current) charges…

 

·     A benefits-based charge that will recover the cost of (i) the 7 major existing investments and (ii) any new investments.

 

·     A residual charge to recover any remaining costs in a way that does not distort incentives to invest in or use the grid.

 

·     Making the new charges hard to avoid.

 

·     Aligning the approach to the recently released distribution pricing principles.

 

Not surprisingly, those who face higher transmission charges are concerned by the proposed changes.

 

The revised cost-benefit analysis

 

In April 2020 the EA released a revised cost-benefit analysis. Key features of that revised analysis based on stakeholder feedback include…

 

·     Amended assumptions around grid-scale batteries, particularly about how installed battery costs are unlikely to decline as rapidly as previously thought, and better recognition of constraints to demand-shifting.

 

·     Less new generation (about 850 MW in the 2020 analysis, compared to between 1,000 MW to 1,500 MW in the 2019 analysis).

 

·     Changes to the way wholesale market features such as the value of water and part dispatch of generation are modelled.

 

·     A downward revision of the expected TPM benefits, from between $200m to $6.4b in the 2019 analysis to between $400m to $2.4b in the 2020 analysis.

 

The final decision

 

In June 2020 the EA released its final decision, which confirmed the benefits charge and the residual charge proposed in the draft.

 

Next steps

 

Pipes & Wires will provide further analysis and comment as the TPM progresses, including Trustpower’s appeal to High Court.

 

Aus – rule change to allow demand response trading

 

Introduction

 

Behind the most visible energy (MWh) trading feature of wholesale markets are other markets that allow trading of and paying for other electricity products such as peak demand (kW), frequency keeping and demand response. This article examines a recent rule change in the Australian National Electricity Market (NEM) that will allow large electricity customers to not simply curtail demand but to trade that curtailing.

 

Explaining demand response

 

Unplanned interruptions to electricity supply (such as a generator or line failure) have traditionally relied mainly on spinning reserve (hydro stations that were synchronised but running near zero load) to meet that sudden excess of demand over supply. The other response was of course interrupting controllable load, however the slow response of legacy ripple relay injection plant limited the usefulness of this for sudden supply interruptions (which is different to AUFLS for slow declines in grid frequency). Technology improvements over many decades now allow instant curtailing of designated demand through smart meters and similar devices.

 

The rule change

 

In June 2020 the AEMC released the National Electricity Amendment (Wholesale demand response mechanism) Rule 2020 No. 9 and the associated Final Determination. The key feature is that electricity customers can now sell demand response to the Wholesale Market either directly or through an aggregator by registering as a demand response service provider (DRSP).

 

Expected benefits of demand response trading

 

The expected benefits include…

 

·     Demand response can now compete with other supply – demand balancing mechanisms, such as peaking generation.

 

·     It shouldn’t require too many changes to retailer billing systems.

 

·     The price at which customers are willing to curtail demand becomes visible to all market participants, enabling customers to respond directly.

 

The final Rule will become operative on 24th October 2021 in time for the 2021/22 summer.

 

Regulating emerging technologies

 

US – is the end of nett energy metering nigh ?

 

Introduction

 

Improving technology and emerging thinking around how valuable embedded generation actually is are reducing the need for exported solar electricity to be bought by the electric company at the same price it would sell electricity at. This article examines a rate case proposed by Rocky Mountain Power in the US state of Utah that could prompt the end of nett metering in both Utah and in many other states.

 

What exactly is nett metering ?

 

Nett metering is where an accumulating meter simple records the energy imported (bought from the electric company) less the energy exported (sold back to the electric company), with a key implication being that the export price is the same as the import price. The original purpose of nett metering was to encourage the roll out of rooftop solar (which it certainly did), whilst a key concern was that it valued exported energy at the same price as imported energy.

 

The history of nett metering in Utah

 

Electric companies in Utah have been required to offer nett metering tariffs since 2008 under Title 54, Chapter 15 of the Utah Code. Around 2017 the Utah Public Service Commission began revising its nett metering rules which included a temporary tariff of 9.2 c/kWh and an agreement that Rocky Mountain Power would schedule a rate case for the 2020 year.

 

Rocky Mountain Power’s proposed rate case and the solar industry’s response

 

Rocky Mountain Power’s rate case proposes to introduce a tariff of 1.5 c/kWh in 2021 which would apply to all rooftop solar installed after the end of 2020. The signaled end of nett metering which had already caused an approximate halving of rooftop solar sales from around 10,000 in 2017 to about 5,000 by 2019 prompted some in the solar industry to conclude that Rocky Mountain Power would retain the 9.2 c/kWh tariff beyond 2020 (presumably from the view point that solar was now less of a threat so there was no need to reduce tariffs any further).

 

Setting a value for exported solar

 

This will always be an arguable point (much like fixed monthly tariffs), with the key issue being that the initial nett metering tariffs over-priced the value of exported solar and extracted a subsidy from non-solar customers. Rocky Mountain Power argued that the existing nett metering tariff of 9.5 c/kWh forced it to pay $2.3m for energy that would’ve cost less than $1m from the market.

 

Pipes & Wires will re-examine this as the Utah PSC determines Rocky Mountain Power’s rate case.

 

Network regulatory decisions

 

Aus – the SA and Queensland electricity distribution revenue resets

 

Introduction

 

The Australian Energy Regulator (AER) recently released it Final Determinations for SA Power Networks, Energex and Ergon Energy for the 5 year regulatory control period commencing on 1st July 2020. This article follows on from Pipes & Wires #180, #186, #195 and #196.

 

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 135 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 SA process to date include…

 

Parameter

Draft Plan

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$1,850m

$1,741m

$1,247m

$1,712m

$1,596m

OpEx

$1,468m

$1,530m

$1,585m

$1,442m

$1,574m

Opening RAB

Not stated

$4,418m

$4,393m

$4,357m

$4,361m

Nominal WACC

5.5%

5.43%

4.95%

4.79%

4.75%

Depreciation

$1,024m

$1,144m

$1,188m

$1,219m

$1,230m

Smoothed revenue

Not stated

$3,915m

$3,905m

$3,916m

$3,914m

 

Key features of the Energex process to date include…

 

Parameter

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$2,327m

$1,793m

$2,010m

$2,000m

OpEx

$1,806m

$1,942m

$1,938m

$1,932m

Opening RAB

$12,917m

$12,887m

$12,861m

$12,875m

Nominal vanilla WACC

5.46%

4.87%

4.67%

4.73%

Depreciation

$804m

$756m

$822m

$883m

Smoothed revenue

$6,541m

$5,840m

$5,900m

$6,010m

 

Key features of the Ergon process to date include…

 

Parameter

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$2,905m

$2,151m

$3,007m

$2,276m

OpEx

$1,835m

$1,973m

$1,968m

$1,963m

Opening RAB

$11,634m

$11,553m

$11,513m

$11,534m

Nominal WACC

5.46%

4.87%

4.67%

4.73%

Depreciation

$1,052m

$997m

$1,052m

$1,103m

Smoothed revenue

$6,516m

$5,788m

$5,997m

$5,926m

 

This concludes Pipes & Wires coverage of the SA and Queensland electricity distribution revenue resets.

 

Aus – the Jemena gas distribution revenue reset

 

Introduction

 

The Australian Energy Regulator (AER) has recently released its Final Decision for Jemena Gas Networks for the 5 year regulatory period commencing on 1st July 2020. This article examines the key features of the overall process.

 

A bit about Jemena Gas Networks

 

Jemena Gas Networks distributes gas to 1,400,000 customers throughout the Sydney, Newcastle, Wollongong and regional centers through 25,000km of pipelines. Annual revenue is about $600m and EBITDA is about $370m.

 

The regulatory framework

 

Key elements of the regulatory framework include…

 

·     The National Gas (South Australia) Law 2008.

 

·     The National Gas Objective.

 

·     The National Gas Rules.

 

Key features of the process to date

 

Key features of the process to date in nominal $$$ include…

 

Parameter

Initial Proposal

Draft Decision

Revised Proposal

Final Decision

Total OpEx

$1,037m

$1,097m

$1,092m

$1,170m

Total nett CapEx

$899m

$791m

$893m

$865m

Opening RAB

$3,353m

$3,353m

$3,331m

$3,318m

Return on capital

$826m

$756m

$766m

$755m

Nominal vanilla WACC

4.96%

4.46%

4.60%

4.49%

Regulatory depreciation

$410m

$411m

$445m

$444m

Smoothed revenue

$2,180m

2,003m

$2,091m

$2,176m

 

This completes Pipes & Wires analysis of Jemena’s gas distribution revenue reset.

 

Energy markets and tariffs

 

US – acquisition raises competition concerns in the Lone Star State

 

Introduction

 

In addition to general competition law prohibiting acquisitions that could increase market dominance, many energy regulatory frameworks also include specific provisions to discourage vertical or horizontal reintegration. This article examines the competition and reintegration issues around the acquisition of El Paso Electric by a JP Morgan fund that is affiliated to the Mesquite gas-fired power station in Arizona.

 

The players

 

The 3 players are…

 

·     El Paso Electric is a publicly listed electric company supplying 400,000 customers in west Texas and southern New Mexico. Annual revenue is about $920m.

 

·     Mesquite power station comprises 2 blocks of 625 MW gas-fired generation. One block is owned and operated by Salt River Power, whilst the other is owned Southwest Generation (a JP Morgan affiliate) and operated by Salt River Power.

 

·     JP Morgan is the ultimate owner of the Infrastructure Investments Fund (IIF), a $12b fund.

 

The proposed acquisition

 

IIF has offered $4.3b for El Paso. The proposed acquisition has received regulatory approval from the Texas Public Utilities Commission and the New Mexico Public Regulation Commission.

 

The competition issue

 

The competition issue arises from IIF seeking to acquire El Paso whilst also being an affiliate of Mesquite. Specific concerns include…

 

·     That Mesquite’s energy could be sold to El Paso on a self-dealing basis when the existing Mesquite power purchase agreements expire in April 2021, meaning that El Paso’s customers might be paying more for their electricity.

 

·     That El Paso’s existing generation could be instructed to buy gas hedges from JP Morgan affiliates rather than on the open market.

 

Possible remedies include…

 

·     Requiring Mesquite to enter into a power purchase agreement with an unaffiliated entity from April 2021.

 

·     Imposing an information disclosure regime to ensure that El Paso sources its wholesale electricity and wholesale gas from the cheapest sources.

 

Industry reshuffling

 

US – Memphis considers exiting TVA supply

 

Introduction

 

Pipes & Wires has been examining what appears to be an increasing trend of municipalities wanting to take control of their own electric supply through such means as buying out private electric companies or exiting wholesale energy supply arrangements, ostensibly to reduce prices and reduce CO2 emissions. This article examines recent moves in the US city Memphis, Tennessee.

 

Recent events in Memphis

 

Memphis Light, Gas & Water (MLGW) supplies 431,000 electric customers throughout Memphis and Shelby County, and currently receives all of its electricity from the Tennessee Valley Authority (TVA) for which it pays about $1b per year.

 

A report by Siemens suggests that MLGW could save between $120m and $150m per year by sourcing its energy from a combination of the Midcontinent ISO and developing its own renewables. This would require MLGW to build at least some transmission lines, and could result in some loss of supply reliability (which doesn’t seem to get a lot of attention in comparison to price and CO2 emissions).

 

Editors’ note - municipalisation is not new to these guys, as the City Of Memphis purchased the local portion of Memphis Power & Light in 1939 for $15m.

 

Recapping the other municipalisations

 

A quick recap on the other municipalisations that Pipes & Wires has covered include…

 

Municipality

Current arrangement

Proposed future arrangement

PW ref.

Memphis, TN

Muni takes all energy supply from TVA.

Muni takes supply from a combination of MISO and builds own generation.

 

 PW #199

Pueblo, CO

Assets owned and energy supplied by Black Hills Energy.

Exit Black Hill supply arrangement as provided for, acquire assets at a cost of around $900m to $1b, operate as a division of Water Works (Proposal rejected by voters).

 

PW #198

San Francisco, CA

San Jose, CA

Distribution assets owned by Pacific Gas & Electric, energy supplied by City itself.

 

Acquire PG&E assets, operate as a Muni

PW #193

Chicago, IL

Assets owned and energy supplied by Commonwealth Edison, with franchise payment to City.

 

Acquire the CommEd assets within the City, and operate as a Muni.

PW #192

Boulder, CO

Assets owned and energy supplied by Xcel Energy.

Purchase Xcel assets and operate as a Muni.

PW #195

 

Pipes & Wires will reexamine Memphis’ plans as news emerges.

 

Energy mix and grid security

 

Aus – re-examining the gas exploration moratoria

 

Introduction

 

Pipes & Wires #162 took a broad look at gas supply on the east coast of Australia, and particularly noted the state-by-state moratoria on new gas exploration. This article re-visits those moratoria and comments on how they might affect Australia’s security of gas supply.

 

Recent events in each state

 

The recent events in each state are as follows…

 

State

Previous moratoria

Recent events

Victoria

Announced a permanent ban on all unconventional on-shore gas development (including fracking and coal seam gas exploration) on 30th August 2016, and a moratorium on any other on-shore gas exploration until 30th June 2020.

 

Passing of the Petroleum Legislation Amendment Bill 2020 will allow the restarting of conventional on-shore gas exploration.

Tasmania

Extended the 1 year moratorium on fracking introduced in March 2014 by a further 5 years until March 2020.

 

Fracking ban was reconfirmed in October 2018, and will remain in place until 2025.

Northern Territory

Moratorium on fracking introduced in September 2016 for an undefined period.

 

Focus of recently established Economic Reconstruction Commission will include “securing long-term domestic gas supply”. The state government will also support gas explorers to innovate and adapt to new market conditions.

 

South Australia

Proposing a 10 year moratorium on unconventional gas exploration if the Liberals are elected in 2018.

 

Some efforts in late 2019 to overturn fracking ban.

New South Wales

the Gas Plan attempts to provide a strengthened regulatory framework for ensuring that water purity and customer prices are well managed, however it is unclear how new exploration and development will be incentivised.

The Petroleum (Onshore) Amendment (Coal Seam Gas Moratorium) Bill 2019 which sought to immediately curtail prospecting or extracting of coal seam gas was defeated in the Lower House, surprisingly after it had passed in the Upper House.

 

Western Australia

On-shore fracking was banned in September 2017.

The on-shore fracking ban was lifted in November 2018.

 

 

The editor comments on security of energy supply

 

It is acknowledged that the headline possibility of “more gas” will not sit easily with some, however future restrictions on gas supply strikes right at the heart of the third and often overlooked dimension of the energy trilemma … security of supply. Careful thought will be required if Australia wants gas to play a significant role in the transition to renewables.

 

Recent client projects

 

Recent client projects include…

 

·     Estimating the costs of DERMS (distributed energy resource management system) penetration for distribution feeders for a large US electric company.

 

·     Identifying leading practices in behind-the-meter activities (eg. batteries, solar, smart data, VPP’s etc) for a large US electric company.

 

·     Identifying key learnings from the transformation of a Dutch electric, gas and heat company for a large US electric company.

 

·     Identifying best Australian practices in EV charging for a large US electric company.

 

·     Identifying key features of demand management in the Australian NEM for a large US electric company.

 

·     Compiling a pricing model to reflect asset investment levels to transmission grid exit level rather than averaged over the entire network.

 

·     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, they do not constitute 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.