Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #205 … this month we begin by examining several large
electric and gas companies reshuffling their asset portfolios, and then examine
some security of supply issues including gas supply in Australia and the recent
winter storms in Texas. We then look at an electricity transmission revenue
decision in Australia, and then conclude by looking at the regulation of batteries
and solar in Australia. So … until next month, happy reading…
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Recent client projects
Recent
client projects include…
· Examining emerging trends in DER
integration for a NZ electric company
· Identifying best practices for asset
fleet management for a NZ electric company.
· Providing an independent review of
asset condition and spend forecasts for a distribution company investor.
· 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.
Industry reshuffling
US – Exelon
plans to separate generation into second company
Introduction
Pipes & Wires has previously introduced
Exelon in the
context of the proposed municipalisation of its subsidiary Commonwealth Edison
(ComEd). This article examines Exelon’s proposed separation into separate
regulated wires businesses and unregulated energy businesses.
A bit
about Exelon
Exelon is a vertically integrated electric
company with annual revenues of $34b. Its’ 31,000 MW of generation supply about
10,000,000 electric and gas customers through its 6 regulated distribution companies that
include ComEd and Baltimore Gas & Electric.
The
proposed separation
Exelon plans to separate its lines and
energy activities into 2 separate publicly listed companies…
· A
holding company that will continue to own the regulated distribution companies,
with a specific goal of increasing regulated revenues to $15b by 2024.
· An energy
company that will include a specific focus on closing the remaining gas-fired and
oil-fired generation and growing its renewable fleet.
Exelon hopes to complete the separation
during the first quarter of 2022.
The
strategy of separating
Some of the strategies behind the proposed
separation include…
· Recognising
that lines and energy have increasingly different investment drivers, and that
investors are wanting to choose between the quite distinct risk-reward profiles
offered by lines and energy respectively rather than a combination.
· Promoting
the energy company as increasingly carbon-free from its current 90% carbon-free
position.
· Separating
the competitive market and regulatory risks.
These strategies appear to be a natural progression of the migration
of capital away from regulated lines and towards competitive energy markets
that emerged in Europe about 10 years ago, only this time it is the regulated
businesses that form the anchor point.
Further
reading
· Pipes
& Wires #104 – Germany –
selling the grids (summary).
· Pipes
& Wires #113 – Germany – E.On
sells Open Grid Europe.
· Pipes
& Wires #114 – Germany – EnBW
looks to sell majority stake in transmission grid.
· Pipes
& Wires #192 – Chicago
considers municipalising Commonwealth Edison.
· Pipes
& Wires #200 - Dominion sells
gas storage and transmission assets.
UK – PPL
and National Grid to swop assets
Introduction
Pipes & Wires has been examining Pennsylvania Power & Light’s (PPL) proposed sale of its’ UK subsidiary Western Power Distribution (WPD), and noted that PPL was open to some sort of asset swop.
This article concludes the story by examining inter alia the sale of
WPD to National Grid.
Details
of the deals
The deals are…
· PPL will
sell WPD to National Grid for $11b, effectively forward integrating National
Grid into 7,900,000 distribution customers in the legacy SWEB, SWALEC, MEB and
EME areas.
· PPL will
buy the Narragansett
Electric Company from National Grid
for $5.3b, comprising $3.8b of equity and assumption of $1.5b of debt. This
will add 780,000 electric and gas customers to PPL’s existing 2,700,000
electric and gas customers in Pennsylvania and Kentucky.
Coincidently, National Grid is also
starting a sale process for a majority stake in its UK gas transmission business.
The
strategies behind the deals
Key features of National Grid’s strategy
include…
· Increasing
its focus on electrifying Britain’s energy sector.
· Reducing
exposure to US regulatory regimes.
· Reducing
its exposure to gas from 39% to 28% of total revenue
Key features of PPL’s strategy include…
· Focusing
more closely on US operations.
· Reducing
debt and improving earnings.
· Accelerating
its transition to clean energy, where it sees the most growth potential.
Further
reading
· Pipes
& Wires #200 – PPL plans to
sell Western Power Distribution.
· Pipes
& Wires #203 – Pennsylvania
Power & Light’s sale of Western Power Distribution.
Energy mix and grid security
Aus – gas under pressure on the East
Coast
Introduction
Back
in April 2020 Pipes & Wires #197 examined the Australian
Energy Market Operator’s (AEMO) Gas Statement
Of Opportunities (GSOO) for eastern and
south-eastern Australia which forecast shortages in the southern states as soon
as 2024. This article examines the Australian Competition & Consumer
Commission’s recently released 10th
Interim Report.
Context for the report
The
context for the Interim Report is ACCC’s wide-ranging inquiry into the supply of and demand
for natural gas of April 2017, which has resulted in Interim Reports being
published about every 3 to 6 months.
Key findings of the report
Key
findings of the report include…
· Record low oil and gas prices have
provided some relief, and early information suggests that prices will remain
lower for the remainder of 2021. However, these low oil and LNG prices have
also increased the medium-term supply risks.
· Revised supply and demand forecasts indicate
there will be sufficient gas to meet both domestic and export demand for the
remainder of 2021.
· Beyond 2021, medium-term supply is
expected to tighten due to reliance on reserves that are yet to be developed,
which may result in shortfalls in Victoria by 2024.
· Concern also remains that long-term
supply is uncertain, possibly as early as 2026 for the east coast.
· The ACCC notes that these risks were
reported in January 2020, and expressed the concern that less progress has been
made than was expected.
Further reading
· Pipes & Wires #162 – examining the impending east coast
gas shortage.
· Pipes & Wires #197 – summary of the 2020 GSOO.
· Pipes & wires #201 – downgrading of the Pohokura reserves
(New Zealand).
· Pipes & Wires #203 – summary of the west coast GSOO.
Global – progress on the European
Pressurised Water Reactors
Introduction
Pipes & Wires #194 used the slowing progress at Hinkley
Point C as a starting point for examining progress of the following European
Pressurised Water Reactor (EPR)
stations…
This
article notes further progress for each station, and provides a summary.
Hinkley Point C
HPC
seems to be progressing well enough, with what appears to be a slight advancing
of the expected completion from early 2027 to late 2026. Delays due to Covid
are expected to add an additional £500m, diluting the expected return from
7.7% to 7.15%.
Flammanville #3
A
decree by the French Government in March 2020 postponed the commercial start
until 2024, with fuel loading expected at the end of 2022. Cost to completion
is now expected to be €19.1b.
Olkiluoto #3
Commercial
operation is expected around February 2022, with an expected cost to completion
of about €11b.
Taishan
Units
1 and 2 began commercial operation in December 2018 and September 2019
respectively.
Summarising progress
A
quick summary reveals the following…
|
Flammanville
#3 |
Olkiluoto
#3 |
Taishan
#1 and #2 |
Hinkley
Point C |
Construction
start date |
2007 |
2005 |
2008 |
Early 2018 |
Original
completion date |
2012 |
2010 |
2012 |
Late 2025 |
Estimated
completion date |
2024 (12 year delay) |
Feb 2022 (11 year delay) |
2018 (6½ year delay) |
Late 2026 |
Original
cost estimate |
€3.3b |
€3.7b |
€8b |
£18b |
Likely
cost to completion |
€19.1b |
€11b |
Thought to be €15b |
£22b – £23b |
Pipes & Wires will continue examining these EPR’s
as they progress.
US –
winter security in the Lone Star State
Introduction
Over the last few years Pipes & Wires
has examined ERCOT’s
concerns around the Texas interconnected grids’ summer reserve capacity
margins. This article examines the lengthy blackouts that occurred during
February 2021 in which temperatures plunged to -2oF (-19oC)
in central Texas.
Structure
of the Texas interconnected system
Many readers are probably aware that the
overall US power grid is interconnected into 3 areas…
The reasons for Texas going alone broadly
stem back to the Federal Power Act
of 1935 which placed
inter-state electricity connections under the jurisdiction of the Federal
Power Commission (now the FERC). Texas
sought to avoid coming under that federal jurisdiction by not interconnecting
across state lines (there are, however, a few asynchronous interconnections to
other grids).
Apparent
causes of the blackouts
At this early stage, the apparent causes of
the blackouts appear to be 3 tightly interconnected themes…
· The
annual Polar Vortex
extended a lot further south during the 2021 winter, to southern Texas.
Normally the Vortex only extends as far south as the Mid-West, but about every
10 to 20 years it extends to Texas as it has done previously in December 1989
and February 2011.
· Following
the February 2011 winter storms, the Texas Public Utilities Commission compiled
winterisation standards, however those standards were voluntary.
· A lot of
generation plant and associated fuel handing plant simply froze solid.
There is also some thought that the lack of
interconnection to the Eastern and Western grids also contributed to the
blackouts, based on the rather tenuous view that counties around the Texas
borders that were part of the Eastern and Western interconnected grids were not
blacked out (when it appears that those electric companies simply winterised
their generation).
Did the
market fail ?
In the eyes of many Texans and their
elected representatives, the answer will undoubtedly be yes. Some critical
thought, however, reveals that markets signal shortfalls of supply with respect
to demand by raising prices, so despite an unpleasant and politically
unacceptable outcome the market has arguably worked.
Public policy
risks going forward
As I see it, two public policy risks have
emerged…
· Some
sort of knee-jerk market redesign.
· Some
sort of federally-mandated interconnection of the ERCOT grids with the Eastern
and Western interconnected grids.
Pipes & wires will comment further as
this unfolds.
Further
reading (and watching)
· Pipes
& Wires #195 - Restoring
capacity in the Lone Star state.
· Pipes
& Wires #191 - Grid emergency
in the Lone Star state.
· Pipes
& Wires #189 - Supply tightens in the Lone Star state.
· What really
happened during the Texas power grid outage ?
· Texas’
power disaster is a warning sign for the US
Network regulatory decisions
Aus –
the AusNet transmission revenue determination
Introduction
The Australian Energy Regulator
is currently resetting AusNet Services electricity transmission revenue for the
5 year control period commencing on 1st April 2022. This article
sets some context for examining the AER’s draft and final decisions.
A bit about AusNet’s electricity transmission business
AusNet Services owns and
operates the 500kV and 220kV transmission networks in the Australian state of
Victoria, with an annual revenue of about $530m.
In addition, AusNet also owns
and operates an electricity distribution network supplying 737,000 customers
and a gas distribution network supplying 710,000 customers. AusNet is 32.2%
owned by Singapore Power, 19.9% owned by State grid Of China, and 48%
publically owned.
Regulatory framework
The
basis of the regulatory framework is Chapter 6a of the National Electricity Rules, which is made pursuant to the National Electricity Law.
Key features of the process to date
Key features of the AusNet
electricity transmission process to date include…
Parameter |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$796m |
|
|
|
OpEx |
$1,371m |
|
|
|
Opening RAB |
$3,582m |
|
|
|
Nominal vanilla WACC |
4.44% to 3.92% |
|
|
|
Regulatory depreciation |
545m |
|
|
|
Smoothed revenue |
$2,646m |
|
|
|
Pipes & wires will comment
further once the AER releases its draft decision.
Regulating
emerging technologies
Aus –
ring-fencing batteries
Introduction
New battery chemistries are emerging at an
exciting pace. This article looks at the less exciting regulatory treatment of
batteries that will be essential to capturing the usefulness of batteries.
The
legacy regulatory framework
The legacy regulatory frameworks in the
states and at a federal level don’t seem to have fully contemplated off-grid
supplies being classified as Distribution Services, and by implication as
Standard Control Services. However the National Electricity Rules limits
inclusion in the RAB, depreciation and recovery of OpEx to assets that meet the
definition of Standard Control Services, which prima facie excludes batteries.
Objectives
of the ring-fencing guidelines
The AER has published various guidelines on
ring-fencing assets, which have the following
objectives…
· Require
accounting and functional separation of Direct Control Services (a subset of
Standard Control Services) from the provision of other services.
· Promote
competition in the delivery of electricity services.
· Limit
the ability of electric distribution companies to cross-subsidise other
services from its Distribution Services.
· Prevent
electric distribution companies conferring a competitive advantage on related
entities.
The
AER’s emerging guidelines
Electric distribution business were
required to ring-fence their activities under the Ring-fencing
Guideline Electricity Distribution – Version 2, October 2017, and in
late 2020 the Australian Energy Regulator (AER) published an issues
paper on updating the guidelines to better
address stand-alone power supplies (SAPS) and batteries.
The AER has recently held two stakeholder
workshops to further explore issues SAPS and batteries. Pipes & Wires will
comment further as the AER’s final decisions emerge.
Aus – centralised
control of rooftop solar
Introduction
South Australia’s 35% penetration of
rooftop solar is highlighting a range of access and pricing issues. This
article examines two themes within the broad heading of centralised control of
rooftop solar.
Curtailing
solar to preserver grid stability
Back in March 2021 the Australian Energy Market Operator (AEMO) used
its new powers to curtail rooftop solar injection to preserve grid stability by
instructing transmission grid operator ElectraNet to
maintain at least 400 MW of grid demand. This resulted in the curtailing of
about 67 MW of both industrial and domestic solar injection for about 1 hour by
distribution operator SA Power Networks, and
has been been quite usefully described as “fixing the solar traffic jam”.
The
solar tax – charging to inject rooftop solar electricity
Reducing feed-in tariffs for rooftop solar
has proved to be a thorny issue, and the logical progression to charging for
injecting rooftop solar is certainly no easier ... readers should be very
familiar with the gap between the solar lobby expecting free access to
distribution networks, and electric companies needing to recover the fair and
equitable cost of using their network. The AEMO recently released a suite of
draft rule changes that would inter alia…
· Amend
the regulatory framework to clarify that distribution services are bi-directional,
and include injection into the network.
· Promote
incentives to efficiently invest in networks to support solar injection.
· Enabling
electric companies to offer two-way prices and pricing structures for energy
injection.
The editor
comments
A little thought (actually a lot of
thought) reveals the following…
· Expectations
of both solar customers and the community at large are high (possibly
unrealistic some might say, with some even claiming that unconstrained
injection of renewable electricity is a human right) … inject as much solar as
you want when you want and get paid a high price for it.
· That the
issue of all connected customers fairly and equitably paying for their use of
the distribution network and the transmission grid is gaining increased
regulatory recognition.
· That the
technically complex issue of grid stability needs to be more clearly
communicated to customers and communities, with the key messages being (i)
networks were built to move energy in 1 direction, and (ii) a grid blackout
will be way more inconvenient and costly than your solar panel getting switched
off.
· Prices have
been used to discourage consumption at peak periods for about 130 years, hence reducing
the payment for injected solar is simply a logical extension of this approach.
Further
reading
· Pipes
& Wires #204 – increasing need
for central coordination.
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.
Extending
the above, a second collection of classic historical photo’s with humorous
captions looks at some topical issues of regulating emerging technologies. 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.
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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.
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