Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #206 … this issue starts by examining 2 industry
reshuffling and then presents a more philosophical piece on the shift from
mergers to demergers. We then look at 2 regulatory decisions, and revisit our
previous analysis of the Texas blackouts.
This
issue then concludes with a look at how batteries might be treated in Hawaii
and in the Australian NEM. So … until next month, happy reading…
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Recent client projects
Recent
client projects include…
· Identifying the global and regional
trends facing transmission grid operators for a US client.
· 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.
Cool multimedia stuff
Building
NZ’s electric system
The next few issues will include links to
some videos of building NZ’s electric system … this video
features Selwyn Toogood interviewing various people around the Benmore
construction site and the Otematata village in 1964.
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. This
has also been republished as a short
narrative.
Industry reshuffling
Ukraine
– joining the European grid
Introduction
News recently emerged that the Ukraine’s
electricity transmission grid NPC Ukrenergo will
disconnect its’ interconnects to Russia and Belarus, and then connect to the European grid. This
short article briefly examines Ukrenergo, and then considers why it wants to
join Europe.
A bit
about Ukrenergo
NPC Ukrenergo is the
state-owned electricity transmission grid that owns and operates the 110kV,
220kV, 330kV, 500kV and 750kV grids that interconnect generation companies with
27 distribution companies. Annual revenue is about €180m. Ukrenergo is also installing Europe’s
largest battery in conjunction
with RTEi.
The Ukraine is a nett exporter of
electricity to Russia, Belarus, Poland, Slovakia, Hungary and Romania, with
most exports going to Hungary and Belarus.
Reasons
for joining ENSTO-E
A large part of Ukrenergo’s decision to
connect to ENSTO-E is to align with the EU trading rules (given that Ukraine
joined the EU in 2011). Other reasons include…
· Improved
ability to meet peak demand in western Ukraine by importing from Belarus.
· Improve
generator utilisation both in Ukraine and in Europe due to peak demands across
time zones.
· Adding
rotating inertia to the ENSTO-E grids.
· Providing
stronger interconnections.
· Reducing
each ENSTO-E grids required share of spinning reserve.
· Increase
investor confidence in building new generation.
· Reducing
dependence on Russia for coal and Uranium supplies.
· Improving
political solidarity with the Baltic states.
Pipes & Wires will pick up this story
as the disconnection and reconnection process progresses.
UK – National
Grid to sell majority stake in gas business
Introduction
Pipes
& Wires #205 briefly noted
National Grid’s plans to sell a majority stake in its gas transmission and
metering business as part of a wider
portfolio optimisation that included
buying Western Power Distribution and selling the Narragansett
Electric Company. This article
examines the sale of the majority stake in the gas business more closely.
A bit
about the gas business
National Grid’s gas transmission network
stretches throughout England, the east of Scotland and South Wales, and has a
regulatory asset value (RAV) of about Ł6.4b. Gas transmission and metering account
for about 39% of UK revenue.
The
proposed sale
The sale will be launched during Q3 of
calendar 2021, with regulatory approval expected during Q3 of calendar 2022.
The
strategy behind the sale
Key features of National Grid’s strategy
include…
· Increasing
its focus on electrifying Britain’s energy sector.
· Reducing
its exposure to gas from 39% to 28% of total UK revenue.
· Migrating
to higher growth businesses.
Further
reading
· Pipes
& Wires #200 – PPL plans to
sell Western Power Distribution.
· Pipes
& Wires #203 – Pennsylvania
Power & Light’s sale of Western Power Distribution.
· Pipes
& Wires #203 – Final RIIO – 2
decisions.
· Pipes
& Wires #205 – PPL and National
grid swop assets.
Global -
de-mergers in the quest for value
Introduction
After what seems like 25+ years of mergers
and acquisitions, we are now seeing an increasing number of de-mergers in which
identifiable components of an electric company with ostensibly different
characteristics are being separated and sold off. This article examines a
couple of current de-mergers to get a sense of what those electric companies
are trying to achieve.
The pattern
of mergers and de-mergers
The following pattern of de-mergers has
emerged…
Pattern |
Objective |
Legacy mergers and acquisitions focused
on horizontal aggregation between similar companies, in part due to
prohibitions on vertical re-integration in many jurisdictions. |
Primarily to increase scale (and in some
cases, scope) efficiencies. In some cases these gains were captured for a
limited period, and were then shared with customers after the next reset. |
Vertical de-mergers began in which
early-movers recognised the increasingly different investment characteristics
of (regulated) lines and (unregulated) energy. A lot of these vertical
de-mergers happened in Germany around 2009. |
Separate businesses having different risk
and reward profiles eg. pension funds seem to prefer regulated lines
businesses. |
Shifted to include horizontal demergers
as the differing investment characteristics of fossil, hydro, wind and solar
generation become more apparent. TrustPower’s demerging of its hydro and wind
businesses to form Tilt
Renewables back in 2016 is a
good example. |
Further separate energy businesses having
different risk and reward profiles. |
Some
examples of recent de-mergers
A few examples of current de-mergers
include…
· Duke Energy
– one of Duke’s largest shareholders recently wrote to
Duke noting that Duke
has one of the highest quality and most under-appreciated asset portfolios in
the US, and should consider
a horizontal de-merger into 3 regional businesses
focusing on the MidWest, the Carolinas and Florida that could unlock $90b of
additional shareholder value.
· AGL –
the structural
separation of AGL into New AGL (a
retailer with some gas and renewable generation) and PrimeCo (a coal and wind
generator with batteries) was announced in March 2021
· TrustPower
– a strategic
review was announced in early 2021, in
which TrustPower (i) tested the market for interest in its 231,000 retail
customers, and (ii) explored the merits of a stand-alone generation business.
At the time of publication Mercury has agreed to buy TrustPower’s retail
business for $441m subject to regulatory and shareholder approval.
· Exelon –
the separation of
regulated distribution and retail businesses (eg. Commonwealth Edison) from the
generation businesses was announced in February 2021.
Further
reading
· Pipes
& Wires #114 – Germany – EnBW
looks to sell majority stake in transmission grid.
· Pipes
& Wires #88 – E.On sells EHV
grid to TenneT.
· Pipes
& Wires #86 – Germany –
unbundling the grid.
Network regulatory decisions
Aus – gas under pressure in South
Australia
Introduction
The Australian
Energy Regulator recently released its Final Decision for Australian Gas
Networks (AGN) South Australian gas distribution networks for the 5
year control period starting on 1st July 2021. This article examines
that Final Decision.
A bit about AGN
AGN
operates gas networks nationally that supply 1,300,000 customers through
25,000km of distribution pipelines and 1,100km of transmission pipelines, with
460,000 of those customers being in South Australia. The subject of this
article is AGN’s South Australian network which is mainly in the Adelaide metro
area.
Regulatory framework
The
basis of the regulatory framework is the National Gas (South Australia) Act 2008, which sets out the National Gas Law
as a Schedule to the Act. Section 26 of the Act provides for the National Gas Rules to have legal effect, and it is those
Rules that set the detailed regulatory framework.
Key features of the process to date
Key
features of the process to date include…
Parameter |
Access
Arrangement |
Draft
Decision |
Final
Decision |
OpEx |
$357m |
$338.8m |
$391m |
CapEx |
$579m |
$478.8m |
$512m |
Opening
RAB |
$1,769m |
$1,769m |
$1,702m |
Depreciation |
$318m |
$262m |
$323m |
Return
on equity |
4.72% |
4.57% |
5.37% |
Return
on debt |
4.19% |
4.67% |
4.68% |
Revenue |
$1,148m |
$1,029m |
$1,121m |
This
concludes Pipes & Wires examination of AGN’s South Australian gas
distribution revenue reset.
France –
the sixth electricity transmission price control
Introduction
The French Energy Regulator (CRE) recently
released its sixth
electricity transmission price control (TURPE
6 HTB) that will apply to Réseau de Transport d’Ėlectricité (RTE) for
the 4 year period starting on 1st August 2021.
A bit
about RTE
RTE is a wholly-owned subsidiary of EDF, and owns
and operates France’s high-voltage transmission grid. RTE’s grid comprises
107,000km of lines at 63kV, 90kV, 150kV, 225kV and 400kV along with 50
interconnections to neighboring countries. Annual revenue is about €4.7b.
The
regulatory framework
The regulatory
framework includes Title 3
of the Energy Code, of which Articles L. 134-1 to L. 134-9 include rules on the
efficient functioning of networks. The CRE has set out the following challenges
for RTE…
· Play a
pivotal role in the energy transition.
· Investment
costs are to be strictly controlled.
· Maintain
high levels of reliability.
· Adopt
technology as a key to ensuring grid flexibility.
· Customer
price rises are to be limited.
Key features
of TURPE 6 HTB
Key features of TURPE 6 HTB include…
Parameter |
RTE’s
proposal |
CRE’s
decision |
Total inflation |
6.40% |
4.30% |
Grid interconnection, balancing and
system operator costs |
€4.15b |
€3.82b |
Operating costs (wages, general
purchases, taxes) |
€8.66b |
€8.04b |
Asset beta |
0.45 |
0.37 |
Nominal WACC before tax |
5.35% |
4.6% |
Energy mix and grid security
US –
moving on from the Lone Star blackouts
Introduction
Pipes
& Wires #205 examined the
recent winter blackouts in Texas, and noted the apparent cause stemming from 3
tightly interconnected themes. This article briefly examines some of the key
themes emerging from the blackout.
Key themes emerging from the blackout
Notable
themes emerging from the Blackout include…
· The need
for previously voluntary weatherization standards to be made mandatory.
· A
proposal by Berkshire Hathaway to (i) build 10,000MW of gas-fired generation
and associated gas storage at an estimated cost of $8.3b, and (ii) operate that
generation outside of the market rules during emergencies.
· Requiring
non-dispatchable generation to purchase ancillary firming services, which has
prompted Senate
Bill 1278 which inter alia would require intermittent
generators to purchase firming services from dispatchable generators. In all
fairness, renewables actually performed better than expected leaving many to
criticize SB 1278 as (i) simply forcing renewables to subsidize the gas
industry, and (ii) regulatory discrimination between technologies.
Observations from the editor
A few
observations from the editor…
· The
Berkshire Hathaway proposal would need to include a lot of trace heating to
stop the moisture in the gas freezing.
· Simply
requiring intermittent generation to purchase firming services from
dispatchable generation won’t guarantee that dispatchable generation will
actually run. Refer to previous comment about trace heating.
· Making
voluntary weatherization standards mandatory seems to be a solid idea.
Further
reading (and watching)
· Pipes
& Wires #205 – Winter security
in the Lone Star State.
· 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
Regulating
emerging technologies
US –
regulatory treatment of batteries in the Aloha state
Introduction
Most of us are well aware of at least some
regulatory unease about electric companies (or lines companies) owning and
operating batteries. This article examines a recent regulatory decision in
Hawaii around a power purchase agreement with a battery operator.
A bit
about HECO
The Hawaiian Electric Company (HECO) was
established in 1891, and rapidly expanded including by acquiring other electric
companies such as the Maui Electric Company. HECO currently supplies about
463,000 customers from a firm generation capacity of about 2,300 MW. Annual
generation is about 8,800 GWh, of which about 26% is from renewable sources.
A key theme for HECO is the retirement of oil-fired
and coal-fired generation as part of its journey
to 100% renewable energy by 2045. Those
retirements are being increasingly scrutinized by the Hawaii Public Utilities
Commission (HPUC).
The
proposed Kapolei project
The Kapolei Energy Storage being
developed by Power Plus is located on the island of Oahu, and will provide 185
MW - 565 MWh of batteries to provide demand shifting and frequency response
under a power purchase agreement with HECO.
The
HPUC’s decision
The HPUC
recently approved HECO’s power purchase agreement with
Power Plus primarily because it would assist grid reliability after the
retirement of the 180MW coal-fired West Oahu station in 2022 that currently
supplies about 15% of Oahu’s electricity. That approval, however, came with a
suite of conditions that included…
· Requiring
HECO to forego specified performance incentives for future renewable energy
projects.
· Given
increased support to community-based renewable energy projects.
· Removing
a specified cohort of fossil-fired generators from the rate base, meaning that costs
would be carried by shareholders rather than customers.
· Requiring
HECO to account specifically for the percentage of stored energy derived from
fossil fuels.
In reaching its conclusion, the HPUC
identified the following concerns…
· That
HECO’s reserve capacity margin would decline as West Oahu is closed and new
renewable projects are delayed.
· That the
Kapolei battery would be charged with fossil-generated electricity (Editors’
note – this overlooks the issue of battery storage allowing more efficient
operation of all of HECO’s thermal plant).
HECO in turn expressed concern that the imposed
conditions could actually impede Kapolei’s development.
Aus –
ring-fencing batteries
Introduction
Pipes
& Wires #205 examined the AER’s
work stream on ring-fencing batteries. This article examines the AER’s Draft
Guideline v3 that was released
in May 2021.
Recapping
the AER’s objectives for ring-fencing
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.
Key
features of the v3 Draft
The AER’s draft positions include…
· Allowing
distributors to provide generation services under an exemption framework that
will include inter alia a generation
revenue cap.
· Distributors
will be prima facie prohibited from using
batteries to provide contestable services to either themselves or to other
parties, but can apply for a waiver to supply excess battery capacity to a
third party where the distributor believes that the benefits outweigh the detriment.
· Restrictions
on a distributor sharing its staff with an affiliate that provides contestable
services to ensure that the affiliate is not provided with an unfair advantage.
As usual, Pipes & Wires has paraphrased
the Draft, so affected parties should examine the AER’s full publication.
Next
steps
The AER expects to publish its Final
Guideline and explanatory statement around September or October 2021.
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.
Utility Consultants Ltd accepts no liability for action or inaction
based on the contents of Pipes & Wires including any loss, damage or
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