Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 206 – June 2021

 

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.

 

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.