Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #207 … we start this issue with a look at the proposed
updating of distribution regulatory settings in NZ, along with an unfolding
view on battery ownership in New York state.
We
then examine some network regulatory decisions in NZ and the UK, followed by
some industry reshuffling in NZ, the UK and Nigeria. This issue concludes by
examining the closure of coal-fired generation in Australia and the rolling
blackouts in California. So … until next month, happy reading…
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Regulating
emerging technologies
NZ –
updating regulatory setting to integrate DER’s
Introduction
Regulators all over the world are updating
policy settings to encourage electric distribution companies to integrate
DER’s. This brief article notes the key themes of a recently
released discussion paper in New Zealand.
Key
themes of the paper
The key themes of the discussion paper
include…
· Information
on power flows and hosting capacity, including better visibility of LV networks
so that flexibility service providers can better target their services.
· Proposed
supply standards, including addressing the frequency, voltage and harmonic
problems that may arise from increased DER penetration.
· Promoting
competitive markets for DER-related services, including removing entry barriers
and creating level playing fields for third-party flexibility service
providers.
· Issues
around operating agreements for DER’s and flexibility services, including
imbalances of negotiating power and the high cost of compiling agreements.
· Concern
that not all electric distribution businesses will have sufficient skills and
capability to integrate DER’s, leading to foregone customer benefits.
· Efficient
pricing to correctly signal constraints and investment opportunities.
Next
steps
The Electricity Authority will receive
submissions on this discussion paper until 5pm on Tuesday 14th
September 2021. Pick this link for
help with compiling your submission.
US –
regulator rejects battery ownership proposals
Introduction
Whether electric companies should own or
operate batteries is one of the battle lines of the emerging world, with what
seemed to be an even mix of regulatory decisions for and against. This article
examines a recent decision by the New York Public Service Commission that inter alia rejected a request for
utility-owned batteries.
The
context for the decision
The Energy
Storage Order 2018 required electric
companies to competitively acquire the dispatch rights for bulk energy storage
that would be operational by 31st December 2022. Implicit within the
Order was the firm view that battery storage should be developed and owned by
third parties.
The initial targets for 31st
December 2022 included 300 MW of storage for Consolidated Edison, and 10
MW each for the other investor-owned electric companies in New York state.
The Joint
Utilities Group petition
Initial market solicitations during 2019
and 2020 did not result in sufficient third party offers, prompting the Joint Utilities Group to
claim that the Energy
Storage Order 2018 needed to be
amended to achieve the goal of 3,000 MW of battery storage by 2030. Hence the
electric companies petitioned for the following…
· An
extension to the 31st December 2020 deadline out to 2025.
· Extending
the duration of the dispatch rights contract from 7 years to 10 years.
· Ownership
of batteries by the electric companies for a limited period, followed by a
competitive sale process to third party operators in which the electric company
would retain ownership for 2 further years if minimum sale prices were not met.
Key
features of the NYPSC’s decision
Key features of the NYPSC’s decision
include…
· Approving
the requested time extension.
· Approving
the requested duration of dispatch rights.
· Declining
the ownership proposal, on the basis that it could inhibit the development of a
competitive storage market and that the evolving NYISO rules would increase the
certainty of emerging revenue streams.
Further
reading
· Pipes
& Wires #186 – simplifying
market access for battery storage (FERC Order #841).
Recent client projects
Recent
client projects include…
· Identifying the key features of
distributor-led DSO models.
· Identifying a range of structural and
service delivery models for an electric company.
· 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 … from the central South Island in
Pipes & Wires #206 we now move to the central North Island to examine the Tongariro Power
Scheme around 1970.
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.
Bruce Springsteen cover … by my awesome
daughter
Pick this link
to see my awesome daughter Becca Caffyn singing Bruce Springsteen's "Dancing In the Dark"
off the 1984 album Born In The USA.
Network regulatory decisions
NZ – setting the WACC for electricity
and Wellington Airport
Introduction
The Commerce Commission recently released its cost of capital
decisions for the 2022 disclosure year for
electricity distribution businesses and for Wellington Airport. This article
examines the key features of those decisions.
Regulatory frameworks
The regulatory frameworks are set out in…
· Clauses 2.4.1 to 2.4.9
of the Electricity
Distribution Services Input Methodologies Determination 2012 (consolidated to 31st
January 2019).
· Clauses 5.1 to 5.7 of
the Commerce Act (Specified
Airports Services Input Methodologies) Determination 2010.
Key features of WACC’s
Key features of the WACC’s include…
|
Company |
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
EDB’s |
Vanilla WACC |
3.14% |
3.82% |
4.26% |
4.50% |
|
Post-tax WACC |
2.84% |
3.52% |
3.96% |
4.20% |
|
|
Wellington Airport |
Vanilla WACC |
|
5.06% |
|
|
|
Post-tax WACC |
|
4.94% |
|
|
UK – planning
the PR24 water price control
Introduction
The UK water and sewage regulator Ofwat
recently released their initial
views on the framework for the PR24 price review. This
article examines the key features of Ofwat’s views, and makes some comparisons
with the RIIO electricity and gas price controls.
Key
features of Ofwat’s initial views
Key features include…
· Increased
focus on the long term, including a clearer vision of long-life asset
stewardship, obtaining a fuller understanding of long-term resilience, and more
robust analysis of investment proposals.
· Delivering
greater environmental and social value, including more visible exploration of
different approaches to delivering core water services, and a stronger focus on
key concerns such as biodiversity, flood reduction and reduced storm overflows.
· Reflecting
a clearer understanding of customers and communities, including building on the
customer engagement practices evident in PR14 and PR19, but also influencing
key customer behaviors such as reducing water consumption and correct waste
disposal.
· Driving
improvements through efficiency and innovation, including building on the
challenging cost reduction and service improvements from PR19. This will
include ROI incentives to firstly set challenging targets and then secondly out-perform
those targets.
Ofwat also notes that it will be required
to balance providing clarity for future price reviews on the one hand with room
to adapt on the other hand.
Comparisons
with the RIIO price controls
Long-time readers will probably remember
that Ofgem’s RIIO – 1 electricity and gas price controls embodied the following
5 features…
· Stakeholder
engagement processes.
· Outputs.
· Efficient
costs.
· Efficient
financing.
· Prudent
management of uncertainty and risk.
The key features of Ofwat’s initial views
appear to align strongly with the RIIO – 1 features.
Next
steps
Ofwat is consulting on its views, and
expects to publish its draft methodology in mid-2022.
Industry reshuffling
NZ – Mercury enters binding agreement to acquire Trustpower’s retail
business
Introduction
Earlier in 2021 Trustpower announced a strategic review of its retail electricity, gas and
communications business, including the possibility of selling it. This article
examines Mercury’s offer to buy that retail business in the context of Pipes
& Wires #206’s article on de-mergers.
Trustpower’s strategic review
Back in January 2021 Trustpower
announced a review of its retail business to…
· Test the market interest in buying the business, and
· Explore the merits of becoming a stand-alone generation business.
A range of strategic issues
including decarbonisation, decentralisation and digitialisation prompted the
review. The retail business supplies bundled electricity, gas, fixed and
wireless broadband and mobile phone services to approximately 231,000 customers
nationwide.
Mercury’s conditional offer
In June 2021 Mercury entered into binding
agreements to acquire the retail business for $441m conditional on several
matters including Trustpower shareholder, completion of the proposed
restructure of the Tauranga Energy Consumers Trust (TECT) and Commerce Commission
clearance. Trustpower will retain all generation assets, about 14,000 large
electricity customers, power purchase agreements, and existing hedge contracts.
Thanks to Mercury for their assistance
with this article.
Some thoughts on the wider de-merger theme
Pipes & Wires #206 noted that after a 25 years of horizontal
amalgamations to increase scale (and sometimes scope), de-mergers began to
occur as the differing value drivers of lines and energy occurred. Horizontal
de-mergers such Trustpower (and its previous demerger of Tilt Renewables) and
AGL are further emphasising the differing value drivers of generation and
retail.
Further reading
· The
12D’s of electricity distribution in the emerging world
UK – Pennon acquires Bristol Water
Introduction
It’s been a while since Pipes
& Wires has examined any reshuffling of the UK water industry, so recent
news that Pennon
has acquired 100% of the issued capital of Bristol Water provided a great opportunity to have another look at this sector.
A bit about the companies
The two companies are…
· Pennon is an environmental services group that inter alia owns South West Water, which supplies water and sewage
services to a population base of 1,700,000 in Cornwall and Devon, and in parts
of Somerset and Dorset. Annual revenues are about £645m, and annual NPBT is
about £157m.
· Bristol Water Holdings UK Ltd includes Bristol Water plc, which supplies drinking water to about 1,200,000 customers in
the 2,600km2 centered on Bristol (sewage services are provided by Wessex Water). Annual revenue is about £125m, and NPBT is about £9.2m.
The proposed deal
Pennon acquired 100% of the
issued share capital in Bristol Water Holdings for £425m cash plus debt
assumption of £389m, making an enterprise value of £814m. That enterprise value
represents about 20% of Pennon’s enlarged asset value.
The strategy behind the deal
The sale of the Viridor waste and recycling business during FY21 was a key component of
Pennon’s exclusive re-focusing on the UK water industry, and provided nett
proceeds of £3.7b. The acquisition of Bristol Water is a highly complementary
continuation of that strategy, enabling both operational synergies and a return
of about £1.9b to shareholders.
Nigeria – selling the generators
Introduction
News recently emerged that
Nigeria is offering 5 generating plants for sale as part of its reform
process that has already seen 11 distributors and 6 generators sold. This article examines the initial stages of the sale process of
5 gas-fired generators to set some context for later analysis.
The generators being offered for sale
The 5 generators being offered
for sale include…
· Geregu Generation Company Ltd – 506MW open-cycle gas turbine.
· Benin Ihovbor Generation Company Ltd – 507MW open-cycle gas turbine with provision to convert to
combined-cycle.
· Calabar Generation Ltd – 643MW open-cycle gas turbine with provision to convert to
combined-cycle.
· Omotosho Generation Ltd – 513MW open-cycle gas turbine with provision to convert to
combined-cycle.
· Olorunsogo Generation Company Ltd – 754MW combined cycle gas turbine.
This 2,900MW represents about
23% of Nigeria’s installed capacity.
The sale framework
The sale process is occurring
within a framework based on the National Electric Power Policy 2001 which led
to the Electric Power
Sector Reform Act 2005. The
Act includes provision for...
· Establishment of corporations to takeover over the various assets
and liabilities of the National Electric Power Authority.
· The formation of the Nigerian Electricity Regulatory Commission to
oversee the transmission and distribution functions.
· Establishment of a wholesale electricity market.
Readers shouldn’t be surprised
at any of that … all very standard sector reform stuff.
The expected sale process
The sale process is being
managed by the Bureau Of Public Enterprises, and calls for bids for 100%
shareholdings in any of the 5 companies from experienced generation companies.
The Nigerian government hopes to raise N434b (about NZ$1.467b) from the sale of
Geregu, Omotosho and Calabar alone.
Energy mix and grid security
Aus – closing coal-fired generation
Introduction
A couple
of months ago EnergyAustralia
announced its intention to close the Yallourn
W coal-fired station in Victoria in
2028, about 4 years ahead of its originally planned closure date of 2032. This
article examines the planned closure, and a proposed orderly closure of
remaining coal-fired generation to minimise price spiking.
A bit about Yallourn W
The current
Yallourn W station comprises two 350MW and two 375MW steam turbines, and is
located in the Latrobe Valley about 130km east of Melbourne . The station is
fired on Victoria’s renowned brown coal, burning about 18,000,000 tons per
year. Yallourn W supplies about 22% of Victoria’s electricity, and about 8% of
the NEM’s electricity.
The closure plans
Earlier
in 2021, EnergyAustralia announced that the intended closure in 2032 would be
bought forward to mid-2028. This is due to a combination of…
· Falling
wholesale prices.
· Rising
maintenance costs as the plant ages (it will be close on 50 years old now).
· Decreasing
ability to ramp up and down to match variable renewable generation.
· Exhausting
of the Yallourn coal mine.
The
closure is expected to be preceded by the installation of a 350MW
battery at Jeeralang.
An orderly withdrawal and the energy
trilemma
No
analysis of a power station closure would be complete without a look at the energy
trilemma, a model which
highlights the interdependence of price, security and emissions. As noted
previously, the closure of Hazelwood in 2017 caused average prices in Victoria
to increase from $60 per MWh to around $100 per MWh, and also caused a decline
in grid security.
However,
there is general agreement amongst commentators that the seemingly ad-hoc
closure announcements have contributed as much to the price rises as the
closures themselves, and to this end a centrally-coordinated Coal
Generation Phasedown Mechanism has
been proposed in which generators would bid the value they attach to continued
generation for target dates of 2026, 2028 and 2030. Those values would then
allow a coordinated and least-cost closure of the least efficient coal-fired
stations.
Further reading
· Pipes
& Wires #193 - increasing
concern over coal-fired closures.
· Pipes
& Wires #192 – examining the
impact of the planned Liddell closure.
· Pipes
& Wires #175 – retaining
coal-fired generation.
· Battery in,
coal-fired power out as energy giant closes Yallourn plant four years early.
· Concerns of price
spikes after Yallourn power station closure brought forward to 2028.
US – power shortages in the Golden State
Introduction
Pipes
& Wires #200 examined the
rolling blackouts in California in the 2020 summer, and noted that the cause
appeared to be the unhelpful convergence of several factors that led to a
capacity shortage. This article examines the recurring shortages in the 2021
summer to set some context for future analysis.
The CaISO warnings
In late
June the CaISO warned that rising temperatures and droughts could mean capacity
shortages, noting that demand response and customer conservation would be
critical to getting through summer. Key issues include…
· Low
hydro storage going into a long, dry summer
· Reduced
imports from Arizona, Washington and Oregon as those states battle their own
hydro shortages and high air-con demand.
· Temperatures
expected to be above normal, getting towards 105oF.
What’s changed since the 2020 summer ?
A couple
of things have changed in California since the 2020 summer…
· Reduced
imports from the Pacific North-West in particular.
· Approval
of an 11,500 MW procurement package by the CPUC in June 2021, including 2,000
MW of capacity available by 2023 and stepping up to the full 11,500 MW being
available by 2026.
· An expected
1,490 MW of batteries coming on-line over the June quarter. The CaISO notes
that unlike gas-fired generation, these batteries will need careful management
to ensure they are fully charged to supply the evening peak (when demand climbs
and solar generation also declines).
· A
campaign by OhmConnect to
offer 1,000,000 smart thermostats that could reduce peak demand by 680 MW.
It is,
however, worth noting that 3,700 MW of gas-fired generation and 2,200 MW of nuclear
generation are scheduled to close by 2025, leaving a nett 5,600 MW of new
generation by 2026. Pipes & Wires will pick up this story again later in
2021 as the summer heat fades in fall…
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
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