Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #208 … after a few video clips including 1 of my awesome
daughter singing a Bruce Springsteen cover, this issue examines the amending of
the New Zealand Code to become technology-neutral, the recovery of EV charger
costs in the US, and amending the Australian Rules to be indifferent to energy
flow direction.
We
then focus on two (more) regulatory decisions from New Zealand, and then
examine Australia’s recently announced energy scenarios. This issue concludes
by examining the Spark Infrastructure takeover in Australia and the
unsuccessful attempt to form a non-profit public electric company in the US. So
… until next month, happy reading…
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Recent client projects
Recent
client projects include…
· 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 South Island in Pipes
& Wires #206 and the North Island in Pipes & Wires #207, we now look at
the in-between … the HVDC from Benmore
to Wellington (also known as the
Cook Strait Cable.
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.
Regulating
emerging technologies
NZ – allowing
energy storage to provide instantaneous reserves
Introduction
The Electricity Authority recently released
its Draft
Decision to amend the Electricity
Industry Participation Code to allow some
energy storage owners to offer instantaneous reserves. This article examines
the key features of the Draft Decision.
The
existing Code and the need to amend
The existing Code unintentionally prohibits
energy storage from providing instantaneous reserves to the wholesale market,
as the definition only allows for…
· Interruptible
load.
· Partly
loaded spinning reserve.
· Tail
water depressed reserve.
The
Draft Decision
Key features of the Draft Decision include…
· A
conclusion that the benefits to the wholesale market of allowing low-cost
instantaneous reserves will exceed the costs.
· An
acknowledgement that allowing energy storage to provide instantaneous reserves
is consistent with the Code’s intent of improving reliability and efficiency.
· Recognising
that regulatory certainty would encourage the installation of large batteries
for the overall benefit of the grid.
· Omitting
the specific term “battery” from battery energy storage system to consider
other technologies such as mechanical and thermal energy storage.
· Minor
amendments to clarify specific technical terms.
The proposed amendments to the Code are at the back of the Draft
Decision paper.
Next
steps
In conjunction with amending the ancillary
services procurement plan, the Electricity
Authority hopes to complete the amendments and bring them into force by April
2022.
US –
recovering the cost of EV chargers
Introduction
News recently emerged that Southern
California Edison plans to install 38,000 EV chargers. This article looks
beyond the engineering scale of this plan to consider the revenue and
regulatory models that might emerge.
SoCalEd’s
plans
SoCalEd plans to install 38,000 EV chargers
throughout its service territory over the next 5 years, with an added emphasis
on installing about 18,000 chargers near multifamily apartments and
condominiums. Media comment noted that the roll-out will be funded by SoCalEd’s
customers
The
CPUC’s responses
In July 2020 the California
Public Utilities Commission approved $442m of funding for the
roll-out, noting that the decision was consistent with California’s emission
reduction policies.
The
emerging model
Key features of the emerging revenue and
regulatory model appear to be…
|
Parameter |
SoCalEd roll-out |
Remarks |
|
Revenue |
Will allow costs to be recovered from
customers at large. |
Appears to be at odds with other charger
roll-out decisions that have prohibited recovering the costs from customers
at large. |
|
Regulatory approval |
Appears to have approved spend rather
than cost recovery. |
Again, this seems unusual in that
regulators usually specify how much cost can be recovered through regulated
tariffs, rather than what can be spent. |
|
Ownership |
Allowed to own chargers. |
States show a mixed preference for
ownership, with some states preferring competitive third-party ownership, and
other states allowing ownership by electric companies. |
Further
reading
· US – who
should own EV chargers ?
· US –
recovering the cost of EV charging infrastructure
· US –
clarifying the definitions around EV charging
Aus – becoming
indifferent to energy direction
Introduction
Pipes
& Wires #200 examined a proposed
a change to the National Electricity Rules that would allow distributors to charge rooftop solar customers
for injecting, and then followed up the Australian Energy Markets Commission
(AEMC’s) draft decision in Pipes
& Wires #205. This
article examines the AEMC’s final decision.
The
AEMC’s draft determination
Back in March 2021 the AEMC released a draft
rule determination 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.
This two-page
infographic summarises it
nicely.
The
AEMC’s final determination
The AEMC released its final
determination in August 2021,
which largely confirm the key features of the draft determination. Key features
of the final determination include…
· Confirming
that export of electricity is a core service to be provided by DNSP’s by
removing references to the direction of energy flows.
· Allowing
the AER to apply similar criteria and incentive mechanisms to investment
required for energy export as it has historically done for investment required
for energy import.
· Requiring
DNSP’s planning frameworks to fully explain their approach to energy export
planning, and the use of non-network options.
· Requiring
DNSP’s to describe how each chapter of its regulatory proposal (rate case) will
treat DER integration.
Further
reading
· Aus –
charging customers to inject solar.
· Aus –
centralised control of rooftop solar.
Network regulatory decisions
NZ –
setting the WACC’s
Introduction
The Commerce Commission recently released a series of cost of capital
decisions that will apply as follows…
· To Chorus for the first
price-quality period (PQP1), from 1st January 2022 to 31st
December 2024.
· To Transpower for the
disclosure year ending in 2022.
· To GasNet and Vector’s
gas pipeline businesses for the disclosure year ending in 2022.
· To Auckland and
Christchurch Airports for the disclosure year ending in 2022.
This article examines the key features of those decisions.
A bit about Chorus
Chorus is the fiber and fixed line copper company in New Zealand
following the demerger of Telecom into line (Chorus) and retail services
(Spark) in 2011. Chorus is prohibited from selling fiber and copper services
directly to customers, rather it must sell to retailers such as Spark and
Vodafone.
Regulatory frameworks
The regulatory frameworks include…
· Subpart 3 of Part 4 of
the Commerce Act 1986.
· Subpart 3 of Part 6 of
the Telecommunications Act 2001.
· Clauses 2.4.1 to 2.4.9
of the Transpower Input
Methodologies Determination 2010 (consolidated to 29th January 2020).
· Clauses 2.4.1 to 2.4.9
of the Gas Distribution
Services Input Methodologies Determination 2012 (consolidated to 3rd
April 2018).
· 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 |
|
Chorus |
Vanilla WACC |
|
4.72% |
|
|
|
Post-tax WACC |
|
4.52% |
|
|
|
|
Transpower |
Vanilla WACC |
3.35% |
4.03% |
4.47% |
4.71% |
|
Post-tax WACC |
3.02% |
3.70% |
4.14% |
4.38% |
|
|
GasNet, Vector |
Vanilla WACC |
3.66% |
4.37% |
4.83% |
5.08% |
|
Post-tax WACC |
3.34% |
4.05% |
4.51% |
4.76% |
|
|
Auckland and Christchurch Airports |
Vanilla WACC |
|
5.24% |
|
|
|
Post-tax WACC |
|
5.11% |
|
|
NZ –
resetting the gas default price paths
Introduction
The Commerce Commission is currently
compiling the third default price-quality path (DPP3) that will apply to 4 gas distribution
businesses and 1 gas transmission business for the 5 year period starting on 1st
October 2022, and has recently released a process
and issues paper. This article
examines that paper to set some context for future analysis of the DPP3.
Regulatory
framework
The regulatory framework is set out in Part
4 of the Commerce
Act 1986, and includes…
· Subpart
6, which sets out
the generic default and customised price-quality regulation.
· Subpart
10, which includes
regulatory issues specific to gas pipelines.
The
changing context for DPP3
Not surprisingly, the expected decline of
natural gas consumption over the next decade or so creates a lot of uncertainty
within which to compile the DPP3, which the Commission needs to balance against
its various statutory objectives. Key challenges include…
· Accurately
projecting profitability in the context of uncertain future gas volumes.
· Amending
the Input Methodologies whilst still meeting the statutory timeframe for
determining DPP3.
· Correctly
addressing asset stranding as customers relinquish supply.
The
notable feature – a different approach to setting starting prices
Section 53P(3) of the Commerce Act 1986
provides two approaches for setting starting prices…
· A simple
rolling over of the previous periods’ closing prices, or
· Resetting
the starting prices based on current and forecast profitability.
The DPP1 and DPP2 gas price controls were
reset on the basis of current and forecast profitability, however the
Commission considers that the expected decline in gas volumes and eventual
asset stranding makes excessive profits unlikely, which in turns makes a simple
rolling over appropriate.
Pipes & Wires will revisit this issue
as the Commission progresses the DPP3 compilation, both in the specific context
of the Gas DPP3 but also in the context of compiling price controls for
infrastructure facing significant volume changes.
Energy mix and grid security
Aus – future energy scenarios
Introduction
The Australian Energy
Market Operator (AEMO) recently released its final 2021 Inputs, Assumptions &
Scenarios Report. This article notes the AEMO’s role, and examines
the key features of the Report.
The AEMO’s role
The AEMO’s primary role is to promote efficient
investment and efficient operation of gas and electricity infrastructure and
markets for the long-term interests of Australian consumers in regard to price,
quality, safety, reliability and security. The AEMO has to interface with the
Australian Energy Markets Commission (the rule maker), and the Australian
Energy Regulator (the rule enforcer).
The five core scenarios
The report sets out the
following five core scenarios…
·
Slow Change,
which reflects a challenging post-Covid world with a higher risk of industrial
demand closures. The weaker economy leads to slowing commercial decarbonisation
but increased customer DER penetration (to offset higher energy bills).
·
Steady Progress,
which reflects existing policy commitments, uptake trends and cost reductions,
but is unlikely to achieve nett zero by 2050. Aging coal-fired generation exits
the market as currently scheduled, if not before.
·
Nett Zero 2050,
in which immediate term emission reduction research and development is deployed
from 2030 onwards to decarbonise industry and home space heating.
·
Step Change,
which includes a rapid customer-led decarbonisation prompted by step changes in
policy.
·
Hydrogen
Superpower, which reflects strong global action and includes exports of green
hydrogen.
As always, interested
readers should read the entire report.
Industry reshuffling
Aus – Spark Infrastructure accepts takeover offer
Introduction
News emerged recently of an unsolicited
offer for Spark Infrastructure of A$4.9b that was subsequently increased to A$5.2b. This article was intended to set some context for
future analysis, however events moved very rapidly with Spark accepting that
offer.
A bit about Spark
Spark Infrastructure’s investments
include…
· 49% of SA Power Networks.
· 49% of Victoria Power Networks (comprising CitiPower
and Powercor).
· 15% of Transgrid.
· 100% of the Bomen Solar Farm in New South Wales.
Spark’s investment characteristics include
a good mix of regulated cash returns (from the networks) and growth (from the
solar farm).
The initial offer
The various offers are…
· The initial offer of A$2.70
per share (totalling A$4.9b) by a consortium led by Kohlberg Kravis & Roberts (KKR) and the Ontario Teachers’ Pension Plan (OTPP), which was rejected by the Spark board in
mid-July 2021.
· A second offer of A$2.80 per share lifted Spark’s
closing share price to A$2.67
· A third offer of A$2.95 per
share prompted Spark to allow the bidders to have non-exclusive access to a
select range of non-public information. This was the offer that was accepted.
The strategy behind the bid
Investment strategies over the last 15
years or so have shown the following…
· A divergence of the regulated cash returns from lines
businesses from the growth prospects of energy businesses. This was very clear
in Germany as electric companies like E.On and RWE divested their transmission
grids to focus on generation and retail.
· A divergence between thermal and renewables within
energy businesses, as generators sought to distance themselves from perceived
dirty energy and sought the emerging high returns of renewables.
· A further divergence within renewables, between hydro
and wind / solar eg. the Trustpower demerger in
2016.
· A possible re-converging of lines and wind / solar,
combining the regulated cash returns (attractive to pension funds) and the
emerging high returns of solar.
The wider context of Australian infrastructure
Off to the side of the Spark bid, Sydney
Airport rejected a bid of A$8.25 per share (totalling
A$22b, which is well short of its estimated valuation of A$30b) from a consortium
led by IFM Investors. That bid was subsequently raised to A$8.45
per share, which was also rejected.
Also in late breaking news is Brookfield Asset Management’s A$9.6b non-binding offer for
AusNet Services. Pipes
& Wires #209 will examine that story in detail.
US – forming a public electric company in Maine
Introduction
Transferring privately owned electric
companies into public ownership is nothing new … it happened in the UK in the
late 1940’s (and undoubtedly other places both before and after). This article
notes the unsuccessful attempt to form a public electric company in the US
state of Maine.
The proposal
The proposal was to form a new legal
entity called Pine Tree Power Company, which would then issue bonds to buy the
assets of Central Maine Power and Versant Power. The legal process
included…
· The passing of LD 1708 (also known as HP 1269) in
the House in late June 2021.
· The passing of LD 1708 in the Senate.
· Subsequent veto by Governor Janet Mills in mid-July 2021.
What were the proponents hoping to achieve
?
The proponents of the Pine Tree Power
Company have 4 objectives…
· Reducing the cost to customers, claiming that
customers of Central Maine Power and Versant pay 58% more than Maine’s
customers supplied by community-owned electric companies.
· Improving reliability, claiming that Maine has both
the most and the longest outages in the US.
· Facilitating clean energy, claiming that both Central
Maine Power and Versant do not cooperate with solar providers.
· Improve accountability to customers and the community.
Arguably the last 2 points could be easily
achieved by a change of ownership structure, however it is not clear how a
legacy cost-reliability position could be easily moved (especially as prices
would still need to include a commercial cost of capital).
The parallel of Glas Cymru
Long-time readers might have
noted a parallel with the formation of Glas
Cymru in
2001 as a special purpose company to own the shares in Dwr Cymru Welsh Water. Because Glas Cymru has no shareholders, its balance sheet is
funded by a mix of bonds and by costless equity funded from retained earnings.
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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