Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 209 – October 2021

 

From the editor’s desk…

 

Welcome to Pipes & Wires #209, which starts with a look at regulating solar exports in Australia. We then examine phasing out of coal in Germany, and consider whether hydrogen-fired gas turbines might beat batteries.

 

After examining an Australian electricity transmission revenue decision, we end this issue by considering industry reshufflings in Australia and the US. So … until next month, happy reading…

 

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Recent client projects

 

Recent client projects include…

 

·     Developing an asset lifecycle risk strategy for an electric distribution company.

 

·     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 … this grainy black-and-white video copied off an 8mm film shows the construction of the 90 MW Karapiro hydro station near Cambridge during the 1940’s. With a total population of only 1,700,000 (of whom about 140,000 were away fighting the war) we built…

 

·     Karapiro – 1940 to 1947.

 

·     Tekapo A – 1938 to 1951 (recess from 1942 to 1944).

 

·     Highbank – 1939 to 1945.

 

·     Cobb – 1937 to 1944.

 

·     Piripaua – 1939 to 1943.

 

·     Kaitawa – 1943 to 1948.

That’s an impressive record for a small country that then went on to build a whole heap more hydro, coal and geothermal stations during the 1950’s.

 

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.

 

Radiohead cover … by my awesome daughter

 

Pick this link to see my awesome daughter Becca Caffyn singing Radiohead’s "High And Dry" off the 1995 album The Bends.

 

Regulating emerging technologies

 

Aus – introducing dynamic solar exports

 

Introduction

 

One of the 12D’s of the emerging distribution network is Decentralisation, which now appears to also have an increasing component of centralisation. This article examines the centralised coordination of rooftop solar using the introduction of dynamic solar export in South Australia as a starting point.

 

What exactly is dynamic export ?

 

Put simply, dynamic export is the centralised control of rooftop solar inverters being centrally instructed when they can export to the network, and how much. The key reasons for needing to limit solar injection are to prevent component overload and ensure grid stability, which is no different to a TSO instructing a large steam or hydro generator to reduce generation.

 

The proposed introduction of dynamic export in South Australia

 

The Australian Energy Market Operator (AEMO) already has the authority to curtail rooftop solar export to ensure grid stability. In contrast to this simple curtailing of solar exports to address overall grid stability, dynamic export will allow more localised congestion to be reduced by centralised ramping of inverters.

 

A recent virtual power plant (VPP) trial in South Australia has revealed that all of the 1,000 participating rooftop solar customers were able to export more into the network than if they had operated within SA Power Networks’ fixed 5kW per phase export limit. The expected benefits include…

 

·     Avoiding network capacity augmentation.

 

·     Providing frequency control ancillary services (FCAS).

 

·     Additional export revenue for solar customers.

 

A start date of 1st July 2022 for inclusion of dynamic export functionality has been proposed.

 

Further reading

 

·     Pipes & Wires #205 – centralised control of rooftop solar.

 

·     Advanced VPP grid integration.

 

Energy mix and grid security

 

Germany – phasing out coal

 

Introduction

 

Obtaining an orderly exit from coal-fired generation that correctly balances supply security, prices and emission reductions is obviously a major strategic challenge for many electric companies. This article examines Germany’s recently enacted Coal Phase-Out Act.

 

Key features of the Coal Phase-Out Act

 

Key features of the Act include…

 

·     Prohibiting the start of any new coal-fired generation after 14th August 2020, unless a license to operate was granted before 29th January 2020.

 

·     Requiring the national fleet of anthracite-fired generation to reduce to 15,000 MW by 2022, to 8,000 MW by 2030 and to be fully closed by 2030.

 

·     Requiring the national fleet of lignite-fired generation to reduce to 15,000 MW by 2022, to 9,000 MW by 2030 and to be fully closed by 2038.

 

·     Reviewing these phase-out schedules in 2026, 2029 and 2032 to determine whether full closures can be achieved by 2025.

 

·     Designating the Garzweiler lignite mine as essential to securing electricity supply, and allowing it to operate until 2038.

 

·     Paying workers aged 58 and older who lose their jobs for up to 5 years.

 

·     Amending the Renewable Energy Sources Act to raise the percentage of renewable generation to 65% by 2030.

 

In parallel, the Structural Support for Coal Regions Act provides for the following…

 

·     Providing €14b of aid to lignite-mining regions until 2038.

 

·     Providing €1b of aid to anthracite-mining regions until 2038.

 

·     A further €26b of aid to all coal mining regions to support infrastructure development and job creation.

 

Balancing the energy trilemma

 

We now consider how the coal phase-out might impact each dimension of the energy trilemma…

 

·     Emissions reduction – this will only occur if every coal-fired kWh is replaced by renewables. If those kWh are simply replaced by imported coal-fired kWh no global emissions reduction will occur.

 

·     Security of supply – the evidence from the Australian NEM is that security of supply declined as major coal-fired plants were closed. The long phase-out period suggests that the German authorities might be nervous about security of supply.

 

·     Price – again, the evidence from both Europe and the Australian NEM is that wholesale prices rose when nuclear and coal-fired generation was withdrawn from the market.

 

Further reading

 

·     Pipes & Wires #207 – closing coal-fired generation.

 

·     Pipes & Wires #138 – closing generation capacity.

 

·     Pipes & Wires #131 – coal makes a come-back.

 

·     Pipes & Wires #129 – slowing the transition to renewable energy.

 

·     Pipes & Wires #102 – phasing out the phase out of the phase out.

 

Global – could hydrogen-fired gas turbines beat batteries ?

 

Introduction

 

Pipes & Wires has previously examined the emerging battle between gas turbines and batteries for the peaking market. This article examines recent news that hydrogen-fired gas turbines could squeeze out Lithium-Ion batteries.

 

The engineering aspects

 

Firing gas turbines on a mix of gas and hydrogen appears to be well established, with at least some models of turbines also being capable of full hydrogen firing.

 

Possible advantages

 

Lithium-ion batteries are playing a significant role in buffering renewable energy, however two of the recognised limitations are…

 

·     The emerging view that whilst batteries can provide buffering for minutes or hours, they appear to have a limited ability to provide inter-seasonal buffering eg. storing summer solar electricity for release in winter.

 

·     Batteries must be fully charged at the start of a peak period, and eventually go flat (in contrast to generation, which can keep supplying).

 

Indicative levelised costs per MWh for both green and blue hydrogen-fired gas turbines are below that of Lithium-ion batteries, and are expected to decline further as hydrogen infrastructure is built.

 

Further reading

 

·     Pipes & Wires #188 – what future hath gas turbines ?

 

·     Pipes & Wires #187 – setting an end date for gas turbines

 

·     Pipes & Wires #184 – batteries versus gas turbines

 

·     Pipes & Wires #177 – replacing gas turbines with batteries

 

·     Pipes & Wires #175 – will batteries displace gas turbines for peaking ?

 

Global – WEC trilemma rankings

 

Introduction

 

The World Energy Council recently released its 2021 Energy Trilemma Index. This article examines the underlying principle of the Trilemma and refreshes the 2020 trilemma results from Pipes & Wires #202.

 

The trilemma rating

 

The trilemma is basically a triangle model that depicts how well a country is balancing the trade-offs between the three important dimensions of…

 

·     Security of energy supply.

 

·     Accessibility and affordability of energy.

 

·     Environmental sustainability, including both supply and demand side efficiencies and uptake of renewables.

 

Key features of the Index report

 

The WEC’s website has a cool interactive graphic which is worth having a muck about with to see which countries are ranked best in each of the indices. Picking the country names jumps to a screen detailing that country’s energy supply arrangements and also (perhaps equally important) that country’s political, societal and economic performance. Not surprisingly the top performers have a long history of stable and consistent energy policy that has encouraged investment in security of supply, and perhaps also has historically priced energy at a sustainable level that doesn’t require steep price increases to recover the full cost of energy and energy supply.

 

The top performers

 

The top performers for 2020 are…

 

 

 

2021 index

2020 index

Rank

Country

Score

Security

Equity

Sustainability

Score

Security

Equity

Sustainability

1

Sweden

84.2

5

19

2

84.2

6

28

2

2

Switzerland

83.8

24

6

1

84.3

24

9

1

3

Denmark

83.0

11

10

7

84.0

4

15

10

4=

Finland

81.7

2

21

19

82.1

2

31

22

4=

United Kingdom

81.7

19

9

10

81.7

17

14

11

5=

Austria

81.0

16

10

12

82.1

12

14

12

5=

France

81.1

17

16

8

81.7

18

21

5

 

What are the top performers of each dimension doing ??

 

Let’s consider what the Trilemma report has to say about the top performer in each dimension…

 

Dimension

Country

Score

Key features

Security

Canada

80.6

·     Significant indigenous primary energy.

·     Diverse generation portfolio.

·     Emerging concerns about long-term affordability.

 

Equity

UAE

69.5

·     Emphasis on universal access and affordability.

·     Diverse generation with high system reliability.

 

Sustainability

Switzerland

83.8

·     Increased low-carbon generation.

·     Reduced overall energy intensity.

·     Strong energy security, supported by low dependence on imports.

 

 

A bit closer to home

 

The rankings a bit closer to home are…

 

 

2021

2020

Country

Rank

Score

Security

Equity

Sustainability

Rank

Score

Security

Equity

Sustainability

New Zealand

9

79.1

28

17

18

10

79.5

29

24

18

Australia

18

74.6

30

12

59

25

75.4

34

17

60

 

Unfortunately, New Zealand’s energy security has declined since 2020 due to declining diversity and increasing reliance on fuel imports.

 

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 examines the AER’s draft decision.

 

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

Proposal

Draft Determination

Revised Proposal

Final Determination

CapEx

$796m

$754m

 

 

OpEx

$1,371m

$1,318m

 

 

Opening RAB

$3,582m

$3,546m

 

 

Nominal vanilla WACC

4.44%

4.76%

 

 

Regulatory depreciation

545m

$560m

 

 

Smoothed revenue

$2,646m

$2,675m

 

 

 

Pipes & wires will comment further once AusNet submits its revised proposal.

 

Industry reshuffling

 

Aus – AGL Energy proposes demerger

 

Introduction

 

Structural separation of businesses to release value is certainly a popular theme. This article examines the proposed demerger of Australian electricity and gas company AGL Energy.

 

A bit about AGL

 

AGL began as the Australian Gas Light Company in Sydney in 1837, and listed on the Sydney Stock Exchange sometime around 1871. From those simple beginnings, AGL has grown into an integrated energy services company supplying 4,200,000 electric and gas customers and operating a portfolio of coal and renewable generation totalling almost 11,000 MW (which supplies about 20% of the National Electricity Market).

 

AGL’s proposed demerger

 

The proposed demerger will firstly involve a name change to Accel Energy, and then the separation of the energy retailing business which will retain the AGL Energy Australia Ltd name. The businesses separations will include…

 

·     Accel Energy will retain the coal-fired generation, some gas storage, some wind generation and some batteries.

 

·     AGL Energy will retain gas-fired generation, hydro generation, solar generation, some gas storage, some wind generation and some batteries.

 

A key strategy of Accel Energy will be migration away from coal-fired generation, which is a now a well-established global strategy. Pipes & Wires will comment further as the demerger progresses.

 

The strategy behind the bid

 

As noted in Pipes & Wires #208, investment strategies over the last 15 years or so have shown the following…

 

·     A divergence of the regulated cash returns from lines businesses and the growth prospects of energy businesses. This was very clear in Germany as electric companies like E.On and RWE divested their transmission grids (stable, regulated earnings) to focus on generation and retail (unregulated growth opportunities).

 

·     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.

 

Further reading

 

·     Pipes & Wires #208 – Spark Infrastructure accepts takeover offer.

 

·     Pipes & Wires #207 – Mercury enters binding agreement to acquire Trustpower’s retail business.

 

·     Pipes & Wires #206 – Demergers in the quest for value.

 

US – merger based on clean energy

 

Introduction

 

Pipes & Wires #202 examined the proposed merger of Avangrid and PNM Resources to create “one of the biggest clean energy companies” in the United States. This article examines the merger partners’ recent engagement with the New Mexico Public Regulation Commission.

 

Recapping the proposed merger

 

The merger of Avangrid’s 3,100,000 electric and gas customers across New York, Maine and Connecticut with PNM Resources 790,000 electric customers across northern New Mexico and western Texas would create a merged company supplying about 3,600,000 regulated electric and gas customers across 5 states, but would also have renewable energy operations in 24 states. A key component of the merger is Avangrid’s and PNM’s strong focus on both renewable energy generation and distribution, with an intent to use the regulated earnings to fund renewable development.

 

Regulatory approvals required

 

In addition to the usual state, FERC, NRC and FCC approvals, antitrust and foreign investment approvals are also required due to Avangrid’s foreign parent. A further lengthy list of stakeholders were included as intervenors, and has resulted in the merger partners agreeing to provide $133.5m of customer credits and economic development funding.

 

Recent engagement with the New Mexico PRC

 

It is reported that the PRC has agreed not to oppose the merger in exchange for specific service quality commitments from Avangrid, which appear to be in response to declining service and supply reliability in both PNM and Avangrid’s legacy service territories. Those service quality commitments are based on PNM’s SAIDI and SAIDI over the period 2013 to 2017, and include

 

·     A starting $340,000 penalty for exceeding the average by more than 10% for 2 consecutive years, which would increase to $510,000 for a third year.

 

·     A further $34,000 penalty for each additional percentage over the 10% threshold, which would increase to $51,000 for a third year.

 

Pipes & Wires will pick up this story again as the final regulatory approvals are obtained.

 

Aus – Brookfield makes non-binding bid for AusNet

 

Introduction

 

As noted in Pipes & Wires #208, Brookfield Asset Management recently made a non-binding bid of A$9.6b for 100% of AusNet Services. This article examines that non-binding bid more closely.

 

A bit about AusNet

 

AusNet owns the following businesses…

 

·     The high voltage transmission grid across the state of Victoria, which includes plans for new connections to renewable energy projects in western Victoria.

 

·     The electricity distribution network in the northern and eastern suburbs of Melbourne, and across eastern and north-eastern Victoria as far as the NSW border.

 

·     The gas distribution networks in western Melbourne and across central and western Victoria.

 

·     A technology services business (Mondo).

 

AusNet’s current owners include Singapore Power International (32.3%), State Grid Corporation Of China (19.9%) with the remaining 48% being publically owned.

 

Brookfield’s non-binding bid

 

Brookfield’s A$2.50 per share bid in mid-September 2021 followed two previously rejected bids of A$2.35 and A$2.45 respectively, and values AusNet at A$9.6b. AusNet’s share price increased to A$2.36 when the latest offer was announced. Acceptance would require the approval of either of the two main shareholders, as well as by the Foreign Investment Review Board.

 

APA makes an offer

 

In late September 2021 energy infrastructure owner APA made a A$10b bid for AusNet, however Brookfield had already secured an exclusive 8 week due diligence period. APA challenged that exclusivity at the Takeovers Panel, and in late breaking news as this issue goes to print has been granted due diligence by AusNet. A bid by APA is likely to face competition scrutiny from the Australian Competition & Consumer Commission (ACCC) due to APA’s already extensive asset footprint.

 

Similar to the KKR-led takeover of Spark Infrastructure, decarbonisation is an obviously attractive component of the bids for AusNet.

 

And off to the side…

 

Pipes & Wires #208 also noted that Sydney Airport rejected a A$22b bid from IFM Investors. A further bid of A$23.6 was made in mid-September 2021, which has allowed IFM to begin due diligence. This bid is likely to concern the Australian Competition & Consumer Commission (ACCC) due to IFM’s ownership stakes in Melbourne, Brisbane, Adelaide and Darwin Airports.

 

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.