Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 210 – December 2021

From the editor’s desk…

Welcome to Pipes & Wires #210 … this issue starts with a quick review of a recent decarbonisation workshop and an update on the ring-fencing guidelines in Australia, and then looks at three revenue decisions. We then examine three significant acquisitions, and conclude with a look at Germany’s nuclear phase-out.

I would also take this opportunity to wish you all a very merry Christmas. So … until next month, happy reading…

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Recent client projects

Recent client projects include…

· Identifying the key features of grid-scale solar business models.

· 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

This video clip concludes the series of building NZ’s electric system … this scratchy black and white video describes the construction of the Manapouri underground hydro station during the 1960’s back when the NZ Electricity Department moved pretty much everything on J2 Bedford trucks. I first went to Manapouri on a high school biology camp in 1983, and continue to be amazed at its scale.

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

NZ – shaping the regulatory framework in the face of DER’s

Introduction

Regulators and electric companies alike are recognising that legacy regulatory frameworks seem poorly aligned to the emerging world of DER’s. This article summarises the key themes from a recent decarbonisation workshop hosted by the Commerce Commission. Many of the principles, observations and conclusions will however be applicable globally.

Takeaways from the workshop

Key takeaways from the workshop (in no particular order) include…

· AMP spend forecasts will form a critical component of the DPP4 reset.

· Historical OpEx is an unsuitable starting point to forecast future OpEx, with many participants saying that DER integration may require step increases in OpEx.

· The need for DDP re-openers to involve a modest amount of work, certainly much less than a CPP.

· Establishing a framework to better consider whether non-network solutions would improve capital efficiency.

· Changing how EDB’s think about customer demand, including encouraging demand at other times.

· Considering whether customer investment behind the meter might improve capital efficiency, and how EDB’s might help unlock that value including through encouraging market mechanisms.

· Consider whether non-network solutions might be better placed to provide resiliency, and how that resiliency might be paid for.

· Stronger linking of regulatory frameworks to digital assets.

· Progressing from discrete customer surveys to more continuous engagement.

· Ensuring that the regulatory framework correctly recognises required public policy outcomes, and rewards EDB’s for achieving policy outcomes.

· Recognising that whilst decarbonisation is important, it must be achieved at least cost.

Next steps

The Commission will receive written comments until 5pm on Tuesday 21^st December 2021. In the meantime, if you need assistance with any of these or similar matters, please contact me by replying to this email.

Aus – update on the ring-fencing guidelines

Introduction

Pipes & Wires has been examining the Australian Energy Regulator’s work stream on ring-fencing batteries, including the Draft Guideline v3 that was released in May 2021. This article examines the Final Version of the ring-fencing guideline that was released in November 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.

The guideline is made under Clause 6.17.2 of the National Electricity Rules.

Key features of the Final Version

The AER’s final positions include…

· An electricity distributor must not provide services (including services from an energy storage device first installed on or after the v3 amendment date) other than distribution services or transmission services.

· Accounting procedures sufficient to demonstrate the nature and extent of transactions with affiliated entities must be established and maintained.

· Costs must be allocated in a way that is consistent with the Cost Allocation Principles and its approved Cost Allocation Methodology.

· An electricity distributor must not discriminate between a related electricity service provider and their competitors in regard to direct control services or contestable electricity services.

· Separation of offices from any related electricity service provider which provides contestable services.

· Separation of branding of direct control services from the branding of a related electricity service providers’ contestable electricity services.

As usual, Pipes & Wires has paraphrased the decision, so affected parties should examine the AER’s full publication.

Further reading

· AER ring-fencing guidelines.

· Pipes & Wires #206 – ring-fencing batteries.

· Pipes & Wires #205 – ring-fencing batteries.

Network regulatory decisions

Aus – the Powerlink draft revenue determination

Introduction

The Australian Energy Regulator (AER) recently released its Draft Determination for the 5 year control period commencing on 1^st July 2022. This article examines the key features of that Draft.

A bit about Powerlink

Powerlink owns and operates the high voltage transmission grid that stretches from the Gold Coast in the south to Cairns in the north, comprising 15,300km of lines and 140 grid substations. Powerlink is owned by the Queensland State Government, and has an annual revenue of about $700m.

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 Powerlink process to date include…

Parameter	Proposal	Draft Determination	Revised Proposal	Final Determination
CapEx	$864m	$864m
OpEx	$1,029m	$1,119m
Opening RAB	$6,958m	$6,983m
Post-tax nominal WACC	4.44%	4.65%
Depreciation	$881m	$947m
Smoothed nominal revenue	$3,565m	$3,652m

Pipes & wires will comment further once Powerlink submits its Revised Proposal.

South Africa – regulator rejects Eskom’s MYPD5

Introduction

Readers will be familiar with Pipes & Wires analysis of the allowable $$$ as revenue decision approval processes progress. This article takes a different focus, examining the recent rejection of the Eskom’s 5^th multi-year price determination (MYPD5) by the National Electricity Regulator (NERSA).

The regulatory requirement

Eskom’s regulatory framework is based on the Electricity Regulation Act 4 of 2006, and inter alia requires a revenue application to comply with a methodology that has been previously consulted upon and approved by NERSA, and which remains in place until replaced by an approved alternative methodology.

Eskom’s MYPD5

Eskom submitted the MYPD5 for the period 1^st April 2022 to 31^st March 2025 back in early June 2021, which used the same (approved operative) methodology as MYPD4.

The regulators initial decision

In late September 2021, NERSA announced that it had rejected the MYPD5 application because it was compiled using a methodology that was no longer valid due to industry changes including Eskom’s unbundling. NERSA has requested Eskom to submit a revised 1 year application based on the principles of a new methodology that is currently being considered.

Eskom’s response

Eskom, in turn, has urgently asked the High Court to review NERSA’s decision, which NERSA has understandably opposed. Pipes & Wires will pick up this story again as the High Court’s decision emerges.

Further reading

· Pipes & Wires #194 – proposed break up of Eskom.

· Pipes & Wires #197 – court dismisses Eskom’s request for urgent relief.

· Pipes & Wires #198 – Eskom recovers additional revenue.

· Pipes & Wires #202 – splitting off Eskom’s transmission.

NZ – setting the WACC for gas pipelines

Introduction

The Commerce Commission recently released its cost of capital decisions for the disclosure year commencing on 1^st October 2021 for First Gas and for Powerco’s gas pipeline business. 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 Gas Distribution Services Input Methodologies Determination 2012 (consolidated to 3^rd April 2018).

· Clauses 2.4.1 to 2.4.9 of the Gas Transmission Services Input Methodologies Determination 2012 (consolidated to 3^rd April 2018).

Key features of WACC’s

Key features of the WACC’s include…

Company	Parameter	25^th percentile	Mid-point	67^th percentile	75^th percentile
First Gas Powerco gas	Vanilla WACC	3.96%	4.67%	5.13%	5.38%
	Post-tax WACC	3.60%	4.30%	4.77%	5.01%

These WACC’s show a clear upward movement from 12 months ago…

Company	Parameter	25^th percentile	Mid-point	67^th percentile	75^th percentile
First Gas Powerco gas	Vanilla WACC	3.07%	3.78%	4.24%	4.49%
	Post-tax WACC	2.83%	3.54%	4.00%	4.24%

Industry reshuffling

Aus – Spark Infrastructure recommends takeover to shareholders

Introduction

Pipes & Wires #208 examined the recent offer for Spark Infrastructure led by Kohlberg Kravis & Roberts (KKR) and the Ontario Teachers’ Pension Plan (OTPP). This article notes the independent advisors’ estimated fair value and the directors’ unanimous recommendation that shareholders accept the offer. This article is for general interest only, and is not to be considered as financial or investment advice.

Recapping the offers

The various offers are…

· The initial offer of A$2.70 per share (totalling A$4.9b) by a consortium led by, 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 independent advisors conclusions

The independent advisors’ have estimated the value of Spark to be between $2.49 and $2.86 per share, which is less than the offer (technically referred to as the Scheme Consideration) of $2.8875 per share. The independent advisors’ consider that offer of $2.8875 per share to be fair and reasonable, and is therefore in the best interests of shareholders in the absence of a superior offer.

The directors’ recommendations

The directors of Spark Infrastructure have unanimously recommended that shareholders vote in favor of the Scheme. This concludes Pipes & Wires coverage (unless a superior offer emerges).

Further reading

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

· Pipes & Wires #209 – Brookfield makes non-binding bid for AusNet.

US – PPL acquisition receives further approval

Introduction

Pipes & Wires has been following Pennsylvania Power & Light’s exit from its UK subsidiary Western Power Distribution, which led in turn to National Grid selling its US subsidiaries. This article notes a significant regulatory approval.

The transactions

The transactions are as follows…

· PPL will sell Western Power Distribution to National Grid

· In a separate transaction, PPL will buy the Narragansett Electric Company from National Grid.

· In a third separate transaction, National Grid will sell a majority stake in its UK gas pipeline business.

The strategy behind the transactions is to better align both PPL and National Grid assets to decarbonisation strategies and value extraction in their own countries.

FERC approval to acquire Narragansett Electric

In September 2021 the Federal Energy Regulatory Commission (FERC) unanimously approved PPL’s purchase of Narragansett Electric. The one outstanding approval required is from the Rhode Island Division of Public Utilities and Carriers, which is expected by March 2022.

Further reading

· Pipes & Wires #200 – PPL plans to sell Western Power Distribution.

· Pipes & Wires #203 – PPL’s sale of Western Power Distribution.

· Pipes & Wires #205 – PPL and National Grid to swop assets.

· Pipes & Wires #206 – National Grid to sell majority stake in gas business.

Aus – AusNet accepts Brookfield’s takeover offer

Introduction

Pipes & Wires has been following Brookfield Asset Management’s offer for 100% of AusNet Services. This article examines AusNet’s acceptance of that offer.

The process to date

Key events to date include…

· Brookfield’s initial offers of A$2.35 per share and A$2.45 per share respectively that were rejected.

· Brookfield’s A$2.50 per share bid in mid-September 2021, which valued AusNet’s equity at A$9.6b.

· An offer of A$10b by APA in late September 2021, by which time Brookfield had already secured an exclusive 8 week due diligence period.

· APA appealed that exclusive due diligence to the Takeovers Panel, and was granted due diligence by AusNet.

Key features of Brookfield’s final offer

Key features of Brookfield’s final offer include…

· Brookfield’s final offer was A$2.65 per share, valuing AusNet’s equity at A$10.2b and the total company at A$17.8b.

· That offer received support from the AusNet board, and its major shareholder Singapore Power.

· Some uncertainty over whether AusNet’s other major shareholder, State Grid Corporation of China, would sell.

Energy mix and grid security

Germany – phasing out nuclear

Introduction

Long-time readers might remember that about 10 years ago Germany decided to phase-out its nuclear generation fleet by 2022, and then reversed that decision and then reversed that decision (the phase-out of the phase-out of the phase-out). This article takes a look at how that phase-out appears 1 year from the target date.

Germany’s long road to phasing out nuclear

Germany’s long road to Atomaausstieg (the phasing out of nuclear) is as follows…

· Back in 2000 the German coalition government announced its intention to phase out nuclear power. This intention was subsequently enacted as the Nuclear Exit Law and saw plants at Stade, Obrigheim and Krummel closed down in November 2003, May 2005 and June 2007 respectively. The 30 year old plus stations at Biblis, Neckarwestheim and Brunsbüttel were scheduled for closure in 2010, which would have removed about 5,540MW of Germany’s 120,000MW of installed capacity.

· In 2005 a new federal government was elected in which Chancellor Angela Merkel announced an intention to re-negotiate the required closures. However her party’s coalition agreement with the Social Democrat Party (SPD) saw the closure policy being retained for the time being.

· In early 2008 Merkel and her party shifted to an open opposition of the nuclear phase-out and rejected a compromise by the SPD to postpone further shutdowns in return for a ban on new nuclear plants. Media comment suggested that the SPD were on the way out in the build up to the 2009 election as public opinion shifted toward “phasing out the phase out” (but appeared to stop short of approving new nuclear stations).

· After the 2009 election little time was lost in reaffirming the coalition government’s taste for nuclear energy, with a formal statement emerging from the CDU that Germany needed nuclear energy as a bridge until renewable are able to fill the gap.

· The radiation leaks following the Fukushima earthquake prompted vigorous protests from the anti-nuclear brigade, but also prompted something of a quick policy U-turn by Merkel who announced that the previous year’s life extension decision of 17 plants has been suspended for 3 months, and that shutdown of the 7 oldest reactors will proceed.

The year ahead

· The year ahead was to see the closure of 3 of Germany’s remaining 6 reactors by the end of 2021, and the final 3 reactors closing by the end of 2022.

· However, an open letter published in October 2021 urged the Government to suspend the closure to avoid missing Germany’s 2030 emission reduction targets. It is estimated that closing 8,000 MW of nuclear capacity will lead to an additional 60,000,000 tons of CO₂ from coal-fired generation.

Pipes & Wires will follow this closely as the role of nuclear in reducing emissions becomes more prominent.

The role of coal in Germany’s generation fleet

Pipes & Wires #209 noted the recently enacted Coal Phase-Out Act which provides for an orderly closure of anthracite-fired generation by 2030 and lignite-fired generation by 2038. The legislation also provides for reviews of the closure plans in 2026, 2029 and 2032.

Further reading

· Pipes & Wires #138 – closing generation capacity

· Pipes & Wires #100 – shifting nuclear policies

· Pipes & Wires #87 – forming the nuclear policy post-election

· Pipes & Wires #85 – which way for nuclear ?

· Pipes & Wires #77 – back-peddling in the nuclear shut-downs

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.