Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #211 … we hope that the New Year finds you fit and well.
This issue starts by examining how gas pipelines might be regulated in a
transforming energy system, and then looks at the exiting of thermal generation
from markets. We then examine a denial of transmission grid access along with
two regulatory decisions and conclude with a rejected merger and some thoughts
on disintermediation.
A
recurring theme of this issue is the increasing need for orderly retirement of
thermal generation. My colleagues at the UMS Group have extended their
successful learning consortia program with the Glidepath For Coal learning
consortium for electric companies to share their learnings and best
practices in a secure and confidential forum.
So …
until next month, happy reading…
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Recent client projects
Recent
client projects include…
· Compiling a client resilience framework
for an electric distribution company.
· 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
Metro
transit substations
This two video clips take a step back in
time to the generators and substations that supplied New York’s subways…
· 17
minute video – secret substations.
· 3½
minute video – a rotary converter.
Chimney
& boiler demolition
This 1 minute
video shows the blasting
of the chimneys and boilers at Wallerawang in the Australian state of New South
Wales.
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.
Regulatory
policy
Aus – regulating
gas in a transforming energy system
Introduction
Precisely what role gas will play in the
energy transformation seems unclear … some say it will be a welcome interim
substitute for coal, whilst others say it should be retired just as quickly as
coal. This article examines a recent thought piece from Energy Networks
Australia entitled Regulating
Gas In A Transforming Energy System, which
is well worth reading and reflecting upon.
Key
themes of the ENA thought piece
Key themes of the ENA thought piece
include…
· The
economic regulatory framework for gas distribution networks was established
when gas was Australia’s fastest growing fuel, with no end in sight.
· Very
critically, that regulatory framework does not appear to contemplate any
decline in gas volumes or that networks may have a limited remaining life.
· Although
future gas volumes are expected to decline over the long-term, by exactly how
much appears uncertain, with a wide range of interdependencies including
hydrogen, bio-gas and substitution by renewable electricity.
· The AER
has outlined a range of amendments to the regulatory framework, including
accelerating depreciation and compensating for asset stranding.
What
other jurisdictions are doing
Other jurisdictions are considering shorter
regulatory periods, ostensibly to prevent regulated gas companies from
capturing any benefits of uncertainty for too long…
· NZ – the
Commerce Commission has recently notified its draft decision to reduce
the duration of the third gas pipelines default price-quality path (DPP3)
from 5 years to 4 years (the minimum allowed), reasoning that a 4 year period
would allow the DPP4 embodying clearer policy changes and technology trends to
be set sooner. The Commission has, however, also noted that it could still
retain a 5 year period if it is persuaded that 5 years would better fulfil the
purpose of Part 4 of the Commerce Act 1986.
· UK – the
original RIIO - GD1 gas price controls were set for 8 year periods back around
2012, with the expectation that the industry was entering a period of
certainty. To the contrary, the industry now faces less certainty which
prompted Ofgem to return to 5 year regulatory periods to ensure that any gains
to the regulated companies are not locked in for long periods.
Pipes & Wires will watch this issue closely and comment further as
changes emerge.
Energy mix and grid security
NZ – the case for single thermal operator
Introduction
The need for orderly exiting of thermal
generation from electricity markets is becoming more apparent as the months
roll by. This article examines the case for a single thermal operator in the
New Zealand electricity market, but also cuts across some wider themes.
The case for a single thermal operator in New Zealand
A report on crafting a path towards a 100% renewable electricity market was released by Contact Energy back in November 2021.
Key features of the report include…
·
Contact’s preferred option for
establishing a ThermalCo to own and operate all New Zealand’s thermal
generation.
·
ThermalCo would sell both dry year and
peak demand risk management products to industry participants.
·
A desire to see New Zealand retain its
Triple A energy trilemma rating.
·
The view that ThermalCo would reduce
wholesale price volatility and encourage full recovery of fixed costs.
·
The view that ThermalCo would cause less
disruption to the existing market than the alternatives of introducing a
capacity market or establishing a strategic reserve.
Observations from other markets
A key observation is the uncoordinated
closure of Hazelwood and the proposed closures of Liddell and Yallourn W from
the Australian NEM, which have all been noted as causing price spikes and
declines in grid security. Additional observations include the price increases
on the European Power Exchange when Germany closed several nuclear stations a
few years ago.
Further reading
·
Global – WEC trilemma ratings (Pipes & Wires #209)
·
Germany – phasing out coal (Pipes & Wires #209)
·
Aus – closing coal fired generation (Pipes & Wires #207)
·
US - designating must-run generation (Pipes & Wires #204)
·
Aus – the Liddell closure task force
reports back (Pipes & Wires #201)
US – rejecting a coal retirement plan
Introduction
We’re
used to seeing policy and regulatory support for earlier-than-planned
retirement of coal-fired generation, so when a regulator rejects an electric
company’s proposed coal exit plan some examination is merited. This article
examines the New Mexico Public Regulation Commission’s (PRC) recent rejection
of the Public Service Company of New Mexico’s (PNM) plans to exit its 13% stake
in the Four
Corners power station on the basis that
PNM has not identified how that 200 MW of generation will be replaced.
The Four Corners coal-fired power station
Four
Corners was originally a 2,040 MW coal-fired station dating from the early
1960’s with 5 steam turbines near Fruitland, New Mexico, however only the two
770 MW units designated #4 and #5 remain in service. Units #4 and #5 are
jointly owned, including 13% by PNM, 7% by the Navajo Transitional Energy
Company (NTEC) and the majority 63% stake by the Arizona Public Service (APS)
which also operates the units.
APS has
committed to fully closing Four Corners by 2031, with 1 of the units beginning
seasonal operation around September 2023.
PNM’s plans to exit Four Corners
PNM had
planned to transfer its 13% stake in Four Corners to the NTEC in 2024,
effectively abandoning its stake along with paying NTEC $75m of shareholders’
funds to take ownership. This is thought to have been driven by PNM’s proposed
merger with Avangrid (which was unanimously rejected by the PRC in December
2021).
The
original regulatory filing noted that this transaction would…
· Save
customers about $300m by eliminating a further 6½ years of Four Corners costs.
· Assist
PNM to exit coal almost 7 years earlier than planned.
The PRC
has requested additional information since the PNM’s original regulatory filing
in March 2021, stating that the original filing didn’t sufficiently explain the
public benefits.
The PRC’s decision
The key
feature of the PRC’s 5 – 0 decision to reject the transaction is that PNM has
failed to identify how the 200 MW of available generation would be replaced.
Additional features of the decision included…
· Noting
the difficulties in constructing replacement generation that had been approved
over 12 months ago, suggesting that the PRC’s decision recognises the
importance of secure electricity supply.
· The
transaction would not actually close coal-fired generation.
The various views
The
various views include…
· Disappointment
from PNM, noting that the decision is inconsistent with the accepted policy of
coal exit and that the PRC had previously approved coal exit decisions before
replacement generation was confirmed.
· Applause
from some environmental groups, who claim that the proposed transaction
could’ve left Four Corners operating indefinitely.
Energy
markets and grid access
US – denying
transmission grid access
Introduction
Most of us are well aware that transmission
grid access has long been viewed as critical to an efficient wholesale
electricity market, and is now regarded as even more critical to promote
connection and interconnection of renewables. This article examines a recent
regulatory decision to deny transmission grid access to several smaller
distributors.
The
facts
The facts of the matter include…
· The Tennessee Valley Authority (TVA)
supplies electricity to 153 muni’s and coops around the Tennessee Valley. This
included the establishment of a market fence around the TVA service territory
by amending the TVA Act in 1959.
· This
includes the Athens
Utility Board, the Gibson EMC, the Volunteer Energy Coop and the
Joe Wheeler EMC which
purchase all their electricity from the TVA under fully bundled arrangements.
· In early
2021 Athens, Gibson, Volunteer and Joe Wheeler petitioned the Federal Energy
Regulatory Commission (FERC) to order the TVA to provide open-access
transmission connections so they could shop around outside the TVA supply area for
better electricity deals.
· The
petitioners specifically note that because they are all within the TVA’s supply
area, they cannot practically access any other transmission grids.
· Joe
Wheeler subsequently withdrew its petition in August 2021 after negotiating a
new supply arrangement with the TVA.
The
FERC’s decision
In a lengthy judgment that includes the
nuances of Congressional amendments to the TVA Act in 1959
and s211 of
the Federal Power Act, the FERC
ruled 3:1 against the petitioners and
declined to order the TVA to provide unbundled transmission services. Key
features of the ruling included…
· Three of
the four Commissioners declined to order the TVA to provide the open access
transmission sought by the petitioners.
· Changing
the TVA’s basic statutes is the prerogative of Congress, not of the FERC.
· That
Congress should amend the TVA Act to eliminate the fence, noting that the
benefits of removing the fence (enabling those muni’s
and coop’s to shop around) would likely exceed whatever benefits the fence was
intended to provide in 1959.
Network regulatory decisions
South
Africa – Eskom wins court case against NERSA
Introduction
Pipes
& Wires #210 examined the
National Electricity Regulator of South Africa’s (NERSA) decision to reject
Eskom’s fifth multi-year price determination (MYPD5), which Eskom challenged in
the High Court. This article notes the High Court’s decision in favor of Eskom.
The
MYPD5 application
The MYPD application included the following
revenue forecasts…
|
YE 31st
March |
2023 |
2024 |
2025 |
|
Revenue forecast |
R279b |
R335b |
R365b |
Recapping
NERSA’s decision
NERSA’s rejection of the MYPD5 application
for the period 1st April 2022 to 31st March 2025 was
because it was compiled using the MYPD4 methodology that NERSA contended was no
longer valid due to industry changes including Eskom’s
unbundling. That rejection
was accompanied with a request to submit a revised 1 year application based on
the principles of a new methodology that is currently being considered.
The High
Court’s decision
The Gauteng
High Court decision of 3rd December 2021 ordered
NERSA to apply the MYPD4 methodology to the revenue forecast for the year
ending 31st March 2023, and to make a decision by 25th
February 2022. Pipes & Wires will pick up this story again once NERSA’s
decision emerges.
Aus – the Powerlink revised revenue proposal
Introduction
Powerlink recently submitted
its Revised
Proposal to the
Australian Energy Regulator for the 5 year control period commencing on 1st
July 2022. This article examines the key features of that Revised Proposal.
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 |
$882m |
|
|
OpEx |
$1,029m |
$1,119m |
$1,071m |
|
|
Opening RAB |
$6,958m |
$6,983m |
$7,140m |
|
|
Post-tax nominal WACC |
4.44% |
4.65% |
4.65% |
|
|
Depreciation |
$881m |
$947m |
$843m |
|
|
Smoothed nominal revenue |
$3,565m |
$3,652m |
$3,680m |
|
Pipes & wires will comment
further once the AER releases its Final Determination.
Industry reshuffling
US – New Mexico rejects Avangrid’s bid for PNM
Introduction
News
recently emerged that the New Mexico Public Regulation Commission (PRC) had
rejected Avangrid’s bid for PNM Resources. This article summarises the deal and
then examines the PRC’s reasons for rejecting the bid.
The parties
The parties
to the proposed deal were…
·
Avangrid supplies about 3,100,000 electric customers throughout the New
England states and up-state New York. Spanish electric company Iberdrola is an 81% shareholder in
Avangrid (and also owns ScottishPower and MANWEB in the UK). Annual revenues are
about $6.4b.
·
PNM Resources is an energy holding company based in Albuquerque, which
supplies regulated electric services to 800,000 customers in New Mexico and
Texas. Annual revenues are about $1.5b
The proposed deal
In October
2020, Avangrid offered to buy all of PNM’s common stock for $4.3b, valuing the
total deal at about $8.3b. Completion of the merger would’ve made PNM part of
the world’s third largest electric company.
New Mexico’s rejection of the merger
The PRC
rejected Avangrid’s offer in December 2021 for what appears primarily to be
Avangrid’s alleged poor record of supply reliability in the north-eastern
states. This rejection came as a surprise to many (including to PRC staff who
had agreed not to oppose the merger in return for supply reliability commitments),
despite warnings from a hearing examiner in November 2021 that approval would be
unlikely.
Options
before PNM and Avangrid include…
· PNM requesting a re-hearing by the PRC (which
commentators believe is unlikely to be granted).
· Avangrid appealing the PRC decision to the New
Mexico Supreme Court to force the PRC to reconsider its decision.
Wider stakeholder views
Not
surprisingly, progressing decarbonisation was a major stakeholder concern,
however stakeholder views appear to vary…
· Supporters of the merger claim the PRC’s
rejection will impede PNM’s decarbonisation efforts and deprive New Mexico of some
key roles in Iberdrola’s big renewable plans.
· Critics of the merger claim that PNM could roll
out renewables independently of any merger (PNM subsequently publicly affirmed
its commitment to retire all fossil-fuelled generation).
Views on whether customers will be
better off also vary…
· Supporters of the merger point out that the merger included $300m of
customer and community benefits that will not proceed.
·
Critics of the merger claim that supply
reliability would’ve declined under Avangrid’s ownership.
Further reading
· US – Avangrid and PPL propose giant merger (Pipes & Wires #195).
US – disintermediating the electricity supply chain
Introduction
Most of the industry reshufflings examined
by Pipes & Wires resulted in fewer pieces, but of late demergers have
resulted in more pieces. This article examines the rapidly emerging trend of
disintermediation (a dimension which results in more pieces that seem to come
from nowhere and are owned by non-traditional players) using Tesla’s recent
application to become an electricity retailer in Texas as a starting point.
Tesla’s proposal
Back in August 2021, Tesla applied to the Public Utility Commission of Texas for Tesla Energy Ventures to become an electricity
retailer specifically targeting customers already using Tesla products. Key
features of Tesla’s electricity retail model include leveraging their solar and
batteries, and mining their customer data.
Examining the concept of disintermediation more
closely
Disintermediation is one of the D’s of the emerging world of electric distribution, but what does it really look like in practice ? Disintermediation has the following features…
· Usually involves a non-utility company inserting
themselves into the electricity supply chain.
· Often focuses on small layers of value that have only become
discretely identifiable as markets deregulate.
· The proliferation of new battery chemistries is
creating new layers of value.
· Modern digital technologies are required to identify
and monetise those thin layers of value.
· Modern communication technologies are required to
communicate all the associated data to a central hub.
· Very low transaction costs are required to make those
thin layers of value profitable.
Some personal thoughts
A bit of reflection on the services
provided by the traditional electric company business model reveals that what
we now call flex services were around many decades ago, but they had the
following features…
· Bundled into an overall service offering.
· Difficult to separately identify.
· Weren’t deliberately monetised (although interruptible
supplies were charged less).
· Used technologies such as pilot wires (and then
frequency injection).
· Data transfer back to a centralised hub was limited.
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
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.