Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #212 …. this issue starts with a
quick look at my recent climate resilience and governance work, and then examines
two regulatory decisions in New Zealand and Australia. We then look at some industry reshuffling, with one in particular focusing
on the clean energy transition.
We
then examine the Input Methodologies review in New Zealand, and examine some
energy mix and grid security issues in Australia and conclude with a look at
solar curtailment in Western Australia.
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 time, happy reading…
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Recent client projects
Recent
climate resilience and governance client projects include…
· Aligning an electric company’s
governance framework to the Taskforce on Climate-related Financial Disclosure
(TCFD) recommendations.
· Compiling a TCFD reporting framework
for an electric distribution company.
· Translating climate policy into
infrastructure asset management practices.
· Linking an electric distribution
company’s asset management practices to climate predictions.
· Identifying leading global practices
for electric company climate resilience, including developing specific asset
strategies.
· Assisting 2 electric companies to
identify the revenue growth opportunities as decarbonisation creates new
markets for energy services.
· Amending risk management frameworks to
include climate risk identification, quantification and mitigation.
· Identifying emerging best practices for
community-scale and grid-scale batteries for an Australian lines company.
· Advised an Australian electric company
on how the Regulator has treated network transformation expenditure.
· Identifying best practices in EV
charging for an Australian lines company, including likely regulatory treatment
of chargers.
· Compiled an EV charging strategy
including estimates of the number of EV’s, likely charging habits and possible
tariff options.
· Compiling a solar PV market
intelligence report for an EDB.
· Compiled a regulatory submission on
proposed regulatory settings for DER’s on behalf of an EDB.
· Identifying the key features of
distributor-led transition from a DNO to a DSO or DMO.
· Assess solar PV investment
opportunities on behalf of a private investor.
· Identified emerging practices in DER
integration.
· Compiled a regulatory submission on EV
charging on behalf of an EDB.
· Advised a US electric company on the
role that demand aggregators are playing in the Australian NEM, and how that
demand aggregation might defer distribution feeder investment.
· Advised a US electric company on
Australian best practices in EV charging, including what value streams are
available.
· Advised a US electric company on which
Australian electric companies have the best behind-the-meter practices.
· Advised a US electric company on the
likely costs of DER integration based on recent Australian regulatory
proposals.
· Advised a US electric company on how
DERMS in NZ and Australia are altering CapEx and OpEx requirements.
These
are in addition to Utility Consultants asset management, risk mitigation and
regulatory strategy work.
Cool multimedia stuff
Cool
video clip – 115 year old substation
This 20 minute video
clip examines the early
beginnings of fragmented electricity supply in Britain, including the technical
challenges of interconnecting supplies with different frequencies.
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 … back by
popular demand…
Back by popular demand … pick
this link
to see my awesome daughter Becca Caffyn singing Bruce Springsteen's "Dancing In the Dark"
off the 1984 album Born In The USA.
Network regulatory decisions
NZ – the draft gas DPP3
Introduction
Pipes & Wires #208 noted the Commerce Commission’s
preliminary work on the third gas default price-quality path (gas DPP3) that
will apply to the 4 gas distribution businesses and the 1 gas transmission
business for the 5 year period starting on 1st October 2022. This article examines the
Commission’s recently released draft decision to provide some context for examining
the final decision.
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.
Key features of the draft gas DPP3
Key
features of the draft gas DPP3 include…
· Adoption of a 4 year regulatory period
(the minimum allowed by the Commerce Act 1986).
· Accelerated depreciation to provide
certainty of cost recovery.
· Changes to the WACC.
Specific parameters of the draft DPP3
Specific
parameters of the draft DPP3 include…
|
Parameter |
Draft
decision |
Final
decision |
|
WACC |
6.07% |
|
|
Average
domestic bill increase per year |
$55 |
|
|
Total
revenue - GasNet |
$21.89m |
|
|
Total
revenue - Powerco |
$282.24m |
|
|
Total
revenue - Vector |
$261.84m |
|
|
Total
revenue – First Gas (distribution) |
$135.88m |
|
|
Total
revenue – First Gas (transmission) |
$713.48m |
|
Next steps
The
Commission expects to publish its final decisions around the end of May 2022,
after which Pipes & Wires will conclude this article.
Aus – the ElectraNet revenue determination
Introduction
ElectraNet recently submitted its Regulatory
Proposal (rate
case) to the Australian Energy Regulator (AER) for the 5 year control period
commencing on 1st July 2023. This article examines the key features
of that Proposal to set some context for examining the AER’s draft and final
decisions.
A bit about ElectraNet
ElectraNet owns and operates
the high voltage transmission grid in South Australia, comprising 5,600km of
275kV, 132kV and 66kV circuits along with 91 grid substations. ElectraNet is
owned by State
Grid Corporation Of China, YTL
Power investments and
the Utilities
Trust Australia.
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 ElectraNet
process to date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$742m |
|
|
|
|
OpEx |
$571m |
|
|
|
|
Opening RAB |
$3,594m |
|
|
|
|
Post-tax nominal WACC |
4.29% |
|
|
|
|
Depreciation |
$341m |
|
|
|
|
Smoothed revenue |
$1,709m |
|
|
|
Pipes & wires will comment
further once the AER releases its Draft Determination.
Industry reshuffling
US – refocusing on clean energy
Introduction
Pipes & Wires #206 noted that after 25+ years of mergers to unlock
value, the unlocking of value has now turned to demergers. This article briefly
recaps the trends, and looks at Dominion Energy’s exit from its gas businesses,
ostensibly to migrate that capital into renewable electricity businesses.
The
pattern of mergers and de-mergers
The following pattern of de-mergers has
emerged…
|
Pattern |
Objective |
|
Legacy mergers and acquisitions focused
on horizontal aggregation between similar companies, in part due to
prohibitions on vertical re-integration in many jurisdictions. |
Primarily to increase scale (and in some
cases, scope) efficiencies. In some cases the amalgamation gains were
captured for a limited period, and were then shared with customers after the
next reset. |
|
Vertical de-mergers began in which
early-movers recognised the increasingly different investment characteristics
of (regulated) lines and (unregulated) energy. A lot of these vertical
de-mergers happened in Germany around 2009. |
Separate businesses having different risk
and reward profiles eg. pension funds seem to prefer
regulated lines businesses. |
|
Shifted to include horizontal demergers
as the differing investment characteristics of fossil, hydro, wind and solar
generation become more apparent. TrustPower’s demerging of its hydro and wind
businesses to form Tilt
Renewables back in 2016 is a
good example. |
Further separate energy businesses having
different risk and reward profiles. |
A bit
about Dominion Energy
Dominion Energy supplies 7,000,000 energy
customers across 13 states, with annual revenues of $14b.
Dominion
Energy’s reshaping
Over the last few months Dominion has sold
the following gas businesses…
·
Hope Gas, to Ullico for $690m.
·
Questar Pipelines, to Southwest Gas Holdings for $2b
Key components of Dominion’s strategy
include…
·
Reducing the business’ overall risk
exposure.
·
Recycling capital into attractive
regulated businesses.
This refocusing on regulated electricity
is expected to result in about 85% of Dominion’s earnings coming from regulated
businesses.
Further
reading
· Pipes
& Wires #209 – Aus – AGL Energy
proposes demerger.
· Pipes
& Wires #207 – NZ – Mercury
enters binding agreement to acquire Trustpower’s retail business.
· Pipes
& Wires #206 – Global – demergers
in the quest for value.
· Pipes
& Wires #205 – Exelon plans to
separate generation into second company.
· Pipes
& Wires #114 – Germany – EnBW
looks to sell majority stake in transmission grid.
· Pipes
& Wires #88 – E.On sells EHV
grid to TenneT.
· Pipes
& Wires #86 – Germany –
unbundling the grid.
Aus –
AGL rejects takeover bid
Introduction
Australia has seen a couple of big
infrastructure plays recently … Spark Infrastructure, AusNet Services and
Sydney Airport. This article examines AGL’s recent rejection of a takeover bid
by Brookfield Asset Management and Atlassian.
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 expects its proposed demerger to be
completed by 30th June 2022.
The
offer
The unsolicited all-cash offer of $7.50 per
share represented a 4.7% premium to AGL’s last closing price, and valued AGL’s
equity at $4.9b. It is understood that the bidding consortium planned to
abandon AGL’s proposed demerger and to close AGL’s remaining coal-fired
stations (Bayswater, Liddell and Loy Yang) 15
years ahead of schedule.
AGL’s
rejection of the offer
AGL roundly rejected the offer, publically
stating that…
· It does
not offer an adequate premium for a change of control.
· It is
not in the best interests of AGL shareholders.
· It would
forego the opportunity to realise the value of the proposed demerger.
· It could
delay decarbonisation
Further
reading
· Pipes
& Wires #209 – Aus – AGL Energy
proposes demerger.
· Pipes & Wires #208 – Spark Infrastructure accepts takeover offer.
· Pipes & Wires #201 – Aus – the Liddell closure task force reports back.
Regulatory
policy
NZ –
reviewing the Input Methodologies
Introduction
Regulatory regimes aim to give certainty to
regulated suppliers and their investors, with a large part of that certainty
being a pre-defined approach to setting many of the numerical parameters
embedded in regulatory decisions. This article examines the Commerce
Commission’s commencement of its review
of the Input Methodologies.
Regulatory
framework
The regulatory framework for the Input
Methodologies (IM’s) is set out in Subpart 3 of Part 4 of the Commerce
Act 1986, with s52V setting
out the Commission’s required process and s52Y
requiring a review of each IM at intervals of no more than 7 years.
Key
features of the Commission’s Notice Of Intent
Key features of the Notice Of Intent
include…
· The IM’s
will cover airports, electricity distribution, Transpower, and gas pipelines.
· Setting
out the proposed process, including consultations on decision making framework
and a Process & Approach Paper (Quarter 2 of 2022), through to an expected
Final Report in Quarter 4 of 2023.
Pipes & Wires will comment further as
work progresses.
The
wider view
The Commission’s Cover
Letter notes that work by
other agencies such as the Climate Change Commission and the Infrastructure
Commission form part of the wider of context of the electricity distribution
IM’s.
Energy mix and grid security
Aus – early closure of Eraring
Introduction
Closing
coal-fired power stations in Australia has been a recurring theme of Pipes
& Wires. This article examines Origin Energy’s recently announced closure
of the Eraring
coal-fired station on the New South
Wales central coast.
A bit about Eraring
Earing
has 4 black coal fired steam turbines that were originally rated at 660MW, but
which were upgraded to 720MW each in 2012 and 2013. Construction started in
1977, with the first unit being synchronised in 1982.
Origin’s plans for Eraring and beyond
Origin
had originally planned to close Eraring in 2032 but has now bought
that closure forward to August 2025, noting
that cheap wind and solar have hollowed out the market for inflexible coal
generation. Origin intends to install a 700MW battery on the Eraring site, and
notes that the NSW Government plan to install a 1,400MW battery in the Hunter
Valley.
The energy trilemma implications
The planned
withdrawal of 2,880MW of firm capacity from the National Electricity Market
(NEM) will certainly have implications for the energy
trilemma, although opinions
vary…
· Security
- opinion seems to vary on whether grid security in the NEM will decline,
however an official statement from the Australian Energy Market Operator (AEMO)
notes that planned additional transmission grid capacity and the announced
battery will meet the Energy Security Target at the time of the proposed
closure.
· Price –
opinion seems more uniform that some price spiking in the NEM may occur.
Commentators note, however, that the 3½ year notice period should give the
market sufficient time to adjust (unlike the 6 month notice of the Hazelwood
closure back in 2017 that did cause price spiking).
Further reading
· Pipes
& Wires #208 – Aus – future
energy scenarios
· Pipes
& Wires #207 – Aus – closing
coal-fired generation
· Pipes
& Wires #201 – Aus – the
Liddell closure task force reports back
· Pipes
& Wires #196 – Aus – the draft
Liddell Task Force report.
· Pipes
& Wires #193 – Aus – increasing
concern over coal-fired closures.
· Pipes
& Wires #193 – Aus – examining
the impact of the planned Liddell closure.
· Pipes
& Wires #191 – Aus – closing
coal-fired generation.
· Pipes
& Wires #180 – Aus – coal makes
a comeback.
Aus – reconciling new thermal with
decarbonisation
Introduction
Most
energy scenarios and forecasts don’t include new thermal generation. This
article examines the recent approval of a 600MW gas-fired plant in the
Australian state of New South Wales (NSW), and identifies a range of issues to
ponder.
Approval
of gas-fired generation
In
December 2021, the NSW Government approved
Snowy Hydro’s application to build a 600MW open-cycle gas turbine station
at Kurri Kurri in the Hunter Valley. A key argument for Kurri Kurri is
improving security of supply in the NEM as Liddell closes in 2023 and
renewables ramp up. Snowy will be required to provide the NSW Government with a
nett-zero generation plan that may include firing Kurri Kurri on (presumably
Green) Hydrogen.
Agency scenario – Transgrid’s Energy Vision
Back in
October 2021, Transgrid released its Energy
Vision, which set out the
following six scenarios for the NEM out to 2050…
· Current
trends – aging coal stations are replaced with competitively priced large-scale
and small-scale renewables and storage.
· Deep
decarbonisation – market forces, politics and customer expectations converge to
drive huge emission reductions.
· Prosumer
power – customer choices and technology advances drive a high penetration of
well-coordinated DER’s.
· Deindustrialisation
death spiral – a global economic recession causes 50% decline in industrial
electricity consumption and a 10% decline in commercial electricity
consumption.
· States
go it alone – breakdown in NEM regulations and regulatory impasses results in
state-based silo policies and no new interstate transmission.
· Clean
energy superpower – leverage of renewables and mineral ores to export green
hydrogen and metals.
These
six scenarios each embody different mixes of decentralisation and
decarbonisation.
Agency scenario - the AEMO’s Draft 2022 Integrated
System Plan
More recently, in December 2021, the
Australian Energy Market Operator (AEMO) published its Draft
2022 Integrated System Plan (ISP). The ISP
sets out four scenarios…
· Slow
change – challenging economic environment, with greater risk of
deindustrialization but also slower emissions reduction that would fail to
reach Australia’s decarbonisation goals.
· Progressive
change – progressive pursuit of emissions reduction, with a ratcheting up of the
targets over time.
· Step
change – rapid and nationally coordinated customer-led energy transformation.
· Hydrogen
superpower – quadrupling of electricity consumption to support a global
hydrogen export industry, underpinned by significant technology shifts in
transport and manufacturing.
The AEMO expects that the step change
scenario is the most likely to occur (readers might recall that these four
scenarios are similar to the five scenarios set out in AEMO’s final 2021 Inputs, Assumptions &
Scenarios Report.
Making sense of the Kurri Kurri approval
Key
issues for us all to ponder include…
· None of
the ten agency scenarios examined consider increased thermal generation. This
could result in the states go it alone scenario emerging.
· Critics
claim Kurri Kurri will increase prices in the NEM. In all fairness, many price
trajectories suggest that renewables plus storage are already on a price parity
with gas turbines.
· The idea
of firing Kurri Kurri on (green) Hydrogen would require an established Hydrogen
supply industry, which still seems uncertain.
· Has the “gas
as a transition fuel” argument had its day ?
· What if
emerging renewables prove less reliable than thought, and security does decline
significantly when Liddell closes (as it did when Hazelwood closed).
Further reading
· Pipes
& Wires #209 - Global – could
hydrogen-fired gas turbines beat batteries.
· Pipes
& Wires #201 - Aus – the
Liddell closure task force reports back.
· Pipes
& Wires #188 - US – what future
hath gas turbines.
· Pipes
& Wires #175 - Aus – prices
rise as Hazelwood exits the NEM.
Regulating
emerging technologies
Aus – solar
curtailment in the West
Introduction
Curtailing solar exports to maintain
network and grid stability appears to be a controversial theme. This article
examines the recent introduction of distributed generation management in
Western Australia.
Why is
curtailment controversial ?
There appear to be a couple of reasons that
curtailment of solar is controversial…
· It
effectively wastes free solar energy.
· It
reduces the feed-in revenue paid to solar owners.
Options
for export curtailment
Options for export curtailment include (sort
of in ascending order of contribution to network and grid stability)…
· Static
export limits – preprogrammed export limit set by the network operators’
understanding of available network capacity. In some cases this export limit
will be zero, effectively preventing any export and limiting solar generation
to behind the meter consumption.
· Automated
inverter settings – sensing of the immediately surrounding LV network voltage
with respect to a preprogrammed voltage, but with no sensing of wider grid
congestion.
· Dynamic
operating envelopes – a progression of static export limits, in which allowable
solar export can be set by dynamic models that reflect network and grid status.
· Economic
curtailment – curtailing export in relation to price signals rather than
congestion and stability signals, which can include curtailing export if prices
go negative (ie. costs to export).
· Distributed
generation management – sensing the wider network and grid congestion and
stability, and continuously adjusting allowable solar exports.
The WA
scheme
The recently introduced Emergency
Solar Management Requirements require
all new or upgraded solar panels in Western Australia to include sufficient
functionality to curtail export when grid demand reaches critically low levels.
These requirements coincide with Western
Power’s pilot Project Symphony will
evaluate the behavior and performance of 900 DER’s.
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.