Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 213 – May 2022

From the editor’s desk…

Welcome to Pipes & Wires #213 …. this issue starts with a look at the changing role of hydro as wind and solar penetration increases, and looks at some energy security policy issues in Germany, the USA and France. We then examine 2 network regulatory decisions … 1 in Britain, and 1 in South Africa, and end this issue by examining some industry reshuffling in Australia and the USA.

A recurring theme 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

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. She is available to perform in and around Auckland until early July … phone (020) 4108-2189.

Energy markets and pricing

NZ – the role of hydro amongst wind and solar

Introduction

A key feature of increasing wind and solar penetration is the changing role of the remaining plant. This article takes a bit of a philosophical ramble across several themes to examine the likely future role of hydro in NZ’s electricity system.

The energy transitions

From its early beginnings as a mixed thermal and hydro system, the NZ electricity grid became hydro dominated from about 1915 onwards with the development of remote hydro such as Coleridge. The associated increase in dry-year risk prompted the building of the coal-fired Meremere station around 1958, which established the role of thermal generation as hydro-firming (and as demand increased, thermal took a shoulder-load role).

As wind and solar increase, NZ is now approaching another grid transition in which hydro is migrating to a wind-firming role.

Increasing price volatility

A recent article by the Boston Consulting Group on variable renewables and pricing is worth a quick read. A couple of salient features include…

· The impact of variable renewables on pricing is definitely visible, but varies between markets in subtle ways that are less visible.

· Features that influence volatility appear to include grid interconnections with markets having fewer renewables, some form of capacity payments or market to keep mid-merit generation in the market, high levels of pumped storage, and price caps and floors.

· The dampening effect of grid interconnection will very likely decline as renewable penetration increases in those neighboring markets.

The likely role of hydro

So what does this mean for the likely role of hydro in NZ ? The most obvious is a transition from base-load to peaking, which will embody the following features…

· Start reliability and rapid ramping to quickly inject MW will be more critical, with efficient generation of MWh over long periods becoming less critical. Smaller rated machines with less mechanical inertia may prove especially valuable.

· Location of hydro generation at the nodes likely to become more volatile will be especially valuable.

· The notice period for firming is steadily decreasing, from months (as the hydro lakes were observed to fall, and thermal plant could warmed up) to minutes (for wind) to seconds (for solar).

· Competition with storage technologies (including many exciting battery technologies) which can now provide meaningful substitutes for real-time generation responses. A possible scenario is that solar-firming will require ramping rates that hydro (and possibly other forms of mechanical energy storage) can’t meet, lending that role to batteries.

Given that many of NZ’s hydro stations were built for head rather than storage, they would seem well placed to provide wind-firming (and maybe some solar-firming).

Energy mix and grid security

Germany – the new governments’ energy and climate priorities

Introduction

Most incoming governments give priority to visibly stated climate goals, often including increasingly early dates for exiting thermal generation from the market. This article examines the accelerated climate plans announced a few months ago by Germany’s recently elected coalition government.

The election results

The 2022 federal election for the 20^th Bundestag saw the defeat of the incumbent CDU – CSU coalition and the formation of a coalition between the SPD, the FDP and the Greens, with Olaf Scholz from the SPD being elected as leader. Early evidence is that this coalition has clearly set out a very progressive agenda which appears dominated by the Greens demands.

The coalitions’ plans

A quick comparison of the coalitions’ policies with the previous government is as follows…

Feature	Scholz coalition (20^th Bundestag)	Merkel’s CDU (19^th Bundestag)
Coal phase out date	2030	2038
Renewable electricity share	80%	65%
Expected annual generation in 2030	680,000 to 750,000 GWh	658,000 GWh
Solar PV	200,000 MW	100,000 MW

Implications for the previously announced coal exit plans

Pipes & Wires #209 examined Germany’s recently enacted Coal Phase-Out Act, which inter alia set out an orderly closure of lignite-fired generation by 2038. It appears that this Act will have to be substantially amended to meet the Scholz coalitions’ policy targets.

Further reading

· Pipes & Wires #209 – phasing out coal

· 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.

US – reforming the Texas market to prevent future blackouts

Introduction

Pipes & Wires #205 examined the February 2021 blackouts in Texas, and noted the possible risk of some sort of knee-jerk market redesign. This article examines recent events in Texas to see if that risk of poor market re-design is likely to emerge.

Recent corrective actions

The following recent corrective actions have occurred…

· Generation and transmission has been winterised to ERCOT’s satisfaction in accordance with rules passed by the Texas Public Utilities Commission in October 2021. Readers may recall that much of Texas’ generation simply froze in the low temperatures.

· Decreasing the ERCOT-wide offer cap from $9,000 per MWh down to $5,000 per MWh. Although this will ease the price burden in future market excursions, it will also dampen incentives for new generation as the ERCOT does not have a separate capacity market to ensure adequate generation.

· Introducing rules to improve coordination between gas and electric companies during emergencies, specifically to prevent electric power being cut to gas-fired generation. A report by the FERC concluded that about 75% of generation outages, de-ratings and start failures were caused by inter alia freezing.

Each of these seems reasonable enough.

Reforming the market

After rattling around the corridors of power in Austin, the Public Utilities Commission issued a blueprint for wholesale market changes that includes the following features…

· Amending the Operating Reserve Demand Curve to set the Minimum Contingency Level at 3,000 MW.

· Amending the Operating Reserve Demand Curve to set both the system-wide price cap and the value of lost load (VOLL) at $5,000 per MWh.

· Decoupling the system-wide price cap and the VOLL.

· Amend the market to improve transparency of price signals to improve demand response.

· Amending the market to allow earlier deployment of demand response and virtual power plants.

· Continue existing work streams to improve fast frequency response.

· Expand the use of load-shedding to assist spinning reserve.

ERCOT’s initial response was that it didn’t have enough people to meet the PUC’s target dates.

The editor comments

Whilst it is still early days to form a view on how effective the market changes will be (and we may not know until the Polar Vortex next extends as far south as Texas, which may be 10 to 20 years away), it appears that the winterising of generation assets prevented wide scale outages during February 2022.

France – proposed new nuclear stations

Introduction

Nuclear power faces a complex and arguably confused way forward, ranging from some countries closing down nuclear stations (including Fessenheim in France) to some countries planning more. So when news emerged recently that France is planning a fleet of new nuclear power stations, Pipes & Wires considered it worthy of a closer look. This article examines those plans, and also quickly looks at France’s existing nuclear electricity industry to provide some context.

The proposed new stations

A few months ago President Emmanuel Macron announced plans for Electricité de France (EDF) to build 6 new second generation European Power Reactors (EPR2’s) by 2050, with an option of a further 8 reactors. The following details followed the headline…

· The first EPR2 reactor should be operational by 2035.

· EDF will receive “tens of billions of Euros” of state funding.

· Existing reactors will have their lives extended, and only be closed for safety reasons.

· The program will include development of small modular reactors.

The announcement was phrased in bold rhetoric such as “rebirth of France’s nuclear industry” and “the time of nuclear renaissance has come”.

France’s existing nuclear power stations

France’s existing fleet of 56 operating reactors have a combined capacity of 61,370 MW, with a further 1 reactor under construction (Flammanville #3) and 14 reactors shutdown. These 56 operating reactors generate about 400,000 GWh per year, or about 70% of France’s total generation.

Further reading

· Nuclear power in France (World Nuclear Association).

· Pipes & Wires #210 – Germany phasing out nuclear.

· Pipes & Wires #194 – UK progress slows on Hinkley Point C.

· Pipes & Wires #193 – China continuing the EPR story.

· Pipes & Wires #191 – Finland difficulties at Olkiluoto #3.

· Pipes & Wires #189 – France progress on Flammanville #3.

· Pipes & Wires #172 – Sweden progress on the return to nuclear.

· Pipes & Wires #164 – Lithuania decommissioning the RBMK reactors.

Network regulatory decisions

Britain – challenging the RIIO - ED2 business plans

Introduction

The RIIO – ED2 regulatory model applied to Britain’s electricity distribution network operators (DNO’s) now includes a challenge of each Distribution Network Operator’s business plans. This article examines Ofgem’s recently released Challenge Group Independent Report, and identifies some key themes.

Key themes of the Challenge Report

Key themes of the Challenge Report include…

· The significant uncertainty of NettZero capacity investment, including differing approaches by the DNO’s ranging from higher baseline spend forecasts through to lower baseline spend forecasts coupled with investment recovery through uncertainty mechanisms as and when that investment is necessary.

· A view that the DNO’s progress towards becoming DSO’s could be more ambitious, including more convincing analysis of the benefits of becoming DSO’s.

· The need to balance forecast spend (estimated to be 60% higher than RIIO – ED1) against keeping customer prices acceptable, focusing on the need to deliver NettZero at the lowest cost.

· Concern about how much customer support there is for the apparent wide spread of reliability targets between DNO’s and the proposed reliability increases.

· Overall environmental plans are considered adequate, however there is some concern that DNO’s are not thinking broadly enough about how to decarbonise their supply chains.

· Concern about the national variations in the level of support that vulnerable customers could receive during power cuts.

· Rejection of most (20 out of 24) DNO’s proposals to create customer value beyond BAU, mainly because of inadequate analysis of the proposed benefits.

Next steps

Pipes & Wires will pick up the RIIO – ED2 story as Ofgem releases its determinations.

South Africa – the revised MYPD5 decision

Introduction

Pipes & Wires #211 examined the recent High Court decision that ordered the National Electricity Regulator (NERSA) to apply the MYPD4 methodology to the MYPD5 price control. This article follows up on NERSA’s amended decision of February 2022.

Key features of the story to date

Key features of the story to date include…

· Eskom submitted the following revenue forecasts compiled in accordance with the operative methodology (used for MYPD4)…

YE 31^st March	2023	2024	2025
Revenue forecast	R279b	R335b	R365b

· NERSA rejected these forecasts, claiming that the MYPD4 methodology was no longer valid due to industry changes.

· In December 2021 the Gauteng High Court ordered NERSA to apply the MYPD4 methodology for the year ending 31^st March 2023 by 25^th February 2022.

NERSA’s amended decision

NERSA published its amended decision for the year ending 31^st March 2023 on 24^th February 2022. Key features of that amended decision include…

· An average increase of 9.61% for standard tariff customers.

· An average increase of 8.61% for municipalities.

These allowable increases fall well short of the 20.5% increase sought by Eskom, which argued that energy purchases from IPP’s and carbon taxes were the major sources of cost increases.

Industry reshuffling

Aus – non-traditional buyer for Meridian’s retail business

Introduction

Entry into the electricity retailing business by non-traditional players is steadily on the rise. This article examines Meridian Energy’s recent sale of its Australian generation and retail business to a consortium including Shell, which most of us know as a retailer of petrol and sausage rolls.

Meridian’s business

Meridian’s Australian business includes…

· Powershop Australia, which supplies 185,000 electric and gas customers.

· The Mount Mercer and Mount Millar wind farms.

· The Hume, Burrinjuck and Keepit hydro stations.

· A pipeline of development opportunities.

The deal

Shell and Infrastructure Capital Group purchased Meridian’s Australian business for A$729m, structured as follows…

· Shell will own the Powershop Australia, which is part of Shell’s wider strategy to become a global energy retailer selling 560,000 GWh (about 12x NZ’s annual consumption) by 2030.

· ICG will own the generation assets and the development pipeline.

The wider strategy

In addition to traditional bidders such as Engie and Iberdrola, it is notable that companies with no obvious electricity involvement such as Shell and Telstra were bidding. It appears that a mix of strategies may be involved, including increasing the renewable share of their own electricity consumption, (in Telstra’s case) offering bundled utility products, and (in Shell’s case) simply transitioning from oil to electricity.

US – selling unregulated renewable generation

Introduction

Reshuffling assets to unlock value has come in several waves, with the most recent wave being separating fossil and renewable generation. This article examines American Electric Power’s recently announced plans to sell its unregulated wind and solar in order to sharpen its focus on regulated transmission and regulated renewables.

Waves of separating electricity assets

So far the separation of electricity assets has come in the following waves…

· Separation of lines and energy.

· Separation of fossil and renewable generation.

· What could be the next wave of separating regulated and unregulated renewables.

AEP’s plans

AEP recently announced plans to sell 1,600 MW of unregulated wind and solar, and direct the expected sale proceeds of $1.45b into its regulated renewables business, along with a reallocation of its proposed $1.5b of unregulated renewable CapEx into its transmission business. Those unregulated renewables include 1,435 MW of wind and 165 MW of solar from which the electricity is sold under contracts with an average duration of 11 years, making those assets highly bankable.

The strategy

The proposed sale includes three elements of AEP’s strategy…

· Simplifying the company’s assets.

· Reducing the risk profile.

· Focusing on core utility businesses within the regulated service territories.

Further reading

· Pipes & Wires #212 – US – refocusing on clean energy.

· 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.

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.