Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #214 … this issue starts with 3 topical NZ regulatory
matters. We then introduce a new topic Regulating Transformation Expenditure to
specifically consider the emerging issues of how regulators are treating
emerging technologies, and then look at the AEMO’s updated security of supply
forecasts in light of the early closure of Eraring.
We
then look at the regulatory issues around rebating EV’s from at-large
customers, and then look at a planned pumped storage scheme in Scotland. This
issue concludes with a look at the abandoned AGL demerger. So … until next time, happy reading…
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Recent client projects
Recent
client projects include…
· Compiling a climate 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
Becca Caffyn releases first single
My awesome daughter Becca
Caffyn has released her first single, Stair Kids. Pick here
to listen on Spotify, or here to
listen on Apple Music.
Network regulatory decisions
NZ – recent cost of capital
determinations
Introduction
The Commerce Commission recently released the following cost of capital
determinations…
·
Gas pipeline
businesses for the third default price-quality path (DPP).
·
Electricity distribution
businesses.
·
Wellington Airport.
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 3rd
April 2018).
·
Clauses 2.4.1 to 2.4.9 of the Gas Transmission
Services Input Methodologies Determination 2012 (consolidated to 3rd
April 2018).
·
Clauses 4.4.1 to 4.4.7 of the Electricity Distribution
Services Input Methodologies Determination 2012 (consolidated to May 2020).
·
Clauses 5.1 to 5.7 of the Airport Services Input
Methodologies Determination 2010 (consolidated to December 2016).
Key features of the
gas pipeline WACC’s
At the time of publishing the WACC decisions the Commission had not
finalised its draft decision to set a 4 year DPP, hence 4 year and 5 year WACC
decisions have been published. Key features of the WACC’s include…
|
Parameter |
Duration |
Mid-point |
67th percentile |
|
Vanilla WACC |
4 year |
5.68% |
6.14% |
|
5 year |
5.70% |
6.16% |
|
|
Post-tax WACC |
4 year |
5.21% |
5.67% |
|
5 year |
5.22% |
5.68% |
Key features of the
EDB WACC’s
Key features of the EDB WACC’s include…
|
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
4.71% |
5.39% |
5.84% |
6.07% |
|
Post-tax WACC |
4.20% |
4.88% |
5.32% |
5.56% |
Key features of the
Wellington Airport WACC’s
Key features of the Wellington Airport WACC’s include…
|
Parameter |
Mid-point |
|
Vanilla WACC |
6.54% |
|
Post-tax WACC |
6.32% |
NZ – the final gas DPP3
Introduction
Pipes & Wires #212 examined the Commerce Commission’s
draft third gas default price-quality path (gas DPP3) that
will apply to the 4 gas distribution businesses and the gas transmission
business for the 4 year period starting on 1st October 2022. This article examines the
Commission’s recently released final decisions, and notes the associated publication
of the amended gas Input Methodologies.
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.
Comparing the draft and final DPP3’s
Key
features of the draft and final DPP3 are…
|
Draft |
Final |
|
Adoption
of a 4 year regulatory period (the minimum allowed by the Commerce Act 1986). |
Adoption
of a 4 year regulatory period. |
|
Accelerated
depreciation to provide certainty of cost recovery. |
Includes
accelerated depreciation by introducing an asset (life) adjustment factor
that will better align regulatory life with expected economic life. |
Specific parameters of the draft DPP3
Specific
parameters of the draft and final DPP3 include…
|
Parameter |
Draft
decision |
Final
decision |
|
WACC |
6.07% |
6.14% |
|
Average
domestic bill increase per year |
$55 |
$48 |
|
Total
revenue - GasNet |
$21.89m |
$22.12m |
|
Total
revenue - Powerco |
$282.24m |
$267.63m |
|
Total
revenue - Vector |
$261.84m |
$249.63m |
|
Total
revenue – First Gas (distribution) |
$135.88m |
$140.41m |
|
Total
revenue – First Gas (transmission) |
$713.48m |
$691.87m |
This
brings Pipes & Wires coverage of the gas pipeline resets to a close.
Regulating
transformation spending
Regulating various classes of spend is
nothing new … Pipes & Wires regularly examines the regulation of emerging
technologies, as well as general revenue determinations. In order to
continually refresh and stay relevant, Pipes & Wires is introducing a new
topic of regulating grid transformation spending to look more specifically than
the generic topic of regulatory determinations.
US – challenging
grid modernisation proposals
Introduction
Most of us appreciate that proposed CapEx
and OpEx must meet a range of efficiency criteria to receive regulatory
approval. This article examines some rejected energy transition and grid
modernisation proposals in order to begin identifying any recurring themes.
Some
representative figures
The following representative figures have
identified 498 actions from the 48 mainland states during the third quarter of
2021 that range from studies to capital investments. Key figures include…
|
Description |
Value |
|
Total funding sought |
$14,700m |
|
Held for closer scrutiny |
$12,700m |
|
Rejected |
$1,100m |
|
Approved |
$904m |
This table indicates that only about 6% of
funding sought was initially approved.
Some
specific cases
Some specific cases of transformation
expenditure being pruned include…
|
Applicant(s) |
Purpose |
Sought |
Approved |
Key reasons for rejection |
|
Southern California Edison |
Grid management software |
$908m |
$425m |
Regulatory hesitancy to allow recovery of
spending on unproven automation technologies, despite the technology plan
being consistent with regulatory directives to integrate DER’s. |
|
Baltimore Gas & Electric, Delmarva
Power & Light, Potomac Edison and PEPCO. |
Install public EV chargers to meet state
EV goals |
24,000
chargers |
5,000
chargers |
The PSC believed it is in the public
interest to approve a limited EV charging program at a reduced cost to
customers, but which will provide valuable insights. |
|
Dominion Energy |
Install advanced metering, intelligent
devices and grid hardening. |
$1,349m |
Nil |
Dominion
has not demonstrated these plans to be reasonable or prudent. In regard to
intelligent devices, the SCC ruled that DER penetration was still too low to
justify widespread deployment of such devices, and that Dominion had no
documented evidence that DER’s were causing voltage or reliability problems. |
|
Baltimore Gas & Electric |
Install smart meters |
$835m |
Nil |
The
PSC rejected BG&E’s proposal, stating that “the proposal asks BG&E's
ratepayers to take significant financial and technological risks and adapt to
categorical changes in rate design, all in exchange for savings that are
largely indirect, highly contingent and a long way off." |
An emerging theme appears to be regulators being
hesitant to commit customers to technologies that are uncertain or needs that
are unproven.
Further
reading
· Pipes
& Wires #184 - US regulator
prunes Dominion’s grid modernisation plan.
· Pipes
& Wires #183 – US Maryland
prunes EV charging program.
· Pipes
& Wires #94 – US smart metering
in Maryland.
Regulatory
policy
NZ – progress
on the Input Methodologies review
Introduction
Pipes
& Wires #212 examined the
Commerce Commission’s commencement of its review
of the Input Methodologies. This article
examines the key features of the recently released Process And Issues Paper and the
Draft
Framework Paper. As usual, these
are both very lengthy and complex documents that interested parties should read
in their entirety.
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 Process And Issues Paper
Key features of the Process And Issues Paper include…
· Stating
the applicability of the IM’s to certain electricity lines businesses, gas
pipeline businesses, and certain airports.
· Setting
out the Commission’s expected work streams and timing.
· How
risks and incentives are allocated under a price-quality regulatory model.
· Assessing
components of the cost of capital.
· How in-period
adjustments and customised price-quality paths might provide flexibility to the
default price-quality path model amidst the energy transition.
Key
features of the Draft Framework Paper
Key features of the Draft Framework Paper
include…
· Reiterating
the statutory context for the IM review.
· Setting
out a framework for reviewing key IM components.
· Describing
how key principles such as allocation of risk and the asymmetric consequences
of over-investment and under-investment will be applied.
· How the
Task Force on Climate-Related Financial Disclosures (TCFD) framework might be
applied to better understand climate related risks, uncertainties and
opportunities. Pick here to
discuss how your regulatory and asset management processes
can be aligned to the TCFD framework.
Next
steps
The Commission will receive submissions on
these papers until 5pm on 11th July 2022 (this date was correct at
the time of publishing Pipes & Wires #214).
Energy mix and grid security
Aus –
the updated AEMO statement of opportunities
Introduction
The Australian Energy Market Operator
(AEMO) has recently released an update
of its 2021 Electricity Statement Of Opportunities
(ESOO), with particular
reference to the early retirement of Eraring. This article examines the key
features of the updated ESOO.
The
changing electricity market
The updated ESOO specifically notes…
·
The possibility that Eraring will be
retired in 2025, about 7 years earlier than planned.
·
The announcement
that Bayswater and Loy Yang are expected to
close 3 years earlier than originally planned, but still beyond the ESOO
planning horizon.
Key
features of the ESOO
Key features of the updated ESOO include…
· A
reliability gap is forecast in the coming 5 years, in which the AEMO expects
that unserved energy will exceed the reliability standard of 0.002% of energy
supplied.
· In
particular, the risk of unserved energy in New South Wales is expected to occur
during FY26, 4 years earlier than the FY30 identified in the 2021 ESOO.
· Inclusion
of Eraring’s closure (-2,880 MW) during FY26, offset by 1,080 MW of committed
wind, solar and gas and a further anticipated 4,200 MW of generation and 600 MW
of storage.
· If the
new generation identified in the draft 2022 Integrated System Plan is
commissioned prior to Eraring’s planned closure, the unserved energy is
expected to remain within the allowable limit.
· Treating
Tallawarra B as committed, but withdrawing the Hunter Valley Gas Turbine.
Further
reading
· Pipes
& Wires #212 – Aus early
closure of Eraring.
· Pipes
& Wires #208 – Aus future energy
scenarios.
· Pipes
& Wires #205 – Aus gas under
pressure on the East Coast
Regulating
emerging technologies
US – the
thorny issue of EV rebates
Introduction
Issues around whether public EV chargers
are selling electricity or selling a service is proving to be a thorny issue
for some state regulators. This article examines the wider evolution of that
issue in the context of the Minnesota
Public Utilities Commission’s recent
rejection of a $150m EV rebate by Xcel Energy.
Xcel
Energy’s proposed EV rebate
Xcel had proposed $150m in rebates for
EV’s, as follows…
· $100m of
rebates for electric buses.
· $50m of
rebates for light electric vehicles.
· Inclusion
of all $150m in the rate base.
The wider program also included $5m to
install 21 rural EV charges (which the MPUC approved).
The
MPUC’s decision
The MPUC unanimously rejected Xcel’s
proposal, due to concerns about the MPUC’s statutory authority to approve
electric companies spending customer funds on EV incentives. The Minnesota
Attorney General had cautioned the MPUC about their lack of jurisdiction, and
further noted that the rebates would increase the electric bills of those already
struggling to pay.
Some additional
thoughts
Some additional thoughts on this matter
include…
· Regulators
seem fairly clear that EV chargers benefit only a specific market segment, and
therefore the capital cost of EV chargers should not be included in the rate
base.
· More
subtly, the Kentucky
Public Service Commission has previously observed
that because EV charging is limited to a specific defined class of persons it
does not have jurisdiction over chargers.
Readers should carefully note the subtle
difference between (i) rejecting such a proposal, and (ii) not having
jurisdiction to rule on such a proposal.
Further
reading
· Pipes
& Wires #208 – US recovering
the cost of EV chargers.
· Pipes
& Wires #203 – US who should
own EV chargers ?
· Pipes
& Wires #200 – recovering the
cost of EV charging infrastructure.
· Pipes
& Wires #189 – US clarifying
the definitions around EV recharging.
Energy markets
and grid access
UK –
Drax plans to expand pumped storage
Introduction
News emerged recently that the Drax Group
plans to expand its Cruachan
pumped storage station in Scotland. This
article examines the engineering aspects of the expansion, and examines
possible reasons for considering pumped storage in preference to other
technologies.
The
engineering features of the proposed expansion
Cruachan was the first large reversible
pumped storage scheme in the world, located in the Argyll and Bute district of
Scotland. The existing station was started in 1959 and commissioned in 1965
with a capacity of 440 MW. Its original purpose was store electricity generated
at night by the near-by Hunterston
A nuclear station for release during
peak periods.
It is planned to add up to
600 MW of additional capacity that
can operate independently of the existing station.
The
expected role of the enlarged Cruachan
Cruachan’s original role of peaking has
morphed over the years to providing
synchronous compensation to National Grid.
That provision of grid services will expand with the proposed 600 MW of
additional quick-start capacity. Readers have probably noted strong parallels
with other markets use of hydro to buffer wind and solar.
Why
pumped storage ?
In a world in which battery technologies
are rapidly advancing (and other mechanical energy storage methods are having a
renaissance), we might query why Drax has decided to not only build pumped
storage but also at a location remote from Britain’s large customer bases. Some
thoughts include…
· A lower
incremental cost due to the existing hydro and transmission assets.
· A proven
ability to store energy for extended periods (some might say that evaporation
won’t be much of a problem in Scotland).
· The
possibility of actually generating from inflows into the Cruachan Reservoir
(which appears low due to the small catchment).
· At the
time of writing, Cruachan’s 7 GWh of storage is still more than the largest
batteries (around 1.6 GWh).
· Whilst
Cruachan will be able to supply some market services such as frequency keeping,
black start capability, voltage support and spinning reserve, it won’t be to
provide customer or grid services as well as distributed batteries.
Further
reading
· Pipes
& Wires #213 – NZ the role of
hydro amongst wind and solar.
Industry reshuffling
Aus – AGL
abandons planned demerger
Introduction
Those who closely follow the Australian
business papers will have no doubt seen that AGL has abandoned its planned
demerger. This article recaps the proposed demerger, and examines its
abandoning.
Recapping
the planned demerger
The proposed demerger would’ve
firstly involved a name change to Accel Energy, and then the separation of the
energy retailing business which would’ve retained the AGL Energy Australia Ltd
name. The businesses separations would’ve included…
· Accel Energy to retain the coal-fired generation, some
gas storage, some wind generation and some batteries.
· AGL Energy to 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. The proposed merger was expected to be completed by 30th
June 2022.
Abandoning
the merger
A shareholder vote to approve the demerger
was planned for 15th June 2022, with the expected demerger to occur
on 22nd June 2022. However the following events occurred…
· Grok Ventures opposed
the demerger, and began accumulating AGL shares. The demerger would’ve required
75% shareholder approval, which seemed unlikely given that Grok’s 11.3% shareholding
and a further aligned 13.7% shareholding intended to vote against the demerger.
· A report
to shareholders revealed that the planned demerger would cost $260m upfront,
with $35m per year in additional annual costs.
It is also worth noting that Brookfield’s
unsolicited takeover offer in early 2022 included the intention to abandon the proposed demerger and to also close
AGL’s remaining coal-fired stations (Bayswater, Liddell and Loy Yang) 15
years ahead of schedule.
Further
reading
· Pipes & Wires #212 – AGL rejects takeover bid.
· Pipes & Wires #209 – AGL Energy proposes demerger.
· Pipes & Wires #206 – Demergers in the quest for value.
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
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parties.