Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #217 … this issue starts with a look at some energy
pricing and market issues in New Zealand and Europe. Under the heading of
emerging technologies we look at the recent trials of wireless power
transmission and firing gas turbines on green hydrogen.
We
then examine some regulatory decisions in New Zealand and Australia, and
conclude by examining what appears to be an emerging trend of selling renewable
assets to refocus on regulated wires. I’d like to wish you and yours a Merry
Christmas and hopefully Pipes & Wires will be back around February 2023.
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Recent client projects
Recent
client projects include…
· Providing an independent assessment of
network condition and spend adequacy.
· 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.
· Compiling a climate resilience
framework for an electric distribution 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.
· 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.
· Identifying best customer engagement
practices on behalf of an Australian distributor.
· Identifying learnings from the RIIO –
ED1 reset on behalf of an Australian distributor.
· Advising on the regulatory implications
of an aging timber transmission pole fleet.
· Compiling some introductory thoughts on
digital transformation and blockchain.
· Reviewing the AER’s recent treatment of
network transformation expenditure.
Cool multimedia stuff
Cool
video clip – electricity and its impact in the 1920’s
This 3½ minute video
clip examines the great
benefits that electricity bought in the 1920’s … lower domestic energy prices,
wider variety of home appliances, improvements to diet and nutrition as
refrigeration became popular, less soot and smell as gas and kerosene lighting
declined, fewer house fires as fewer flames were used etc.
Energy
markets and pricing
NZ –
finalising the grid pricing methodology
Introduction
Which classes of customers an
infrastructure business gathers its revenue from can be a critical issue for a
national economy, as inefficient prices may result in customers not paying the
right amount for the services they use. This article examines the recent pricing
methodology decisions released by Transpower that
will apply to the pricing year starting on 1st April 2023.
The
purpose of a pricing methodology
The purpose of a pricing methodology is to
match the amount charged to customers to the cost of providing those services
(efficient pricing) both now and in the future. To be clear, the pricing
methodology does not set the allowable total revenue (which is a revenue
control issue), but rather from which classes of customers that allowable
revenue is gathered.
Key
features of the Transmission Pricing Methodology (TPM)
The TPM is a complex body of work that has
occupied several years, hence providing a brief summary is understandably
difficult. The four TPM decisions recently released by Transpower include
|
Decision |
Key features |
|
BBC
(benefit-based charges) Assumption Book v1.0 |
· Requirement
to publish an assumptions book that sets out the assumptions and
methodologies. · Sets
out a range of specified financial and generation operational parameters. |
|
· Records
the price-quantity method used to calculate the benefit-based investment
customer allocations for the Clutha
& Upper Waitaki Lines Project. |
|
|
Reclassification
of Buller region assets |
· Reclassifies
specific grid assets as connection assets, reducing the residual charges to
all other grid customers. |
|
Review
of connection asset replacement costs |
· Adoption
of revised replacement costs estimated by an independent engineer. · Use of
those revised replacement costs to calculate connection charges. |
Next
steps
Transpower will consult on the Assumptions
Book in late January 2023.
Europe – reining in demand and prices
Introduction
Most
of us are aware that gas and electricity prices in Europe are rapidly
increasing, due in large part to reduced supplies of Russian gas through the Nord Stream Pipeline. This article examines a suite of recent decrees by the
European Union to rein in demand and prices.
The suite of decrees
The
EU has announced the following suite of decrees…
· Requiring member countries to reduce electricity
consumption by at least 5% during peak price hours, based on identifying the
876 hours with the highest forecast prices.
· Reduce overall electricity consumption
by at least 10% until 31st March 2022.
· Capping the price paid to renewable
energy suppliers at €0.18 per kWh (except for feed-in
tariffs and CFD’s), noting that “these suppliers are making revenue they never
dreamt of” as higher gas prices boost wholesale electricity prices. A specific
feature is that individual member countries can set even lower prices without
EU approval, which understandably concerns renewable investors.
· Proposed price caps for biomass,
nuclear, lignite and some hydro generation.
· An intention to make deep and
comprehensive reforms to the electricity market to decouple the dominant
influence of gas prices on the market.
· Investment of €3b
in a green hydrogen bank.
Some points to reflect on
A
couple of points to reflect on arise from the suite of decrees…
· Interference in any market spooks
investors. Governments are keen to attract massive investment in renewable
energy, but then spook those investors with ad-hoc price controls.
· Pipes & Wires has previously noted
that Europe has become more dependent on Russian gas over the last decade
instead of less, so it’s not surprising that electricity prices have increased.
· Policy makers and regulators alike seem
keen to see prices reflect underlying costs, but then introduce distortions
such as price caps.
Further reading
· Europe – gas under pressure (Pipes & Wires #215).
· Germany – the new Government’s energy
and climate priorities (Pipes & Wires #213).
· Germany – phasing out nuclear (Pipes & Wires #210).
· Germany – phasing out coal (Pipes & Wires #209).
Emerging technologies
Global – progress with wireless power transmission
Introduction
Most
of us are probably aware of current research into wireless power transmission,
which actually dates back to Nikola Tesla’s great work in the early 1900’s. This article briefly examines Emrod’s
recent wireless power demonstration.
Nikola Tesla’s seminal work
Most
folks have probably never heard of people like Maxwell, Poynting and Hertz, but few would not have heard of Nikola Tesla (1856 – 1943), the famous Serbian inventor and electrical
engineer. After developing the Tesla Coil in 1891, he went on to develop
wireless power transmission and in 1900 he lit 200 lamps without wires over a
distance of 40km.
Emrod’s recent wireless transmission
Emrod
has been developing wireless power transmission that recently resulted in a power beaming demonstration in Germany. This has been achieved
using a combination of proprietary technologies that includes beam shaping, metamaterials and rectenna technologies.
The
power beaming uses the ISM frequency band (900 MHz, 2450 MHz and 5800 MHz) to
achieve point-to-point transmission with minimal radiation leakage. The beam is
surrounded by low powered laser safety curtains that shut down the main beam if
a transient object gets close.
Examining the three levels of
disruption to conventional wires
This
technology undoubtedly has the potential to significantly disrupt conventional
wires businesses. We can consider disruption of conventional wires at three
levels…
|
Level of disruption |
Description |
|
Technologies
that add to existing wires and enhance their functionality. |
· Data capture and telemetry devices. · New materials such as heat shrink. · Bird be-gone. |
|
Technologies
that replace key components of existing wires. |
· Retrofitting vacuum interrupters. · Software updates. · Smart meters and relays. |
|
Technologies
that totally substitute for existing wires. |
· Wireless power transmission. · RAPS. |
Thinking
about this a bit more, wireless power transmission could disrupt the disruptors
ie. overtake the RAPS that overtook the wires. Pipes
& Wires will continue to watch these disruptive technologies.
US –
firing gas turbines on green hydrogen
Introduction
The possibility of firing gas turbines on
green hydrogen may well provide a further option for making variable renewable
energy “on demand”. This article notes a retrofitted gas turbine burning 44%
green hydrogen, and then considers the global green hydrogen industry and the cycle
of energy storage technologies.
The
technical details
The New York Power Authority recently
announced that it has successfully fired a retro-fitted 45 MW gas turbine on
varying mixtures of natural gas and hydrogen that included up to 44% hydrogen.
Key observations of the test include…
· A fuel
blend with 35% hydrogen reduced CO2 emissions by about 14%.
· Lack of
access to the volumes of hydrogen required to run the turbine
.
· Limited
industry operating experience.
The
green hydrogen supply industry
It’s probably helpful in this context to
examine the green hydrogen supply industry … volumes, price paths and what it
is used for. Some of the key features are…
· Global
total (not just green) annual pure hydrogen production is about 74,000,000 tons
(of which about 60% is used for oil refining, and 40% for ammonia production).
A further 42,000,000 tons is mixed with other gases.
· The
green hydrogen market is currently worth about $3b, but is expected to be worth
about $135b by 2031.
· The
price is expected to decline to about $2,000 per ton by 2030.
· Media
reports suggest that the era of pilot programs has already come and gone, with
billions of investment dollars being proposed by traditional petroleum
companies, pipeline companies and utilities.
Comparisons of approximate energy contents
are…
|
Fuel |
Mass energy density (MJ per kg) |
|
Hydrogen |
120 –
142 |
|
Methane |
50 |
|
Propane |
46 |
|
Coal |
24 |
|
Ammonia |
19 |
The
cycle of energy storage technologies
Energy storage options in the BL (“Before
Lithium”) era were pretty much limited to storing primary energy, with pumped
hydro storage being the most obvious. New and exciting battery chemistries
seems to be emerging all the time that show great promise for storing variable
renewable energy, and allow the option of storing electricity directly (rather
than as primary energy).
The emergence of green-hydrogen fired gas
turbines now provides another option for storing primary energy, with different
cost and reliability characteristics to both batteries and pumped storage.
Further reading
· GE will
pilot a dual-fueled gas turbine in Australia.
· Global –
could hydrogen fired gas turbines beat batteries ? (Pipes
& Wires #209).
· US –
what future hath gas turbines ? (Pipes
& Wires #188).
· US –
setting an end date for gas turbines (Pipes
& Wires #187).
· US –
batteries versus gas turbines (Pipes
& Wires #184).
Network regulatory decisions
NZ –
final decision on returning Powerco to the DPP
Introduction
Pipes
& Wires has been following the Commerce Commission’s work on transitioning
Powerco from their Customised Price-Quality Path (which expires on 31st
March 2023) back to a Default Price-Quality Path. This article examines the
Commerce Commission’s Electricity Distribution Services Default
Price-Quality Path (Powerco transition) Amendments Determination 2022.
A bit about Powerco’s CPP
Powerco’s CPP allows it to recover $1.27b over the 5
year period from 1st April 2018 to 31st March 2023.
Powerco had proposed to recover $1.32b over that 5 year period, which was a
significant step-up from the $937m spent over the previous 5 year period from 1st
April 2013 to 31st March 2018.
Regulatory framework
The
regulatory framework for CPP’s is set out in Sub-Part 6 of Part 4 of the Commerce Act 1986.
Comparing the draft and final decisions
Key
features of the draft and final decisions include…
|
Parameter |
Draft
decision |
Final
decision |
|
Allowable
revenue for FY24 |
$319.723m |
$321.696m |
|
Allowable
revenue for FY25 |
$326.118m |
$328.130m |
|
Annual
rate of change |
0% |
0% |
|
Forecast
OpEx for FY24 |
$114.129m |
$121.090m |
|
Forecast
OpEx for FY25 |
$119.800m |
$126.524m |
Further reading
· NZ – transitioning Powerco back to the
DPP (Pipes & Wires #216).
· NZ – transitioning Powerco back to the
DPP (Pipes & Wires #215).
· NZ – the final decision for Powerco’s
CPP (Pipes & Wires #174).
· NZ - Wellington Electricity’s
customised price path (Pipes & Wires #172).
· NZ – the final decision on Orion’s
return to the DPP (Pipes & Wires #158).
Aus – the Western Power draft revenue decision
Introduction
The Economic Regulation Authority
(Western Australia) has released its draft
decision for Western Power for the
5 year control period starting on 1st July 2023. This article
examines the key features of that draft decision to set some context for
examining the final decision.
A bit about Western Power
Western Power owns and operates
the transmission grid and distribution networks that supplies the areas
stretching from Kalbarri in the north to Albany in the south and then east to
Kalgoorlie, through 103,000km of lines and 154 substations. Western Power is
owned by the Western Australia State Government, and has an annual revenue of
about $700m.
Regulatory framework
The
basis of the regulatory framework is the Electricity Networks Access Code 2004 which is made pursuant to s104(1) of the Electricity Industry Act 2004. Readers will observe similarities to
the regulatory framework in the NEM.
Key features of the process to date
Key features of the Powerlink
process to date include…
|
Parameter |
Updated proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$4,341m |
$3,712m |
|
|
|
OpEx |
$2,183m |
$2,032m |
|
|
|
Post-tax nominal WACC |
4.73% |
7.10% |
|
|
|
Depreciation |
$2,828m |
$2,708m |
|
|
|
Unsmoothed revenue |
$8,911m |
$8,976m |
|
|
Pipes & Wires will comment
further when the Revised Proposal is published.
NZ – setting the WACC for gas pipelines
Introduction
The Commerce Commission recently released its cost of capital
decisions for the disclosure year ending 30th
September 2023 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 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).
Key features of WACC’s
Key features of the WACC’s include…
|
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
6.11% |
6.82% |
7.28% |
7.53% |
|
Post-tax WACC |
5.48% |
6.19% |
6.65% |
6.90% |
Industry reshuffling
US –
refocusing on regulated wires businesses
Introduction
One of Pipes & Wires enduring themes
has been the successive waves of mergers and de-mergers in the quest for
unlocking latent value. This article re-caps those trends, and then examines
the planned sales of both Consolidated Edison’s and Duke Energy’s renewables
businesses.
Re-capping
recent trends
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 might be the next wave of separating regulated
and unregulated renewables.
ConEd’s
sale of its renewables business
ConEd recently announced the sale of its Clean Energy Business to RWE
Renewables America for $6.8b, suggesting an EBITDA multiple of about 11x. RWE
will fund the deal by issuing a $2.43b convertible bond to the Qatar Investment
Authority, which will give the QIA a 9% shareholding in RWE. RWE notes that the
United States is one of the most attractive and fastest growing markets for
renewables.
ConEd has announced that the divestment
will allow it to focus sharply on its core business and invest towards New
York’s ambitious clean energy goals. The deal requires the usual regulatory
approvals, and is expected to be completed in the first half of 2023.
Duke
Energy’s sale of its renewables business
Duke Energy has also recently announced plans
to sell its commercial renewables business, comprising 3,400 MW of wind and
1,700 MW of solar. Duke expects to sell its distributed solar business
separately.
The strategy behind the sale is to fund
further energy transition goals from equity rather than debt.
Further reading
· Pipes
& Wires #213 – US – selling
unregulated renewable generation.
· 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.
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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
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