Pipes & Wires

Though leadership of critical energy & infrastructure matters

Issue 218 – February 2023

 

From the editor’s desk…

 

Welcome to Pipes & Wires #218, and welcome back to 2023. This issue starts with a look at some grid security issues in Australia and the USA, and then examines some network regulatory decisions in NZ, Britain and Australia.

 

We then consider possible renationalization in Australia and a stalled merger in the US, and then close with a look at regulatory treatment of transformation spend in the US. So … until next time, happy reading…

 

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Recent client projects

 

Recent client projects include…

 

·       Assessing the strength of an EDB’s organisational culture, work processes and asset management practices.

 

·       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 client 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 – powering the London Underground

 

This 12 minute video shows the old Lots Road power station that originally supplied the London Underground (start at about 1:10). Lots Road embodies many fascinating themes including…

 

·       The consolidation of fragmented electric supplies.

 

·       Conversion to 50Hz.

 

·       Re-powering from coal to oil to gas (which is a really fascinating story in itself).

 

Energy mix and grid security

 

Aus – AGL to complete coal exit by 2035

 

Introduction

 

Closure of Australia’s coal-fired generation has been one of Pipes & Wires’ long-running themes. This article picks up that theme again, this time in the context of Australian Gas Light’s planned exit from coal by 2035.

 

Announced closures

 

A couple of months ago AGL announced that it would close its Loy Yang A coal-fired station in Victoria by 2035, 10 years earlier than planned. This is in addition to closing its Bayswater coal-fired station in the NSW Hunter Valley between 2030 and 2033.

 

These closures are part of AGL’s Climate Transition Action Plan, which aims to supply about 12,000 MW of renewable and firming capacity by 2036 at an expected cost of $20b.

 

A bit about Loy Yang A

 

Loy Yang A is a 4 unit brown coal-fired steam turbine station in the Latrobe valley, about 160km south-east of Melbourne. The station was built between 1984 and 1988, and is next to the 2 Unit Loy Yang B station which was commissioned between 1993 and 1996.

 

Loy Yang A’s configuration is a bit curious, with Units 1, 3 and 4 being 560 MW Kraftwerke Union generators and Unit 2 being a 530 MW Brown Boveri generator. Visitors might have noticed that the LP turbine cross-over pipework on Unit 2 was different, with the reason being that Unit 2 was originally intended to be the Unit 2 at Newport D in Melbourne that was cancelled.

 

A bit about Bayswater

 

Bayswater is a 4 x 660 MW black-coal fired station in the Hunter Valley about 240km from Sydney, and was commissioned in 1985 and 1986. Annual coal-burn in about 8,000,000 tons, and annual generation is about 17,000 GWh.

 

Further reading

 

·       Pipes & Wires #218 – Aus – renationalising the Victorian power industry.

 

·       Pipes & Wires #216 – Aus – closing coal-fired generation in Western Australia.

 

·       Pipes & Wires #215 – Aus – no plans to close coal-fired generation in Queensland.

 

·       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.

 

US – securing generation in the Lone Star State

 

Introduction

 

Security of supply in the Texas ERCOT market has been a regular theme of Pipes & Wires, as the ERCOT seeks to secure supply for extremes of both summer heat and winter cold. This article revisits Texas to examine the possible introduction of a new market mechanism to encourage construction of more peak generation.

 

The proposed performance credit mechanism

 

The core principle of the performance credit mechanism would require every electric company selling electricity to guarantee that they in turn are buying that electricity from reliable sources, which would work as follows…

 

·       Generators that are able to guarantee supply during identified high-risk hours (broadly speaking, peak periods when the reserve capacity margin is low) would be awarded credits.

 

·       The high-risk hours would be identified by the market operator on an ex-post basis.

 

·       Those electric companies that supplied retail electricity during those identified high-risk hours would then be required to purchase credits from the generators (and recover the cost of those credits from their retail customers).

 

·       Those payments to the generators would then encourage generators to build more secure generation.

 

Understandably, this proposal is not without its critics who claim that the revenue streams wouldn’t be bankable.

 

Attaching attributes to electricity

 

The principle of attaching certificates to electricity to signify an attribute and incentivise behavior is certainly not new, as the following examples illustrate…

 

·       The Non-Fossil Fuel Obligation introduced into the UK in 1990, ostensibly to provide financial support to the nuclear generators.

 

·       The Scottish Renewables Obligation introduced in 2009 with a similar intent.

 

·       The NZ Energy Certificate System, which enables customers to buy certificates from certified green generators.

 

The Texas PUC’s decision

 

In January 2023 the Texas Public Utilities Commission unanimously voted to adopt an energy market overhaul that will include the Performance Credit Mechanism. Wider commentary indicates that the Performance Credit Mechanism will be controversial, so Pipes & Wires will comment further as implementation proceeds.

 

Further reading

 

·       Pipes & Wires #216 – US – the Lone Star state survives the heat.

 

·       Pipes & Wires #213 – US – reforming the Texas market to prevent future blackouts

 

·       Pipes & Wires #206 – US – moving on from the Lone Star blackouts

 

·       Pipes & Wires #205 – US – winter security in the Lone Star State.

 

Network regulatory decisions

 

NZ – updated guidelines for calculating WACC

 

Introduction

 

Pipes & Wires regularly examines the allowable WACC’s for various NZ infrastructure businesses. This article takes a step back from those numbers to examine the Commerce Commission’s recently released guidelines on how it will apply the Cost Of Capital Input Methodologies.

 

Regulatory framework

 

The Commission is required to regularly compile WACC determinations for infrastructure businesses under the following legislation…

 

·       Subpart 3 of Part 4 of the Commerce Act 1986.

 

·       Subpart 3 of Part 6 of the Telecommunications Act 2001.

 

Both of these Acts specify Cost Of Capital as one of the parameters that must be covered by the Input Methodologies, which in turn must…

 

·       Set out the formulae used to estimate WACC’s.

 

·       Explain the methods used for estimating the Risk Free Rate and the Average Debt Premium.

 

·       Specify values for other parameters such as Leverage and Equity Beta.

 

Key features of the determination

 

The methodology for estimating the Risk Free Rate includes…

 

·       Obtaining the yield to maturity of the benchmark NZ government bonds.

 

·       Interpolating the annualized bid yield to maturity.

 

·       Calculating the un-weighted average of those annualized bid yields to maturity.

 

The methodology for estimating the Average Debt Premium includes…

 

·       Taking the average of the debt premium values for the 5 most recent premium reference years.

 

·       The bonds used to compile these estimates must be investment grade, publically traded bonds denominated in NZ$ and issued by a qualifying issuer.

 

As always, those with a specific interest in cost of capital should read the entire determination.

 

Britain – the RIIO – ED2 final determinations

 

Introduction

 

The British electricity and gas regulator Ofgem recently finished setting the RIIO – ED2 revenue controls that will apply to Britain’s 14 electricity distribution licenses for the 5 year control period starting on 1st April 2023. This article examines Ofgem’s final decisions.

 

The adoption of a 5 year control period

 

Readers might note that the RIIO – ED1 revenue control was set for 8 years, but that Ofgem has chosen to revert back to a 5 year period for RIIO – ED2 to avoid locking in allowable revenues and performance standards for an 8 year period during which unprecedented change is expected. This is similar to the adoption of a shorter 4 year period for the third gas distribution price control in New Zealand.

 

Comparing the draft and final decisions

 

Key features of the draft and final decisions include….

 

Parameter

Draft decision

Final decision

Total national revenue to operate, maintain and enhance.

£20.9b

£22.2m

Baseline to support decarbonisation of transport and heating

£2.7b

£3.1b

Uncertainty mechanisms to allow additional network investment if demand for new connections increases.

Yes

Yes

A framework for measuring outcomes that is ambivalent between DSO and DNO activities.

Yes

Yes

An incentive mechanism to encourage DNO’s to adopt non-network alternatives in preference to traditional network reinforcement.

Yes

Yes

Funding for improved instrumentation, telemetry and data analytics.

Yes

Yes

Tougher criteria for being rewarded for delivering customer outcomes.

Yes

 

Adjustment of baseline funding sought by business plans

-17%

-12%

Expected annual efficiency gains

1.2%

1.0%

Cost of equity (6% in RIIO – ED1)

4.75%

5.23%

 

This concludes Pipes & Wires coverage of RIIO – ED2.

 

Further reading

 

·       UK – the RIIO – ED2 draft determinations (Pipes & Wires #215).

 

·       NZ – the final gas DPP3 (Pipes & Wires #214).

 

·       Britain – challenging the RIIO – ED2 business plans (Pipes & Wires #213).

 

·       UK – setting the framework for RIIO – ED2 (Pipes & Wires #196)

 

·       Britain – setting the context for RIIO – ED2 (Pipes & Wires #192).

 

Aus – the ElectraNet revenue determination

 

Introduction

 

ElectraNet recently submitted its Revised 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 Revised Proposal to set some context for examining the AER’s Final Decision.

 

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

$696m

$749m

 

OpEx

$571m

$633m

$701m

 

Opening RAB

$3,594m

$3,817m

$3,860m

 

Post-tax nominal WACC

4.29%

5.56%

5.56%

 

Depreciation

$341m

$274m

$228m

 

Smoothed revenue

$1,709m

$1,937m

$1,970m

 

 

Pipes & Wires will comment further once the AER releases its Final Decision.

 

Industry reshuffling

 

Aus – renationalising the Victorian power industry

 

Introduction

 

Achieving decarbonisation goals has recently emerged as a driver for nationalising or renationalising private electric companies. This article briefly examines proposals to revive a state-owned electricity sector in the Australian state of Victoria, ostensibly to achieve decarbonisation targets earlier.

 

The revised decarbonisation goals

 

Prior to being returned in the state election on 26th November 2022, the Andrews Government proposed to amend its decarbonisation targets as follows…

 

 

Previous target

Proposed target

Date for nett-zero emissions.

2050

2045

Percent renewable electricity by 2035

82%

95%

Percent of wind and solar by 2035

50%

65%

 

The proposal

 

The media headlines announced plans to revive the State Electricity Commission, which would consider all options including becoming a state-owned electricity retailer and having a controlling stake in new energy projects. Initial reports indicate that the Victorian Government would invest $1b over 10 years to build 4,500 MW of generation to replace aging coal-fired generation.

 

The investment markets’ response

 

Not surprisingly, the private energy industry is aghast, claiming that the plan will chill private investment, hurt ordinary investors and leave workers without jobs (as coal-fired generation would be forced to close early).

 

Further reading

 

A selection of readings that examine attempts to bring electric companies into public ownership to better achieve decarbonisation goals…

 

·       Pipes & Wires #215 – the Windy City seeks alternatives to ComEd.

 

·       Pipes & Wires #201 – the price of becoming a muni.

 

·       Pipes & Wires #199 – Memphis considers exiting TVA supply.

 

·       Pipes & Wires #198 – Pueblo rejects muni proposal.

 

·       Pipes & Wires #195 – the Boulder municipalisation saga continues.

 

·       Pipes & Wires #194 – Jacksonville rejects bid for electric and water business.

 

·       Pipes & Wires #192 - Chicago considers municipalising Commonwealth Edison.

 

US – revisiting the Avangrid – PNM merger

 

Introduction

 

Pipes & Wires #211 examined the New Mexico Public Regulation Commission’s (PRC) rejection of Avangrid’s bid for PNM Resources. This article examines changes to the way that the State of New Mexico appoints the PRC’s commissioners that could re-open the merger proposal.

 

Recapping the proposed merger

 

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.

 

The PRC’s decision

 

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. That rejection decision has been appealed to the New Mexico Supreme Court, where it currently sits.

 

Reconsidering the merger

 

Historically the PRC had 5 elected commissioners, however a successful ballot initiative in 2020 altered that arrangement to allow the Governor to appoint 3 of the 5 commissioners subject to ratification by the New Mexico Senate. Accordingly, Governor Michelle Grisham has appointed 3 commissioners (which are each still subject to Senate ratification). Grisham is known to support the merger, and it seems that her 3 appointments will also support the merger.

 

Pipes & Wires will comment further as the merger is revisited.

 

Regulating transformation spend

 

US – examining grid modernisation spend

 

Introduction

 

Pipes & Wires #214 examined four grid modernisation proposals (rate cases), and specifically looked at the reasons for rejecting some or all of the proposed spend. This article examines two more grid modernisation proposals, and augments the table from Pipes & Wires #214 to identify any emerging trends.

 

Public Service of New Mexico

 

Key features of PNM’s 6 year, $344m modernisation proposal include…

 

·       Roll out of 530,000 smart meters, starting with disadvantaged customers.

 

·       Distribution system reinforcements.

 

·       Implementing two-way communications.

 

·       Cyber security.

 

Customer impact is expected to be about $1.20 per month, which PNM plans to defer until after the high-consumption summer months.

 

Duke Energy

 

Key features of Duke Energy’s 10 year, $145b modernisation proposal include…

 

·       About $75b for transmission and distribution network hardening.

 

·       About $40b for renewable generation and storage.

 

·       About $5b for hydrogen-enabled gas technologies.

 

Some specific cases

 

Some specific cases of grid modernisation expenditure being pruned include…

 

Applicant(s)

Purpose

Sought

Approved

Key reasons for rejection

Public Service of New Mexico

Smart meters, network reinforcement

 

$344m

 

 

Duke Energy

Network hardening, renewable generation, hydrogen enablement

 

$145b

 

 

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."

 

 

Further reading

 

·       Pipes & Wires #214 – US challenging grid modernisation proposals.

 

·       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.

 

 

 

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.