Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #221 … this issue starts with a look at the Input
Methodology review in New Zealand, and then examines 2 revenue decisions from
Australia.
We
then examine some industry reshufflings in the United States and France, and
then examine whether New Zealand’s gas reserves are dwindling as much as the
media claims. This issue then concludes by re-visiting the issue of who should
own EV chargers. So … until next time, happy reading…
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Recent client projects
Recent
client projects include…
|
Decarbonisation and energy transformation · 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 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. Regulatory analysis · Reviewing the AER’s recent treatment
of network transformation expenditure. · Advising on the regulatory
implications of an aging timber transmission pole fleet. · Identifying learnings from the RIIO –
ED1 reset on behalf of an Australian distributor. |
Climate governance and resilience · Identifying the governance, strategy
and risk programs required to align with TCFD. · Compiling a client resilience
framework for an electric distribution company. Global trend and pattern analysis · Identifying the global and regional
trends facing transmission grid operators for a US client. Asset strategy and asset management practices · Assessing the strength of an EDB’s
organizational culture, work process and asset management practices. · Compiling a road map to guide an EDB
on its asset management improvement journey. · Identifying a range of structural and
service delivery models for an electric company. · Identifying best customer engagement
practices on behalf of an Australian distributor. · Providing an independent assessment
of network condition and spend adequacy. · Providing an independent review of
asset condition and spend forecasts for a distribution company investor. |
Cool multimedia stuff
Making
distribution transformers
This 12 minute video of a
2,500kVA being made is worth a watch. Especially for those of us who spent a
whole summer de-tanking and re-bolting used transformers…
Regulatory
policy
NZ –
progress on the Input Methodologies review
Introduction
The Commerce Commission has recently published
its draft
decision on the Part 4 Input Methodologies Review 2023. This
article examines the key features of that draft decision and notes the next
steps. As always, those with a specific interest in this matter should read the
Commission’s decisions 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.
The
complex themes that the draft decision acknowledges
The draft decision notes the complex and
uncertain mix of significant themes facing an
historically stable electricity distribution sector … expected increases in electricity
demand across many customer segments, increased embedded generation and
storage, increasing natural hazard risks, supply chain constraints, labor
shortages and cost inflation. These themes make predicting revenues, costs and
margins much less certain.
Key
features of the draft decision
Key features of the draft decision include…
· The view
that the Input Methodologies remain broadly fit for purpose, are flexible
enough to cope with the changing environment, but could benefit from specific
improvements.
· A clear
statement that all businesses operate with some level of uncertainty, and that
EDB’s should manage those uncertainties through good planning practices. In
particular, EDB’s should move away from deterministic planning to probabilistic
and scenario-based planning.
· A view
that forecasting uncertainties have increased (which will be dealt with in
sector-specific DPP resets).
· The proposed
expansion of the availability of DPP re-openers.
· No
significant changes to the Customised Price-Quality Path (CPP) Input
Methodologies.
· The proposed
reduction of the WACC percentile from 67% to 65%.
· The view
that the current expenditure incentive mechanisms for equal incentives for
CapEx and OpEx.
Next
steps
Following a recent period of consultation,
the Commission will publish its final decisions in December 2023 (after which
Pipes & Wires will comment further).
Network regulatory decisions
Aus –
the Transgrid final revenue decision
Introduction
The Australian Energy Regulator
(AER) recently released it Final
Decision for Transgrid for the 5 year control period commencing on 1st July
2023. This article examines the key features of that Decision.
A bit about Transgrid
Transgrid owns and operates the
high voltage transmission grid in New South Wales and the Australian Capital
Territory, comprising 13,000km of 500kV, 330kV, 220kV and 132kV circuits along
with 104 grid substations. In 2015 Transgrid was leased to the NSW Electricity
Networks consortium for 99 years.
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 Transgrid
process to date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$1,879m |
$1,729m |
$2,676m |
$2,436m |
|
OpEx |
$1,015m |
$1,039m |
$1,187m |
$1,101m |
|
Opening RAB |
$8,713m |
$9,229m |
$8,812m |
$8,815m |
|
Nominal vanilla WACC |
4.70% |
5.77% |
5.83% |
5.77% |
|
Depreciation |
$743m |
$525m |
$557m |
$689m |
|
Smoothed revenue |
$4,758m |
$4,758m |
$5,005m |
$4,851m |
This concludes Pipes &
wires coverage of the Transgrid decision.
Further reading
· Pipes
& Wires #176 – Aus
– the Transgrid revenue determination.
· Pipes
& Wires #148 – Aus
– a winner for Transgrid emerges.
· Pipes
& Wires #57 – Aus
– revoking and substituting Transgrid’s revenue.
Aus – the Western Power final revenue decision
Introduction
The Economic Regulation
Authority (Western Australia) has released its final
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 |
$4,210m |
$3,896m |
|
OpEx |
$2,183m |
$2,032m |
$2,805m |
$2,744m |
|
Post-tax nominal WACC |
4.73% |
7.10% |
7.10% |
7.02% |
|
Depreciation |
$2,828m |
$2,708m |
$2,805m |
$2,744m |
|
Unsmoothed revenue |
$8,911m |
$8,976m |
$9,237m |
$9,099m |
This concludes Pipes &
Wires analysis of Western Power’s revenue reset.
Industry reshuffling
US –
Duke Energy sells commercial renewables to Brookfield
Introduction
Following recent sales of unregulated
renewable assets, this article examines Duke Energy’s recent sale of its commercial
renewable assets to Brookfield.
A bit
about Duke Energy’s commercial renewables
Duke’s commercial renewables business
includes 3,400 MW of wind and 1,700 MW of solar. Annual revenue is about $1.5b.
This business will be sold to Brookfield for $2.8b.
Strategies
behind the deals
Duke’s key strategies include…
· Strengthen
its balance sheet and avoid issuing new debt.
· Focus on
its regulated businesses (including grid reliability and 30,000 MW of regulated
renewables by 2035), with the ultimate goal of becoming a fully regulated
company.
· Migrating
out of businesses with flattening returns.
Brookfield’s strategy includes expanding
its 90,000 MW of renewables across the US, and presumably an appetite for
assets whose returns are unacceptably low to other owners.
Re-capping
recent renewable sales
Recent sales of renewable businesses
include…
|
Vendor |
Purchaser |
Asset description |
|
Duke Energy |
Brookfield |
3,400 MW of wind and 1,700 MW of solar. |
|
Consolidated Edison |
RWE |
4,800 MW of on-shore wind and about 3,200
MW of solar in the US, along with a development pipeline of 24,000 MW of
wind, solar and batteries that includes 3,900 MW of off-shore wind. |
|
American Electric Power |
IRG Acquisition Holdings |
Unregulated, contracted 1,200 MW of wind
and 165 MW of solar. |
Further
reading
· Pipes
& Wires #219 – US – AEP sells
unregulated renewables.
· Pipes
& Wires #217 – US – refocusing
on regulated wires businesses.
France –
fully re-nationalising EDF
Introduction
Pipes & Wires #216 examined the French
governments’ plans to fully re-nationalise Electricité
de France (EDF) by buying the 16% of shares it doesn’t already own. This
article examines events over the last year.
Recapping
the proposed purchase and the governments’ thinking
The French government proposed to pay about
€12 per share (about €9.7b), preferring that people voluntarily sold their
shares to the government. The publically stated
reasons for the purchase include…
· Giving the
Government more ability to restructure EDF (which in hindsight could be
interpreted as breakup or sell-off parts of EDF).
· Strengthening
the security of France’s electricity supplies as Europe struggles with reduced
imports of Russian gas.
· A view that
the market is ailing (or possibly failing), as reduced Russian gas supplies
increase Europe’s wholesale prices relative to the French Government’s
self-imposed price cap. The bigger picture appears to be that a fully
nationalised EDF could end up providing electricity below cost as a social
services.
· Managing its
aging fleet of reactors, along with the cost over-runs of new reactors (of
which it plans to build more over the next 20 years).
· A shift in
the patterns of Frances electricity import and exports, noting that France
would normally be exporting around the northern autumn but is currently
importing.
Events
over the last year
The following events have occurred over the
last year…
· February
2023 saw the Lower House pass a resolution to fully nationalise EDF, including
a rejection to break up or sell off any parts of EDF. That resolution then
passed to the Upper House.
· May 2023
saw the appeals court reject a complaint by minority shareholders alleging that
€12 per share undervalued EDF. The courts’ rejection of that complaint allowed
the re-nationalisation to proceed to completion.
· June
2023 saw EDF return to full state ownership, after 18 years of mixed ownership.
This completes Pipes & Wires analysis
of the EDF re-nationalisation.
US – AEP
continues to sell assets
Introduction
Pipes
& Wires #219 examined AEP’s
sale of its unregulated wind and solar business. This article examines the
possible sale of two further AEP businesses.
A bit
about AEP
American Electric Power owns and operates
31,000 MW of generation supplying 5,600,000 customer in 11 states through
225,000 miles of lines. Key goal areas include having about 50% of its
generation to be renewable by 2032 whilst also selling its competitive retail
energy business.
The
proposed sale of AEP Energy
AEP Energy is AEP’s competitive retail electricity
and gas supplier supplying 752,000 customers throughout Delaware, Maryland, New
Jersey, Pennsylvania, Washington DC and Illinois. This sale is proposed for the
first half of the 2024 Calendar Year, and will now include AEP Onsite Partners which
supplies on-site generation, heat, waste heat recovery
and energy storage in 22 states.
The
proposed sale of transmission joint ventures
AEP has yet to decide whether to also sell
its 3 transmission joint venture companies Pioneer Transmission, Prairie Wind
Transmission and Transource Energy. AEP’s stake in these 3 businesses is valued
at about $550m.
The
strategies behind the sales
The strategies behind both proposed sales are
to…
· De-risk
the business away from kWh throughput which is subject to weather patterns,
renewable generation volumes and customer demand.
· Migrate
capital back towards AEP’s core transmission and distribution businesses in
Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee,
Texas, Virginia and West Virginia.
Energy mix and grid security
NZ – are gas reserves dwindling ?
Introduction
The Ministry of Business,
Innovation & Employment (MBIE) recently released estimates of New Zealand’s
gas reserves, and noted a decline since the 2022 update. This article tries to
get underneath the media headline that gas reserves are now less than 10 years
existing consumption.
Latest gas reserve assessments
Key facts from the release
include…
· As of 1st January 2023, the Proven + Probable (2P)
reserves are 1,635 PJ.
· This is down from 1,967 PJ on 1st January 2022.
· The most significant declines in reserves came from Mangahewa
and Maui respectively.
|
Reporting date |
2P Reserves (PJ) |
Consumption during reporting year (PJ) |
Years’ reserve |
|
1 January 2023 |
1,635 |
Not yet available |
|
|
1 January 2022 |
1,967 |
145 |
13½ |
|
1 January 2021 |
2,074 |
155 |
13¼ |
|
1 January 2020 |
2,021 |
183 |
11¼ |
The calendar 2022 year
showed a decline in gas consumption due to…
· The closure of the Methanex methanol plant.
· The closure of the Marsden Point oil refinery.
· A warm, wet winter that required less gas-fired electricity
generation.
Significant factors that
are not strongly reflected in the above numbers include…
· Forecast gas consumption is expected to decline further, not
increase.
· Contingent (currently not economically viable to extract) gas
reserves are estimated to be a further 1,727 PJ, with experience indicating
about 67% of contingent reserves end up being viable to extract. That arguably
adds another 8 years supply at 2022 consumption rates.
· The above estimates also exclude the recently discovered
Toutouwai gas well, which has been described as “significant”.
On the assumption that gas
consumption does continue to decline, it would therefore seem that there is
little truth to the media comment about having less than 10 years’ reserves.
Further reading
· Pipes & Wires #201 – NZ gas under pressure
· Pipes & Wires #199 – Aus re-examining the gas exploration moratoria
Regulating
emerging technologies
US – who
should own EV chargers ?
Introduction
Pipes & Wires has previously examined
the battle over whether electric companies or third parties should own EV
chargers. This article examines a recent move in the US state of Colorado which
has seen a major electric company file an alternative transport electrification
plan.
Recent
moves in Colorado
Xcel Energy filed its Transport
Electrification Plan in May 2023, which
proposed to install 460 DC fast chargers owned by Xcel at a cost of about $137.
That plan was opposed by a coalition who argued that allowing electric
companies to own EV chargers subsidised by electric customers at large would
discourage competitive markets for charging.
Xcel Energy has subsequently filed a
revised plan that includes rebates to assist unregulated third parties to
install and own chargers to allow the Colorado PUC and the public to consider
both options.
Some
observations
A couple of observations…
· Electric
companies have been able to roll out EV chargers quicker than third parties,
despite the insistence that third parties are better placed to provide
chargers.
· Electric
companies are not allowed to include EV chargers in their RAB, meaning that the
chargers are not subsidised by electric customers at large.
Further
reading
· Pipes
& Wires #208 – US recovering
the cost of EV chargers.
· Pipes
& Wires #203 – US who should
own EV chargers.
· Pipes
& Wires #181 – US paying for EV
charger roll-outs.
· Pipes
& Wires #174 – US recovering
the cost of EV chargers through regulated tariffs.
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.