Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #222 … we start this issue with a couple of regulatory
decisions, including how a regulator is treating a transmission grid battery
investment. We then look at the development of flexible export rules in
Australia and the recent pausing of wind and solar approvals in the Canadian
province of Alberta.
We
then examine progress on the Avangrid – PNM merger in the United States, and
conclude this issue with a look at how a transmission grid company might
allocate grid capacity amongst competing generators. 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
Progress
at Hinkley Point C nuclear power station
This 6 minute
video shows progress at
the Hinkley Point C nuclear power station in England … an amazingly complex
project that includes the world’s largest mobile crane…
Network regulatory decisions
NZ –
recent cost of capital decisions
Introduction
The Commerce Commission recently released the cost of capital
determinations that will apply to the following regulated
infrastructure…
·
Vector and GasNet’s distribution pipeline businesses.
·
Transpower.
·
Christchurch and Auckland Airports.
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 September 2020).
·
Clauses 3.5.1 to 3.5.8 of the Transpower Input
Methodologies Determination 2010 (consolidated to January 2020).
·
Clauses 5.1 to 5.7 of the Airport Services Input
Methodologies Determination 2010 (consolidated to December 2016).
Key features of the
Vector and GasNet distribution pipeline WACC’s
Key features of the WACC’s include…
|
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
6.05% |
6.73% |
7.17% |
7.41% |
|
Post-tax WACC |
5.35% |
6.03% |
6.47% |
6.71% |
Key features of the
Transpower WACC
Key features of Transpower’s WACC’s include…
|
Parameter |
25th percentile |
Mid-point |
67th percentile |
75th percentile |
|
Vanilla WACC |
6.65% |
7.36% |
7.82% |
8.06% |
|
Post-tax WACC |
5.94% |
6.65% |
7.11% |
7.36% |
Key features of the
Christchurch and Auckland Airport WACC’s
Key features of the Christchurch and Auckland Airport WACC’s include…
|
Parameter |
Mid-point |
|
Vanilla WACC |
7.79% |
|
Post-tax WACC |
7.49% |
Aus – the
Waratah Super Battery revenue determination
Introduction
The electric
transmission operator in the Australian state of New South Wales, Transgrid,
recently submitted its regulatory proposal for the non-contestable component of
the Waratah Super Battery
Project for the 5 year period starting on 1st
July 2024. This article examines that proposal to provide context for the
Australian Energy Regulator’s (AER) draft decision and the final
decision.
A bit about the Waratah Super Battery
Project
The WSBP is
based around a 850 MW / 1,680 MWh battery at Munmorah
(the site of the former coal-fired power station). The battery will be
installed by Akaysha Energy, and will be operated by Transgrid.
Regulatory framework
Transmission
revenue determinations are usually made under Chapter 6A of the
National Electricity Rules. This determination includes
consideration of the Electricity
Infrastructure Investment Amendment (Non-Contestable Revenue Determinations)
Regulation 2022 which in turn requires the AER to
apply a Transmission Efficiency
Test.
Key features of the determination
Key features
of the non-contestable component of the determination include…
|
Parameter |
Proposal |
Draft decision |
Revised proposal |
Final decision |
|
Return on
capital |
$73.7m |
$77.3m |
|
|
|
Depreciation |
$31.6m |
-$0.3m |
|
|
|
OpEx |
$27.2m |
$24.2m |
|
|
|
CapEx |
$254.7m |
$248.5m |
|
|
|
Opening RAB |
$108.1m |
$105.2m |
|
|
|
Vanilla
WACC |
6.80% |
6.80% |
|
|
|
Revenue
adjustment |
$3.5m |
$3.5m |
|
|
|
Income tax |
$1.7m |
$0.03m |
|
|
|
MARR |
$137.7m |
$104.1m |
|
|
Pipes &
Wires will revisit this story as the decisions progress.
US – are regulators signaling a shift in spending priorities ?
Introduction
In an effort to reflect the
outcomes that a competitive market would provide in response to changing
internal and external drives, regulators are amending their decision making
frameworks and specific decisions. This brief article examines a recent rate case
decision (revenue determination) from the United States to provide a sense of
what regulators might be thinking.
The recent Tucson Electric Power rate decision
The Arizona Corporation
Commission recently handed down its rate
decision for Tucson Electric Power for the period beginning 1st September 2023. The
decision rejected several components of TEC’s rate case, including an estimated
monthly rate increase of $14.22 for the average customer.
The specific winners and losers
The specific winners and losers
include…
|
Parameter |
TEP’s rate case |
ACC’s decision |
|
Average monthly bill increase. |
$14.22 |
$11 |
|
Return on equity. |
10.25% |
9.55% |
|
Fair value increment. |
0.66% |
0.00% |
|
EV discount. |
Proposed to apply a 5%
discount to all kWh consumed by a customer owning an EV. |
Removed. |
|
Demand side management surcharge. |
|
Requires TEC to refund any
unused DSMS funds remaining after 31st December 2023. |
|
Energy efficiency and demand
side management surcharge. |
Proposed to include in the
rate base. |
Removed. |
Associated commentary embodies
the following themes…
· Trying to strike the right balance between TEC’s genuine cost
increases and customers living costs.
· Recognition that benefits to a specific class of customers (EV
drivers) should not be subsidised by customers at large (by rolling into the
RAB).
· Making rates (tariffs) as transparent as possible.
The editor comments
It is
appreciated that this is only 1 of many rate decisions, however the above
themes are becoming apparent in regulatory decisions all over the world. In
particularly, electric companies should be very clear that regulators are very
unlikely to approve subsidies to specific classes of customers.
Aus – the NSW electricity distribution revenue decisions
Introduction
The 3 electricity distributors
in the Australian state of NSW (Ausgrid, Endeavour
Energy and Essential Energy) have submitted their Regulatory Proposals (rate cases) for the 5
year period commencing on 1st July 2024. This article examines the
key features of those Proposals to set some context for examining the Draft and
Final Decisions.
Regulatory framework
The regulatory
framework is based on the National Electricity (South Australia) Act 1996, which provides for the making of the National
Electricity Rules (version 200 at the time of writing). Electricity distribution
determinations are principally made pursuant to Chapters 6 of the Rules.
Ausgrid - key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$3,311m |
|
|
|
|
OpEx |
$2,639m |
|
|
|
|
Opening RAB |
$18,546m |
|
|
|
|
WACC |
5.72% |
|
|
|
|
Depreciation |
$620m |
|
|
|
|
Smoothed revenue |
$9,764m |
|
|
|
Endeavour Energy - key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$1,882m |
|
|
|
|
OpEx |
$1,498m |
|
|
|
|
Opening RAB |
$8,031m |
|
|
|
|
WACC |
6.0% |
|
|
|
|
Depreciation |
$1,022m |
|
|
|
|
Smoothed revenue |
$5,142m |
|
|
|
Essential Energy - key features of the revenue reset process
Key features of the process to
date include…
|
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$2,696m |
|
|
|
|
OpEx |
$2,324m |
|
|
|
|
Opening RAB |
$10,275m |
|
|
|
|
WACC |
5.65% |
|
|
|
|
Depreciation |
$707m |
|
|
|
|
Smoothed revenue |
$5,913m |
|
|
|
Pipes & Wires will revisit
this story when the AER publishes its Draft Determinations.
Regulatory
policy
Aus –
developing flexible export rules
Introduction
The Australian Energy Regulator (AER) recently
released its response
to the flexible export limits consultation
undertaken in late 2022. This article briefly recaps the need for export rules,
and then examines the key features of the AER’s response.
The
evolving role of export and the need to amend the regulatory framework
Most of the distribution regulatory
framework assumes that electricity moves from the network into the customers’
premises through a defined point of connection, which was probably a reasonable
enough assumption 20 years ago when little if any electricity was exported from
consumers’ premises, and hence there was no need for any export rules. The
obvious development of rooftop solar panels and their declining price over the
last 20 years has led to grid congestion and stability problems, which in turn
has prompted regulators to rethink traditional regulatory frameworks (refer to
further reading below).
Key
features of the AER’s response
Key features of the AER’s
response includes the
following four themes…
·
Increased consistency across jurisdictions and between electricity
distribution businesses.
·
More data sharing from electricity distribution businesses and
customers.
·
Stronger governance, and stronger customer protections.
·
More customer awareness and education.
Some of the priority work streams include…
· Establishing
export limit requirements that will be binding on distribution businesses
seeking to implement flexible export limits.
· Identify
capacity allocation principles and a capacity allocation methodology, which the
AER would have the power to asses against the export limit requirements.
· Require
further distribution businesses to provide additional explanatory notes about
flexible export limits.
· Clarifying
the roles and responsibilities of DER’s and traders.
· Identifying
where third-parties may not be complying with technical rules.
Further
reading
· Pipes
& Wires #209 – Aus introducing
dynamic solar exports.
· Pipes
& Wires #205 – Aus centralised
control of rooftop solar.
· Pipes
& Wires #204 – increasing need for
central coordination.
Canada – Alberta pauses solar and wind approvals
Introduction
From where I sit in New Zealand
we’re seeing many solar and wind developments receiving fast-track approval, so
a pause on solar and wind approvals seems really unusual. This article examines
the recently announced 6 month moratorium on new solar and wind over 1 MW in
the Canadian province of Alberta.
Regulatory framework for the moratorium
The regulatory framework is as
follows…
· The Hydro
And Electric Energy Act,
specifically Clauses 9 and 11 of the Act which prohibit a person from
constructing or operating a hydro (Clause 9) or power plant (Clause 11) without approval from the Alberta Utilities
Commission (AUC).
· The Alberta
Utilities Commission Act.
· The Generation
Approvals Pause Regulation is
made under Alberta Utilities Commission Act, with Clause 2 of the Regulation
prohibiting the AUC from granting approval under Clause 9 or Clause 11 of the
Hydro And Energy Act to any generation that produces
renewable electricity within the operative period of the Regulation.
Key features of the moratorium
Key features of the moratorium
include…
· The Generation Approvals Pause Regulation expires on 29th
February 2024.
· The Pause Regulation applies to all generation over 1 MW.
In parallel with the Pause
Regulation, the AUC will conduct a broad
ranging review of current policies for renewable energy development that considers land use, amenity
value, reclamation bonds, development of generation on Crown land, and the
impact of renewables on supply reliability. Subsequent to announcing the Pause
Regulation, the AUC sought stakeholder feedback and based on that feedback announced
that it will continue to process applications subject to specific criteria.
Pipes & Wires will comments
further around April 2024 when the AUC delivers its report.
Industry reshuffling
US –
revisiting the Avangrid – PNM merger
Introduction
To date Pipes & Wires has noted two
significant aspects of Avangrid’s bid for PNM Resources...
· The New Mexico Public Regulation Commission’s
(PRC) rejection of Avangrid’s merger offer, and subsequent appeal to the New
Mexico Supreme Court.
· Changes to the traditional election of the 5
PRC Commissioners to allow the Governor to appoint 3 of the 5 Commissioners.
This article
examines indications that the PRC may reconsider its previous rejection of the
merger.
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.
Progress to date
Key events
to date include…
· Rejection of 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.
· Altering the appointment process for the PRC
Commissioners, from a traditional election of all 5 to allowing the Governor to
appoint 3 of the 5 Commissioners.
· Approval by the Federal Energy Regulatory
Commission and the Texas Public Utilities Commission.
Recent events
Recent
events include…
· Talk that the appointment of 3 new
Commissioners will view the merger more favorably.
· A further extension of the previously agreed
merger deadline of 20th July 2023 until 31st December
2023 (with provision for a further 3 months extension after that).
· A request by Avangrid, PNM and the NMPRC that
the appeal of the merger rejection to the NM Supreme Court be
dismissed, and be returned to the NMPRC for re-consideration.
· The Supreme Court’s denial of that request
(meaning that the Supreme Court would hear the appeal).
· Further Supreme Court hearings, including
arguments that the merger could benefit New Mexico as a whole whilst also
disadvantaging PNM’s customers.
Pipes & Wires will comment further as
the merger is revisited.
Further
reading
· Pipes
& Wires #218 – revisiting the
Avangrid – PNM merger
· Pipes
& Wires #211 – New Mexico
rejects Avangrid’s bid for PNM.
Energy
markets and pricing
South
Africa – allocating transmission grid capacity
Introduction
Analytically sound allocation of
transmission grid capacity amongst competing connection customers appears to be
an emerging problem as the number of competing customers’ increases. This
article examines some rule changes in South Africa to prevent Independent Power
Producers (IPP’s) hogging grid allocations.
Allocating
transmission grid capacity
A useful starting point to illustrate the
allocation of grid capacity is where a vertically integrated electric company
builds new generation, and concurrently decides to connect that generation to
the transmission grid and maybe also build more transmission capacity … all
nice and easy. If we now extend that thinking to a vertically disaggregated
industry in which two or more competing generators need to connect to a grid
with limited capacity, how do we decide which generator gets that transmission capacity ?
South Africa has used a bidding approach in
which IPP’s bid for connection capacity access during specified Bid Windows
under the Renewable Energy IPP Procurement Program (RREIPPPP). A recent example
is Bid
Window 5 from late 2022 in which 25
announced projects totaling 1,759 MW of renewable energy are planned to
commence operation in early 2025.
The
issue
Many of those renewable energy projects
have stalled for a wide range of reasons including an inability to pass through
cost escalations, but are able to retain their allocated transmission grid
connection capacity until the end of the contracted construction period. This
effectively blocks access to a competing renewable project that might have
proceeded (some cynical types might even argue that this creates an incentive
to submit an unviable bid simply to restrict a competing generators’ access to
the grid).
The
proposed answer
Calls have been made for the IPP Office to
set additional rules to clarify how long an IPP has to amend its proposal, and
what should happen to allocated capacity if an IPP fails to proceed.
Further
reading
· Pipes
& Wires #105 – Czech
investigating alleged anti-competitive behavior.
· Pipes
& Wires #72 – Europe interest
in E.On’s transmission business.
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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