Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #223 … this issue starts with an examination of some
regulatory decisions in New Zealand and Australia, followed by a look at
electricity distribution in South Africa and a takeover bid in Australia.
We
then conclude with a few energy mix and grid security stories … some thoughts
on virtual power plants, possible delays to coal-fired generation closures in
Australia, and finally a look at the renewed priority of energy security in the
UK. So … until next time, I’d like to wish you all a very Merry Christmas and
Happy New Year…
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Recent client projects
Recent
client projects include…
|
Decarbonisation and energy transition · 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
The 1932
Detroit electric car
This 1½ minute video
clip shows a 1932
Detroit electric car with what appears to be an 84V architecture. Note the new
sale price of US$2,940, which is about US$66,000 in todays’ dollars (so about
double the current cost of a small EV like a Renault Zoe in the United States).
Network regulatory decisions
NZ – setting
the DPP4 electricity revenue control
Introduction
Those electricity distribution
businesses that don’t meet the consumer ownership requirements set out in s54D of
the Commerce Act 1986 are
subject to the Default Price-Quality Path regime, which is currently in its
third period (DPP3). This article examines the Commerce Commission’s draft DPP4
regime which will start on 1st April 2025.
Regulatory framework
Part 4 of the Commerce Act 1986 sets out the broad regulatory framework, with the
following sub-parts being directly relevant…
·
Sub-part 3 specifies the Input Methodologies (IM’s), which
defines how key parameters such as the WACC are to be set. Clause 52Y requires
the IM’s to be regularly reviewed, which is discussed in a separate article in
this issue.
·
Sub-part 6 sets out the requirements of the Default
Price-Quality Path (DPP).
·
Sub-part 9 describes specifically how electricity lines
businesses may be regulated.
Progress to date (early December 2023)
The Commission’s
progress to date includes…
·
Workshops during
2022 on topics such as expenditure forecasting.
·
Publication of a
Process Paper on 25th May 2023 (followed by a consultation period), outlining how
the Commission intends to engage with stakeholders along the path to its final
decision in November 2024.
·
Publication of
an Issues Paper in November 2023 (refer below), followed by
submissions and cross-submissions (still open at the time of writing this
article).
Key features of the
Issues Paper
Key features of
the Issues Paper published on 2nd November
2023 include…
·
Describing the
context of the electricity distribution sector, specifically the challenges of
the energy transition and improving climate resilience.
·
Recognition of
changing technologies.
·
Recognition that
investments needed to supply decarbonisation of industrial heat will be
uncertain, and how the Commission might forecast efficient expenditure.
·
How innovation
and efficiency could be encouraged during DPP4.
·
How customer
bill shocks might be managed.
Next steps
The following
next steps are proposed…
·
Closing of the
submissions and cross-submissions on the issues paper (closes 15th
December 2023 and 26th January 2024 respectively).
·
Topic based
workshops in early 2024.
·
Publication of
the DPP4 draft decision in May or June 2024.
·
Publication of
the DPP4 final decision by the statutory deadline of 30th November
2024.
Pipes &
Wires will pick up this story again when the draft decision emerges.
Aus – the South Australia electricity distribution revenue reset
Introduction
SA Power Networks has recently
consulted on its Draft Plan for the
5 year regulatory control period commencing on 1st July 2025. This article examines the
Draft Plan to set some context for the AER’s 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 Chapter 6 of the Rules.
Key features of the process to date
Key features of the process to
date include…
|
Parameter |
Draft Plan |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
|
CapEx |
$2,452m |
|
|
|
|
|
OpEx |
$1,943m |
|
|
|
|
|
Opening RAB |
Not stated |
|
|
|
|
|
Nominal WACC |
5.83% |
|
|
|
|
|
Depreciation |
$1,186m |
|
|
|
|
|
Smoothed revenue |
$4,695m |
|
|
|
|
Pipes & Wires will comment
further once SA Power Networks submits its Proposal.
NZ – update on the Input
Methodologies review
Introduction
Continued
investment in regulated infrastructure requires certainty for operators and
owners, and a large part of that certainty stems from consistent and
predictable revenue decisions. This article examines the review of the Input Methodologies that the
Commerce Commission must apply when setting revenue decisions for electricity
networks, gas pipelines and airports.
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 s52Y requiring
the IM’s to be reviewed at intervals not exceeding 7 years.
The process to date
The IM review
began in February 2022 with the publication of a Notice Of
Intention, and has since covered a lot of work
on both general IM components such as cost of capital, and specific components
such as cost of debt wash-ups for gas pipelines. As always, effected parties
should read the published documents in full.
Final decision
The
Commission will release its Final Decision on Wednesday 13th
December 2023. Pipes & Wires will examine that Decision in February 2024.
Industry reshuffling
South
Africa – splitting off Eskom’s distribution
Introduction
News emerged recently that the Public
Enterprises Minister has approved the sale of Eskom’s distribution assets to a
new state-owned company. This article examines previous attempts to reform
distribution, and examines the Minister’s announcement.
Background
to Eskom’s distribution
Historically, electricity distribution in
South Africa has been by a mix of both the vertically integrated Eskom, and by
about 180 municipalities.
Attempts to consolidate distribution date
back 20 years (and maybe even longer) and included plans to form between 5 and
15 Regional Electricity Distributors (RED’s). Long-time readers might recall
that the proposed RED 1 supplying Cape Town almost got started, but
disagreement over the allocation of RED 1 share ownership caused the National
Energy Regulator (NERSA) to withdraw RED 1’s interim supply license.
The
latest announcement
The distribution business will be a
wholly-owned subsidiary of Eskom, with further clarification from the Minister
that the phrase “approval for sale” referred to the sale of the assets into the
new Eskom subsidiary, and not to privatisation. It is noted that the stalled
progress on unbundling Eskom seems to have recently recovered traction, as
NERSA recently approved an operating license for a National Transmission
Company (NTC)
Further
reading
· Pipes
& Wires #204 South Africa
progress on splitting off Eskom transmission.
· Pipes
& Wires #95 – South Africa
consolidating electricity distribution.
· Pipes
& Wires #57 South Africa will
RED 1 sink or swim ?
· Pipes
& Wires #28 – consolidating
electricity distribution in Africa (part 2).
Aus – progress
on the Origin takeover
Introduction
Pipes & Wires has previously examined
Brookfield and EIG’s bid for Origin Energy. This article examines the
Australian Competition & Consumer Commission’s (ACCC) recent approval of
that bid, and its subsequent failure to achieve sufficient shareholder support.
As always, this is a complex issue and interested readers should read the
ACCC’s publications in full.
Recapping
the deal
Earlier in 2023 Brookfield launched an
A$15.5b bid for Australia’s Origin Energy in
conjunction with EIG
Global Energy Partners, representing a
55% premium over Origin’s closing stock price. This offer was subsequently
pruned to $15.3b, due in part to the imposition of 12 month retail price caps. It
is intended that Origin will be broken up, with Brookfield taking the retail
electricity business and EIG taking the gas and LNG assets.
It is noted that Brookfield’s controlling
stake in transmission and distribution company AusNet
was expected to be a concern to the ACCC. Brookfield and EIG provided an enforceable
undertaking to ring-fence AusNet as part
of their approval application.
The ACCC
approval
In mid-October 2023 the ACCC approved the
bid. Key features of the approval
include…
· The
applicants must comply with the enforceable undertaking submitted as part of
their application.
· AusNet
must also comply with that enforceable undertaking.
· The
ACCC’s view that the public benefits of the bid (inter alia accelerating the energy transition) would exceed the
public detriment.
· The ACCC
has not identified any reasons why approval should be withheld.
· That the
deal must be concluded within 12 months of the date of ACCC approval (a general
feature of most ACCC determinations).
Tri-Star
Energy’s legal action
A further complication that has been
brewing for over 12 months is Tri-Star Energy’s legal action against Origin’s
Australia Pacific LNG subsidiary. The action relates to a deal dating from
2002, and includes Tri-Star’s rights to royalties and a reversionary interest
in the Surat and Bowen gas fields. Tri-Star is claiming $4.7b in lost revenue.
Failure
to achieve required shareholder support
As of early December 2023, the deal still
required the approval of Origin’s shareholders. The AustralianSuper pension
fund has previously stated that it planned to oppose the deal, arguing that
Brookfield's offer undervalues Origin's expected role in the energy transition.
At a vote on 4th December 2023,
69% of shareholders voted in favor of the deal which was lower than the
required 75%. Brookfield has now abandoned the acquisition (having recently
said there is no Plan B).
Further
reading
· Pipes
& Wires #219 – Brookfield’s
recent deals
· Pipes
& Wires #210 – AusNet accepts
Brookfield’s takeover offer.
Energy mix and grid security
US – some
thoughts on the emerging Virtual Power Plants
Introduction
The term Virtual Power Plant (VPP) has
become increasingly popular lately. This short article examines VPP’s using a
topical example from the US state of Texas, and then considers the wider benefits
of VPP’s using a structured model.
What is
a VPP ?
A VPP is an aggregation of distributed
energy resources (DER’s) across a network that are pooled together to provide
electricity services during specific times or events. In contrast, a microgrid
is generally within a smaller geographical area.
Recent
events in Texas
The Texas Public Utilities Commission recently
approved 2 VPP’s under its
Aggregate Distributed Energy Resource (ADER) pilot program, with a further 6
VPP’s being commissioned at the time of writing. These 8 VPP’s will total 7.2
MW of capacity.
What can
a VPP do ?
At its most basic level, a VPP releases
energy into the network during specific times or during specific events. The Rocky
Mountain Model provides a more
structured way to consider the 3 different classes of benefits that a VPP can
provide, from real-time grid stability and reducing energy costs through to
long-term capital investment deferral.
Aus – delaying the coal closures ?
Introduction
Closing coal-fired
generation in Australia is a well-established theme that Pipes & Wires has
examined for many years. This article examines the Australian Energy Market
Operator’s (AEMO) recently published August 2023 Electricity Statement Of
Opportunities (ESOO), and then examines
the proposed actions by individual states.
Regulatory framework
The regulatory framework requiring
the AEMO to publish the ESOO includes…
· The National Electricity Law (actually the National Electricity (South Australia) Act 1996, and given effect in the other states).
· The National Electricity Rules, made pursuant to Part 4 of the National Electricity (South
Australia) Act 1996.
· Clauses 3.13.3a
and 3.7c
of the National Electricity Rules.
Key features of the August 2023 ESOO
A key feature of the ESOO
is that reliability gaps are forecast to be greater than the gaps forecast in
the February 2023 Update, and in some cases greater than the gaps forecast in the 2022 ESOO.
In particular, the 2023 ESOO Central Scenario forecasts the following risks on
a state-by-state basis…
|
State |
Forecast reliability |
|
Victoria |
· Over the next 10 years starting from the 2023/24 summer, supply
interruptions are forecast to exceed the Interim Reliability Measure of
0.0006% unserved energy. · From the 2026/27 summer, supply interruptions are forecast to
exceed the Reliability Standard of 0.002% energy unserved. |
|
New South Wales |
· From the 2025/26 summer, supply interruptions are forecast to
exceed the Reliability Standard of 0.002% energy unserved. |
|
Queensland |
· Supply interruptions are forecast to exceed the Reliability
Standard of 0.002% energy unserved for the 2029/30 and the 2030/31 summers. |
|
South Australia |
· Supply interruptions are forecast to exceed the Interim
Reliability Measure of 0.0006% unserved energy for the 2023/24 summer. · From 2028/29, supply interruptions are forecast to exceed the
Reliability Standard of 0.002% energy unserved. |
As always, interested
parties should read the ESOO in its entirety.
Proposed actions by individual states
Individual states are
proposing the following actions…
|
State |
Response |
|
Victoria |
· The Victorian Government has recently
signed an agreement with AGL to keep Loy Yang A available until
mid-2035. Although this is consistent with AGL’s previously signaled plans to
advance Loy Yang A’s closure from 2045 to 2035, the Government agreement is
new. |
|
New South Wales |
· The NSW Government has been talking with Origin Energy about
keeping Eraring open beyond its intended closure in August 2025, although
exactly when Eraring might stay open until is not yet clear. |
|
Queensland |
· Queensland’s response is less clear, with the possibility that
whilst the 5 state-owned coal-fired stations (Callide B, Kogan Creek,
Stanwell, Tarong and Tarong North) are expected to close by the Government’s
2035 deadline, the 3 privately operated coal-fired stations (Gladstone,
Millmerran and Callide C) could remain open. |
|
West Australia |
· Delay
the closure of Unit 6 at Muja from October 2024 to April 2025. |
Further reading
· Pipes & Wires #220 – Aus keeping Eraring open.
UK – the King clarifies the energy transition
Introduction
Most of us are aware that
the UK has set some bold nett-zero targets. This article notes that the recent King’s Speech has articulated the following two themes that are very
relevant to those targets…
· Securing the UK’s energy supplies in a volatile and
increasingly hostile world.
· Attracting more renewable energy and grid connection
investment.
It is perhaps notable that energy security and
transition were right near the top of the Speech, right after reducing
inflation (and ahead of transport, education, crime, immigration and health).
Securing energy supply
The King
said “Legislation will be introduced to strengthen the United Kingdom’s energy
security and reduce reliance on volatile international energy markets and
hostile foreign regimes. This Bill will support the future licensing of new oil
and gas fields, helping the country to transition to net zero by 2050 without
adding undue burdens on households”.
Attracting more investment
The King
said “Alongside this, my Ministers will seek to attract record levels of
investment in renewable energy sources and reform grid connections, building on
the United Kingdom’s track-record of decarbonising faster than other G7
economies”.
Key implications of the King’s Speech
The King’s Speech seems to
recognise the following…
· That gas will play a critical role in the nett-zero
transition.
· That secure energy underpins a modern nation.
· That thermal fuels are a significant geopolitical bargaining
chip.
· That transmission grid and distribution network investment
underpin the energy transition.
· That the energy transition will come at a cost to domestic
customers, which the Government will seek to manage.
Applying the energy trilemma to the King’s Speech
Fundamentally, the King’s
Speech aims to change the UK’s location on the energy trilemma, which is basically a triangle model that depicts how well a country is
balancing the trade-offs between the three important dimensions of…
· Security of energy supply.
· Accessibility and affordability of
energy.
· Environmental sustainability, including
both supply and demand side efficiencies and uptake of renewables.
It would seem that the
Government’s intended direction will shift the UK’s energy trilemma back
towards the Security corner.
Further reading
· Pipes & Wires #209 – WEC trilemma ratings
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.
