Pipes & Wires
From the editor’s desk…
Welcome
to Pipes & Wires #225 … this starts with some regulatory decisions and an
appeal, and then examines an emerging battery chemistry. We then look at some
grid planning from Australia and a swing back to coal-fired generation in
Germany. This issue concludes with a look at incentivising new generation in
the US, and the breaking of an electricity monopoly in Africa. So … until next time,
happy reading…
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Recent client projects
Recent
client projects include…
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. |
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. |
Cool multimedia stuff
This 2 minute video
describes the planning and construction of the original Battersea
Power Station in London, England. It appears that
locating a large coal-fired power station in the middle of a large city was
pretty radical stuff for the 1920’s, with concerns about the effects of pollution
on London’s buildings, greenery and public health being briefly considered but
eventually overridden.
Network regulatory decisions
Aus – the South Australia electricity distribution revenue reset
Introduction
SA Power Networks has recently submitted
its Regulatory Proposal (rate case) for the 5 year control period commencing on
1st July 2025 to the Australian Energy Regulator (AER). This article
follows on from Pipes
& Wires #223 by examining that Proposal to
set some further context for the AER’s Draft and Final Determinations.
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 |
$2,446m |
|
|
|
OpEx |
$1,943m |
$2,044m |
|
|
|
Opening RAB |
Not stated |
$5,223m |
|
|
|
Nominal WACC |
5.83% |
6.18% |
|
|
|
Depreciation |
$1,186m |
$1,293m |
|
|
|
Smoothed revenue |
$4,695m |
$5,164m |
|
|
|
Pipes & Wires will comment
further once the AER publishes its Draft Determination.
NZ – appealing the gas pipeline WACC
Introduction
Most of us
will be very familiar with the importance of investment certainty, which the
Input Methodologies (IM’s) applied by the Commerce Commission are intended to
provide. This article examines the recent appeal against an aspect of the
recently revised IM’s by regulated gas pipes business Firstgas.
The IM decision
The Commerce
Commission released its Final Decision for the IM’s
Review on 13th December 2023, of which Chapter 6
addresses the Weighted Average Cost of Capital (WACC).
The
Commission’s Final Decision CC02 is to adopt the 50th percentile for
gas pipeline businesses, and the 65th percentile for electricity
distribution businesses and Transpower. These both represent reductions from
the 67th percentile adopted in 2014, which is in turn a reduction
from the 75th percentile adopted by the original 2010 Decision.
The reasons
for this decision are set out in Chapter 6 of the Draft Decision Topic
Paper, and include needing to correctly balance the incentives
to invest with limiting excessive profits, which in turn includes consideration
of the risks of discouraging investment (which would manifest as declining
reliability). The Commission notes at Paragraphs 6.113 and 6.114 that (i) gas
outages tend to be less costly for customers, (ii) gas networks are very
reliable, and (iii) the risk of under-investment is ameliorated by gas being a
secondary fuel.
Firstgas appeal
Firstgas has
appealed this decision to reduce the 67th percentile to the 50th
percentile, arguing that this discourages investment and is therefore
inconsistent with promoting the long-term benefit of customers (as set out in s52A of the Commerce Act
1986).
Next steps
Pipes &
Wires will pick up this story again as Firstgas’ appeal progresses.
Further reading
Readers may
be interested in the following…
· Pipes & Wires #224 – NZ the
final Input Methodologies decision.
· Pipes & Wires #224 – NZ gas
under pressure.
· Pipes & Wires #223 – NZ update
on the Input Methodologies review.
· Pipes & Wires #222 – NZ recent
cost of capital decisions.
· Pipes & Wires #221 – NZ
progress on the Input Methodologies review.
· Pipes & Wires #218 – NZ updated
guidelines for calculating WACC.
Aus – the Queensland electricity
distribution revenue reset
Introduction
The two electricity
distributors in the Australian state of Queensland (Energex and Ergon
Energy) have recently submitted their
Regulatory Proposals (rate cases) for the 5 year control period commencing on 1st
July 2025. This article examines those Proposals 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 for Energex include…
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
CapEx |
$3,422m |
|
|
|
OpEx |
$2,285m |
|
|
|
Opening RAB |
$15,591m |
|
|
|
Nominal WACC |
6.16% |
|
|
|
Depreciation |
$1,205m |
|
|
|
Smoothed revenue |
$8,151m |
|
|
|
Key features of the process to
date for Ergon Energy include…
Parameter |
Proposal |
Draft Determination |
Revised Proposal |
Final Determination |
CapEx |
$5,805m |
|
|
|
OpEx |
$2,379 |
|
|
|
Opening RAB |
$16,253m |
|
|
|
Nominal WACC |
6.16% |
|
|
|
Depreciation |
$1,157m |
|
|
|
Smoothed revenue |
$7,816m |
|
|
|
Pipes & Wires will comment
further once the AER publishes its Draft Determinations.
Emerging
technologies
Global – Magnesium-ion water batteries
Introduction
Although Lithium-ion batteries
are undoubtedly popular and seem to dominate peoples’ thinking, they are just
one of many
battery chemistries (which might be best
categorized using the anode material, cathode material and electrolyte), and
indeed are just one of many sub-categories of Lithium batteries. This article
examines the recent development of Magnesium-ion water batteries.
The Magnesium-ion water chemistry
Magnesium-ion batteries are a
sub-category of aqueous metal-ion batteries (already commonly referred to as
water batteries) that uses water as the electrolyte.
The likely advantages of the Magnesium-ion chemistry
Magnesium-ion batteries are
likely to have the following advantages…
· Use of more
abundant and cheaper materials such as Magnesium or Zinc.
· The
electrolyte is less combustible.
· Higher energy
densities than Lithium-ion batteries.
A possible disadvantage is the
formation of passivating (non-conducting) surface layers during recharging,
although some electrolytes are known to reduce passivation.
Further reading
Readers may be interested
in the following further reading…
· Pipes
& Wires #202 – Global competing battery chemistries.
· Pipes
& Wires #197 – Global declining battery prices and emerging
chemistries.
Energy mix and grid security
Aus – the draft Integrated System Plan
Introduction
The Australian Energy Market Operator
(AEMO) recently published its draft 2024
Integrated System Plan (ISP), the road map for the National
Electricity Market (NEM). This article examines the key features of that draft.
Regulatory
framework
The ISP provides a whole-of-system plan for
the efficient development of the NEM for the next 20 years, seeking to optimise
investment in generation, storage and transmission. Section
49(2) of the National Electricity Law sets
out the AEMO’s specific obligations in regard to long-term transmission grid
planning.
Key
features of the draft 2024 ISP
Key features of the draft 2024 ISP include…
· The requirement to
balance four inherent tensions…
· Balancing safe and
reliable operation today with development for the future.
· Keeping the whole grid
stable whilst new technologies are integrated piece by piece.
· Prices must be
affordable.
· Addressing the concerns
of those who will host new infrastructure and technologies.
· Consideration of 3
scenarios…
· Step Change (meeting both
economic growth targets and ambitious emission reduction targets).
· Progressive Change
(reflecting slower economic growth and energy investment).
· Green Energy Exports (export
of low-emission energy backed by strong industrial decarbonisation).
AEMO’s
analysis indicates a 43% probability of the Step Change scenario occurring, a
42% probability of the Progressive Change scenario occurring, and a 15% probability
of the Green Energy Export scenario occurring.
· A view that coal-fired
generation will close 2x to 3x faster than owners have announced, including the
view that under the Step Change scenario only about 2,100 MW of coal-fired
generation will still be operating by 2034/35 and would all be retired by about
2037/38.
Next
steps
The consultation phase on the draft is now
completed, so Pipes & Wires will comment further as the final 2024 ISP is
published.
Germany –
returning coal-fired generation
Introduction
Most of us are aware that Germany has been
migrating its generation fleet from thermal to renewables, aided by various
legislation. This article notes a somewhat surprising Government directive to
reactivate coal-fired generation to minimise supply interruption risks during
the 2023/24 winter.
The
phase-out of coal-fired generation
Germany enacted the Coal Phase-Out Act in
August 2020, which inter alia
required the following fleet closures…
· Requiring
the national fleet of anthracite-fired generation to reduce to 15,000 MW by
2022, to 8,000 MW by 2030 and to be fully closed by 2030.
· Requiring
the national fleet of lignite-fired generation to reduce to 15,000 MW by 2022,
to 9,000 MW by 2030 and to be fully closed by 2038.
The Government
directive
In October 2023 the Government approved the
return of on-reserve brown coal-fired generation until the end of March 2024. This
is in addition to passing emergency legislation in July 2022 to…
· Prolong the operation of
black coal-fired generation until 31st March 2024.
· Allow 1,900 MW of brown
coal-fired generation to be reactivated.
Strategic
drivers of the shortage
The strategic drivers of the expected
energy shortage included…
· Reduced supplies of
Russian gas due the Ukraine war.
· Closure of nuclear
generation.
· Closure of coal-fired
generation.
Further
reading
· Pipes
& Wires #209 – phasing out coal.
· Pipes
& Wires #207 – closing coal-fired generation.
· Pipes
& Wires #138 – closing generation capacity.
· Pipes &
Wires #131 – coal makes a come-back.
· Pipes
& Wires #129 – slowing the transition to renewable
energy.
· Pipes
& Wires #102 – phasing out the phase out of the phase
out.
Energy
markets and pricing
US –
incentivising new generation in the Lone Star State
Introduction
Recent issues of Pipes & Wires have
examined the declining grid reserve capacity margin in Texas, including inter alia various moves to incentivise
new gas-fired generation. This article examines further progress in the form of
the Texas
Energy Fund.
The
Texas Energy Fund
The TEF was created in November 2023, and
will provide both grants and loans to finance the generation projects in Texas
both within and outside of the ERCOT market. Key criteria include…
· Loans within the ERCOT
market can only be applied to dispatchable generation of at least 100 MW
capacity for up to 60% of the estimated cost (excludes storage, own-use
generation and gas pipelines), up to a total of 10,000 MW and $7.2b total cost.
· Loans outside of the
ERCOT market may be applied to modernisation, some weatherisation projects,
reliability or resilience improvements, and vegetation management.
The regulatory framework for the TEF is set
out in Senate
Bill 2627 (also known as the Powering Texas Forward
Act), an Act to support the construction, maintenance, modernisation and
operation of electric generating facilities.
Key dates
The TEF’s key dates include…
· Acceptance of
applications begins on 1st June 2024, with funding of approved
applications by 31st December 2025.
· To receive the completion
bonus, the generation must be interconnected to the ERCOT market by 1st
June 2029.
· The loan program expires
on 1st September 2050.
Further
reading
Readers may be interested in the following…
· Pipes & Wires #224 – US funding new
generation in the Lone Star State.
· Pipes & Wires #220 – US securing generation in the Lone Star State.
· Pipes & Wires #219 – US building a new plant.
· Pipes & Wires #218 – US securing generation in the Lone Star State.
· Pipes & Wires #216 – US the Lone Star State survives the heat.
· Pipes & Wires #213 – US reforming the Texas market to prevent future blackouts.
Industry reshuffling
South
Africa – breaking Eskom’s monopoly
Introduction
Pipes & Wires has examined South
Africa’s various attempts to restructure its electricity industry, including…
· Consolidating several
hundred electricity retailers into between 9 and 15 Regional Electricity
Distributors.
· Splitting up the
vertically integrated Eskom.
This article examines the recent passage of
the Electricity
Regulation Amendment Bill (ERA Bill), which
represents further progress on unbundling Eskom.
South
Africa’s vertically integrated electricity industry
About 95% of South Africa’s electricity is
supplied by the state-owned
Eskom, a vertically integrated electric company
with a proud history dating back over 100 years. As well as owning about 42,000
MW of coal-fired stations, Eskom also supplies about 45% of end-use customers.
The remaining 55% is sold from distributors including municipalities.
Various efforts to break up Eskom’s
monopoly have been attempted over the years, with the ERA Bill being the
latest.
The ERA Bill
The primary purpose of the ERA Bill is to
amend the Electricity Regulation Act 2006, and inter alia…
· Provide for the
establishment of the Transmission System Operator SOC Ltd.
· Assign the duties of the
TSO to the National Transmission Company South Africa SOC Ltd
· Provide for an open
market electricity trading platform.
· Increased penalties for
stealing electricity or vandalising electricity assets.
The Bill received 234 votes in favor, and
only 25 votes against in March 2024.
Responses
to the ERA Bill
Responses to the Bill progress so far
include…
· The Cape Chamber Of
Commerce welcomes the Bill, and its planned introduction of competing energy
suppliers.
· Not surprisingly, the
South African Federation Of Trade Unions SAFTU) has
criticised the Bill with claims of privatisation.
· Legal counsel suggests
that the effect of the Bill will not as great as anticipated, as some
competitive energy trading is already occurring.
Further
reading
Readers may be interested in the following
articles…
· Pipes & Wires #223 – South Africa splitting
off Eskom’s distribution
· Pipes & Wires #222 – South Africa
allocating transmission grid capacity.
· Pipes & Wires #219 – South Africa pruning
Eskom’s revenue proposal
· Pipes & Wires #213 – South Africa the
revised MYPD5 decision.
· Pipes & Wires #211 South Africa Eskom wins
court cases against NERSA
· Pipes & Wires #204 South Africa progress on
splitting off Eskom transmission.
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.