Pipes & Wires

Thought leadership of critical energy & infrastructure matters

Issue 225 – April 2024

 

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…

 

Subscribe to Pipes & Wires

 

If you’re receiving this second-hand, pick this link to subscribe.

 

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.

 

House-keeping stuff

 

Opt out from Pipes & Wires

 

Pick this link to opt out from Pipes & Wires. Please ensure that you send from the email address we send Pipes & Wires to.

 

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.