From the director…
Welcome to Pipes & Wires #83.
This issue has a strong focus on energy policy matters, and includes some
guesses about likely policy shifts and directions in the wake of a swing to the
right in post-election Europe. Apart from that, we examine two regulatory
decisions and two energy market situations.
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Regulatory determinations
NZ – draft approval for the 400kV lines
Introduction
Readers (at least those in New
Zealand) will be well aware of the battle over the proposed 400kV line from Whakamaru to
Otahuhu. Recent articles in Pipes &
Wires have examined New Era Energy’s
attempt to obtain a judicial review of the Electricity
Commission’s final approval, whilst this article takes a look at another
key aspect – the draft decision of the Board Of Inquiry to approve the line
under the Resource Management Act 1991 that was released in late May 2009.
Role of the Board Of Inquiry
Many of us remember the wailing
and gnashing of teeth around getting a coordinated decision from all the
District and City Councils along the line route (6 if my counting is correct).
In August 2007 the Government “called in” the project, which meant that consent
application would be heard by a single Board Of Inquiry. The board heard
submissions from March to October 2008, and released its draft decision to grant consent
on 27th May 2009.
Basis of the draft decision
The key basis for the Board’s
draft decision is that although there will be some adverse effects to the
Waikato landscape those adverse effects are insufficient to outweigh the
benefit of the project. In particular the Board noted that whilst areas of
natural beauty such as Lake Karapiro and Maungatautari need to be protected
from inappropriate development, such protection was not an absolute goal to be
achieved at all costs.
Next steps
The Board’s draft decision and
conditions are open to public comment for 20 days. The Board will then consider
any issues and concerns raised and release its final decision later in 2009.
Aus – amending the service incentive scheme
Introduction
Under the National
Electricity Rules (NER), the Australian
Energy Regulator (AER) is required to develop a Service Target Performance
Incentive Scheme (STPIS) as part of a suite of instruments designed to improve
the regulation of electricity lines businesses. This article examines the AER’s
recent revision of the STIPS to address what it acknowledges as a material
error.
What exactly is the STPIS ?
NER 6.6.2 requires the AER to
develop a STPIS, and sets out the requirements that the AER must comply with in
developing the STPIS. In broad terms the STPIS provides a financial reward for
maintaining or improving service levels instead of leaving lines businesses to
improve their profitability by chiseling costs. A key core component of the
STPIS is the s-factor which scales the rewards applicable to actual performance
relative to targets.
Concerns with the original STPIS
Several concerns were raised over specific
elements of the original STPIS, including...
·
The
carry-over mechanism that could incentivise lines businesses to lower their
target service levels to make subsequent years targets more achievable.
·
The
inclusion of a cap on the revenue at risk, which reduces the incentives to
improve actual performance.
·
The
inclusion of a time-value-of-money element in the carry-over mechanism, which
was seen as unnecessarily complicating the STPIS.
·
Amending
some detail aspects of the major event day definition.
The revised incentive scheme
The revised incentive scheme can
be examined under the following three headings...
|
Component |
Revised provisions |
|
Reliability of supply |
· The
performance targets must be based on average performance over the past 5
financial years or some other measurement period as described in clause
2.4(a) of Appendix C to the Decision. · The
incentive rates must be based on the Value of Customer Reliability as set out
in Appendix C to the Decision. · Only the
events specified in Appendix C can be included in the calculations of revenue
increment or decrement. |
|
Customer service |
· The
parameters to be considered shall include telephone answering, streetlight
repairs, new connections and response to written inquiries. · The
maximum revenue at risk across all four parameters shall be 1%, including a
maximum of 0.5% from any 1 parameter. |
|
Guaranteed service level |
· The GSL
scheme set out in Appendix C shall only apply in the absence of a
jurisdictional requirement to have a GSL. · Applicable
parameters include frequency of interruptions, streetlight repair, new
connections, notice of planned interruptions and duration of interruptions. · A
parameter should not be included in the GSL if it cannot be measured or the
cost of measuring exceeds the likely benefits. · Thresholds
for the parameters and for the payments shall be as set out in Appendix C. |
This article is by necessity a
summary of a complex matter. Readers should read the Decision in
its entirety before making any decisions.
Energy policy
NZ – revised Government Policy Statement
Introduction
The National Government has been
in power for a bit over 7 months, so the revised
Government Policy Statement on Electricity Governance released by the
Minister For Energy & Resources Hon. Gerry Brownlee
in May 2009 was not unexpected. This article summarises the key aspects of the
revised policy.
The Minister’s announcement
In his announcement speech,
Brownlee emphasised three key aspects...
·
Bringing forward the section that emphasises security of supply.
·
Disentangling the regulatory overlap between the Electricity Commission, Transpower and the Commerce Commission.
·
A streamlined, simplified process for approving transmission
investments under $20m.
Brownlee also noted that the GPS
would be revised to reflect the Government’s intention to review the New
Zealand Energy Strategy and assess any duplication with the New Zealand Energy Efficiency &
Conservation Strategy.
Key aspects of the revised GPS
Key aspects of the revised GPS
include...
|
·
An
explicit acknowledgement that security of supply is critical to achieving sustainable
economic development (10). ·
Identifying
specific security of supply threats such as low hydro in-flows and low wind
speeds (11). ·
The
Electricity Commission is to ensure a mean winter energy margin of 17%
nationally and 30% for the South Island (14). ·
The
Electricity Commission should also set standards for meeting peak demand
(15). |
|
|
·
Domestic
supply contracts should address transparency of charges (39). ·
The
obligation of retailers to offer a low fixed charges option will remain (42). |
|
|
·
Recognition
of the importance of demand side initiatives (54). ·
An
expectation that EECA will be the primary agency for delivering energy
efficiency initiatives (56). ·
An
expectation that appropriate incentives for managing losses and constraints
will be signaled to transmission and distribution companies, and that pricing
structures will provide appropriate signals (63). |
|
|
·
An
expectation that renewables will be promoted and encouraged and that grid
planning activities will acknowledge the special characteristics of
renewables (65, 66). |
|
|
·
An
expectation that the Electricity Commission will oversee the development of
arrangements for market participants to manage transmission loss and
constraint risks (68). |
|
|
·
An
expectation of resilience and diversity of supply to large load centers (71). ·
That
the Electricity Commission should play a leading role in establishing common
standards for supply quality and reliability (74). ·
That
Transpower should respond to customer wishes for security levels that are
different to standard levels as long as the integrity of the core grid is not
compromised (75). ·
An
expectation that the Electricity Commission will apply a less rigorous
analysis to grid investment projects less than $20m (88). |
|
|
·
The
Electricity Commission should develop model approaches to distribution
pricing, and should investigate whether pricing methodologies discourage
demand side initiatives (100). ·
An
expectation that changes to rural line charges will be kept in line with
changes to urban lines charges (102). |
|
|
·
An
expectation that the EC and the CC will work closely to coordinate their
respective roles and ensure a minimum of uncertainty (105). |
|
|
·
An
expectation that the Electricity Commission will investigate the need for
guidelines or standards to facilitate connection of domestic scale generation
(111). ·
An
expectation that the purchase of surplus energy by retailers will be on fair
and reasonable terms (112). |
|
|
·
An
expectation that the Electricity Commission will encourage retail competition
(114). ·
An
expectation that the Electricity commission will develop a model approach for
the reconciliation and allocation of distribution losses (116). |
US – Ohio’s energy policy
Introduction
Every so often Pipes &
Wires examines the energy policies in individual US states - so far we’ve
examined Maryland, Michigan, Connecticut, Montana and California. This article
examines Ohio’s energy policy.
The dominant themes so far
So far, two dominant themes have
emerged from Pipes & Wires’ examinations...
·
Head long charges into renewables in what appears to be a race to
set the highest targets, with little apparent thought of security of supply.
·
A determination to undo the supposed evils of deregulation, again
with little obvious thought about the underlying issues.
So will we find anything much
different when we look at Ohio ?
Key elements of Ohio’s energy policy
Ohio’s current energy policy has
its basis in Senate Bill
221 that was signed into law on 1st May 2008 by Gov. Ted Strickland after a very
smooth and unimpeded passage through both the Senate and the House. Key elements of the Bill
include...
·
An enforceable requirement to reduce energy consumption demand by
22% by 2025.
·
A requirement to generate 12.5% of Ohio’s energy by clean sources
(including clean coal and nuclear) by 2025, along with a requirement to
generate a further 12.5% from renewables.
·
Imposing a 3% premium cap on the price of alternative energy, at
which point a utility’s obligation to continue to purchase alternative energy
would lapse.
·
A pricing regime that, at least on the face of it, would allow for
some certainty of cost recovery by utilities whilst also minimising abrupt
price increases to consumers.
A few comments on Ohio’s policy
If we use the Security – Price –
Environment triangle as a measure of Ohio’s policy, it would seem to provide a
very balanced way forward. Given that the Bill emerged from Strickland’s “Energy,
Jobs & Progress” speech of August 2007 this is hardly surprising in a
state that would appear to depend on price stability and security of supply to
underpin its legacy smoke-stack industries. My guess is that Ohio’s policy will
serve its voters a lot better than the policies of some other states.
Spain – examining the nuclear policy
Introduction
This article is one of an
on-going series of articles examining the nuclear policies of various European
countries, and this month we examine Spain.
Spain’s use of nuclear energy
Spain entered the nuclear era in
1964 when it began construction of the 160MW PWR plant at Jose
Cabrera. Thus began Spain’s experience with PWR’s which led to the current
fleet of 8 (or 7, or 9 depending on which source you read) nuclear power plants
with an installed capacity of about 7,200MW. These plants generate about 53,000
GWh per year, or about 18% of Spain’s annual 306,000 GWh consumption.
Historical policy movements
Spain’s move away from nuclear
power began in 1983 with a moratorium on new nuclear stations being enacted by
the Socialist government that had been elected the previous year. This resulted
in 5 units being abandoned at the construction phase – 2 x 900MW PWR’s at Lemoniz, 2
x 975MW General Electric BWR’s
at Valdecaballeros and a 1,000MW Siemens PWR at Trillo. One
of the glaringly obvious inconsistencies of this policy position – one that
seems to occur regularly in Europe - was the agreement with France to import up
to 1,000MW of electricity which would almost certainly be nuclear (but then we
can’t let inconvenient facts stand in the way of ideology).
More recent policy movements
In 2006 Prime Minister José
Luis Rodríguez Zapatero confirmed that the 8 remaining nuclear
plants would be phased out in favor of renewables. However a quick examination
of the phase out timetable indicates a remarkable similarity to the nominal 40
year life of a nuclear plant so it’s possible that Zapatero’s phase out might
be more cautious than bold. That might prove to be wise in the long-term scheme
of things.
Europe – a swing to the right
Introduction
Election of the 736 Members
of the European Parliament occurred across the EU’s 27 member states in
early June, with results concurring with predictions of victory for the
center-right parties and thrashings for the center-left parties. This article
considers the shifts in nuclear and climate change policies that might follow
at an EU level.
Some background to the policy positions pre-election
Firstly we need to step back from
the examination of the nuclear policies of individual EU member states which
have recently featured in Pipes & Wires and obtain a clear picture of the pan-European
policy. The EU began developing a common energy policy in March 2006 which
included the following proposals...
·
Reduction in greenhouse gas emissions to 80% of 1990 levels by
2020 and 50% by 2050.
·
To develop inter alia 4th
generation nuclear power. At first glance this would seem to sit uneasily
with those member states that have anti-nuclear policies (but are happy to
import electricity from France).
To
progress this policy, a Strategic Energy Technologies (SET) Plan was developed
that includes sustainable nuclear fission and work on 4th generation
reactors.
Some thoughts on where policy might go
It’s obviously early days for key
policy positions, but a little extrapolation of policy trends pre- and
post-election in other jurisdictions would suggest...
·
That a more measured response to climate change is likely to
emerge. This may well be characterised by a shift towards elevating security of
electricity supply as a public policy objective, a hesitancy to commit to
emission reductions, and a greater recognition that the science of climate
change is far from settled.
·
That nuclear energy will be increasingly acceptable. This could be
characterised by a dismantling of the “philosophically opposed” views, and the
dilution of policy requirements for new nuclear capacity to be equally backed
by renewables.
But one way or another, this
could be an area where a week in politics is not a very long time.
Mergers & acquisitions
US – Allegheny sells distribution network to Co-op’s
Introduction
News emerged earlier last month
that Allegheny Energy was selling
its Virginia distribution business to the Rappahannock and Shenandoah Valley electric co-operatives. On
the face of it this might seem like a very straightforward transaction, however
the sale of a business from the investor sector to the co-operative sector
raises some issues that might be worth a look at.
Background to the deal
Allegheny Energy is an
investor-owned utility supplying about 1,500,000 customers in Pennsylvania,
Maryland, Virginia and West Virginia through its subsidiaries West
Penn, Monongahela
and Potomac
Edison. Rappahannock and Shenandoah are rural electric co-operatives that together
supply about 139,000 customers in parts of Virginia and West Virginia. The deal
will see Potomac Edison merged into Rappahannock and Shenandoah’s existing
service territories.
Allegheny’s strategy for selling Potomac
The short answer is that Potomac
is bleeding cash (a figure that may reach $100m). The longer explanation is
that until 1st July 2007 Potomac had a capped-rate electricity purchase
agreement with another Allegheny subsidiary. After the expiry of that
agreement, Potomac planned to purchase electricity at market prices and
expected to be able to pass on those prices to its retail customers ... so far,
so good.
This all started to unravel when
Virginia re-regulated
its electricity industry and extended those price caps through to 31st
December 2008. This left Potomac buying electricity at market prices but
selling it at capped rates over the period 1st July 2007 to 31st
December 2008. Potomac sought a 20% tariff increase from the Virginia State Corporations Commission
(SCC) however the SCC rejected the request, arguing that Potomac’s decision to
sell its generating plant to a fellow Allegheny subsidiary and assume market
exposure was unwise.
What do the Co-op’s make of all this ?
Snippets in the media suggest
that Rappahannock and Shenandoah are keen to emphasise the advantages of local
power supply and supplier payments staying in local communities ... a slight
variation on the “profits stay on Main St, not Wall St” slogan.
However, getting beneath those
warm fuzzies is of course the issue of how the cash bleeding will be stopped
... Rappahannock and Shenandoah will need to either hike their retail tariffs
or lessen their wholesale exposure. It appears that the SCC has granted a 6%
tariff increase (which is obviously significantly less than the 20% that
Potomac sought) so it’s far from clear how this will be resolved.
Another interesting issue to be
considered is how will Rappahannock and Shenandoah address the commercial cost
of capital embedded in the Potomac assets. Presumably the Potomac assets have
been bought with real money that has a real commercial cost (or at least an
opportunity cost) so it would seem unlikely that Rappahannock and Shenandoah
won’t pass on that cost through their tariffs.
It will be interesting to see how
the battle shakes out. My guess is that Public winning the Public-Private Battle
will not be as simple as Private selling assets to Public.
Energy markets
Japan – securing gas supplies
Introduction
An emerging theme of Pipes &
Wires is the increasing distance from which gas utilities are having to
take supply from. This article revisits Pipes
& Wires #73’s brief look at Osaka Gas’ attempt at further
backward integration by taking an equity stake in Chevron’s Gorgon LNG project.
Background
Osaka Gas has 6.7m customers in
the Kansai area. Traditionally Osaka relied on gas from coal and oil, but
(surprisingly) has been importing LNG for about 30 years, and for the last 20
years has depended entirely on LNG imports from 6 countries. Osaka’s imports
represent about 5% of the globally traded volumes.
What has become of Osaka’s attempted Gorgon stake ?
Osaka Gas has already
participated in up-stream projects in Oman, Norway, Australia and Indonesia so
its attempt to further secure its gas supplies by investing in additional LNG
production was no surprise.
Previously Osaka was looking to
take an equity stake in Gorgon after having already locked in a 25 year supply
agreement. It appears, however, that Osaka’s attempt to buy an equity stake was
unsuccessful.
Ireland – progress on the single electricity market
Introduction
The commencement of the Single Electricity Market in the
Irish Republic and Northern Ireland on 1st November 2007 was touted
as the world’s first electricity market operating between sovereign states
(although I do recall the Iberian market in Spain and Portugal might have
beaten them). This article follows up Pipes &
Wires previous coverage in #61
and #66.
Background
The core of the SEM is a pool
into which all electricity generated must be sold into, and all electricity
consumed within or exported from Ireland must be purchased from. The operation
of the SEM will be jointly managed by the grid operators in each jurisdiction, EirGrid and SONI respectively.
The first 18 months operation
As good a measure as any of a
market’s robustness would be the price profile over time, and in particular any
prolonged price spiking and the mechanisms used to investigate those spikes. A
cursory analysis of system marginal prices since 1st November 2007
indicates some spiking for 1 and perhaps 2 half-hours during the winter evening
peaks, but apart from that all seems stable.
So by this measure the Irish SEM
seems to be working...
A bit of light reading…
Book review – “Connecting The Country”
Helen Reilly’s latest book
“Connecting The Country” is a history of NZ’s national grid from 1886 to 2007
that interestingly enough splits into the development of the AC and DC systems.
Filled with photos, anecdotes and witty stories this is a really worthwhile
read.
Order your copy from Transpower’s web site … cost
is $60 incl. GST.
Wanted – old electricity history books
If anyone has an old copy of the
following books (or any similar books) they no longer want I’d be happy to give
them a good home…
·
White Diamonds North.
·
Northwards March The Pylons.
·
A Jubilee History Of The Auckland Electric Power Board (1972).
CapEx – general interest stuff
Levels of service and their impact on CapEx
This presentation was made at the
Infrastructure CapEx Summit in November 2008. If you’d like a copy, pick here.
Upsizing – the other half of the hidden side of CapEx
This presentation was made at the
Electricity Engineer’s Association
conference in June 2008. If you’d like a copy, pick here.
Getting the CapEx right in the infrastructure sectors
This presentation was made at the
NZIGE Spring Technical Seminar in
September 2007. If you’d like a copy, pick here.
Renewals – (half) the hidden side of CapEx
This presentation was made at the
Electricity Networks Asset Management Summit in November 2007 on the broad
topic of asset renewals. If you’d like a copy, pick here.
PAS 55 – the emerging standard for asset management
To find out more about improving
your asset management activities through adopting the emerging global standard
for asset management PAS 55-1:2004 pick here
or call Phil on +64-7-8546541, or to request a Slide Show on implementing PAS
55-1 pick here.
Website promoting best practice CapEx
Utility
Consultants is pleased to announce the release of a specialist website
dedicated to promoting best practice CapEx policies, processes and planning in
the infrastructure sectors.
Assorted conference papers
Utility Consultants has recently
presented the following conference papers which are available upon request…
·
“Tariff
control of Pipes & Wires utilities – where is it heading??” – presented
at the NZIGE Spring Technical Seminar,
October 2006.
·
“Setting
service levels for utility networks” – presented at the Electricity Network
Asset Management Summit, November 2006.
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Disclaimer
These articles are of a general nature and
are not intended as 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.
Utility Consultants Ltd accepts no liability
for action or inaction based on the contents of Pipes & Wires including any
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contained herein.