From the director…
Welcome to Pipes & Wires #85.
As well as examining the importance of asset management plans in New Zealand, this
issue has a very European flavor as we examine issues in the UK, Austria, the
Czech Republic, Germany and Spain across a broad spectrum from regulatory
decisions to nuclear policy. And if you’re really keen, please take a moment to
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Regulatory policy
NZ – the future of asset management plans
Introduction
In late July the Commerce Commission released a discussion
paper on Information Disclosure, which is currently being consulted on. Chapter
8 of that paper considers the role that asset management plans (AMP’s) are
likely to play in fulfilling the purpose of Information disclosure. This
article takes a brief look at what is likely to happen.
Background
Part 4 of the Commerce Act 1986
provides for regulation of sectors where there is little or no competition or
likelihood of competition, and explicitly describes the purpose of that Part to
“promote the long-term benefit of consumers ... by promoting outcomes that are
consistent with competitive markets”.
Recognising that informed choice
is a key component of a competitive market, Subpart 4 of Part 4 sets out the
framework for Information Disclosure, with its purpose being to ensure that
sufficient information is available to interested persons to assess whether the
purpose (of Part 4) is being met ie. that outcomes consistent with competitive
markets are likely to occur. Subpart 4 includes provision at s53C(2)(h) for
AMP’s to be included in that disclosed information.
Key themes of the discussion paper
The key themes of the discussion
paper include...
·
That disclosing AMP’s will promote best practice.
·
That AMP’s for regulated businesses (electricity, gas and
airports) will have to demonstrate alignment with the businesses actual
processes and practices, probably by way of having the directors certify that this
is the case.
·
How expected outcomes of energy efficiency, loss reduction,
demand-side management and innovation might firstly be incentivised and
secondly how progress towards those outcomes might be assessed from the AMP’s.
·
An expectation that linkages between customers’ expressed
preferences and asset service levels will be demonstrable and strong.
Pick here
to receive a slide show that discusses these issues in more detail. Pipes &
Wires will make further comment as the consultation process progresses.
Austria – incentivising investment and efficiency
Introduction
Most of us are pretty familiar
with the mechanisms embedded in regulatory frameworks to incentivise investment
and efficiency. This brief article (because there isn’t much in English) examines
2 incentive mechanisms embedded in the agreement reached between the Austrian
regulator E-Control and the energy
industry body VEÖ for the
regulation of Austria’s electricity networks over the 2010 – 2013 control
period.
Key players in the industry
Regulation (well ... deregulation
actually) of Austria’s electricity and gas markets is entrusted to 2 regulatory
bodies – the E-Control Commission (an independent government authority) and
Energie-Control GmbH (a limited company). The Verband der
Elektrizitatsunternehmen Österreichs represents about 140 member utilities and
provides, similar to many other organisations such as the ENA, the ESAA and the NRECA.
Incentivising investment
A key theme of the European
energy sector is increasing renewal investment – every speech, every magazine
article, every press release gives it a mention. Many of us will also realise
that the final form of a regulatory regime often fails to incentivise the
investment that policy makers are advocating. Hence it is pleasing to note that
VEO members who outspend their accounting depreciation (a high-level measure of
the rate of asset renewal) will be able to recover that spend, although it is
not clear whether they will have to demonstrate that the spend was efficient
and be under the threat of being able to recover only an efficient spend.
Incentivising efficiency gains
On the OpEx side of the business,
there is still pressure from regulators to make efficiency gains (and many
utilities seem to still be able to make gains) but the real issue is
incentivising utilities to make those gains. Under the agreement with the VEO,
efficiency gains will be shared equally between consumers and utilities.
Pick here to
start a discussion of this issue in the Pipes & Wires group on Linked In.
Regulatory determinations
UK – the draft water & sewage determinations
Introduction
Pipes & Wires #75
noted the submission of the UK water & sewage businesses draft
business plans to OFWAT as part of PR09, the price controls that
will apply for the 5 years from 1st April 2010. This article
examines the key aspects of OFWAT’s draft determinations.
Key steps in compiling PR09
Key steps in compiling the next
price control have included...
·
Publication of OFWAT’s initial thoughts in March 2008 (Pipes &
Wires #67).
·
Submission of draft business plans to OFWAT in September 2008
(Pipes & Wires #75).
·
Submission of final
business plans to OFWAT in April 2009.
·
Release of the draft determinations in July 2009 (this article).
The next major step will be the
release of the final determinations in November 2009.
Key aspects of the draft determinations
Key aspects of the draft
determinations include....
·
Viewing PR09 as the first 5 year period within a 25 year planning
period, which avoids lurches and discontinuities at re-sets.
·
An expected reduction in the average household bill of £14 from
the current £344 to £330 over the control period, as opposed to an average £31
increase in the submitted business plans.
·
Of the £45 difference between the submitted business plans and the
draft determinations, £15 relates to sharing of past efficiency gains and
OFWAT’s expectation of future efficiency gains.
·
Approval of nearly £21b of capital works instead of the £24b
sought, with the difference relating to OFWAT’s views on efficiency, scope and
scale of investment and dealing with uncertainty.
·
Adoption of a capital expenditure incentive scheme (CIS) that
encourages companies to submit challenging and efficient spend profiles and
then out-perform them (sounds a bit like OFGEM’s IQI scheme – but I’ll stand
corrected on that if need be).
·
A post-tax WACC of 4.5%, which is below the general range of 4.7%
to 5.0% proposed in the submitted business plans.
Overall, the draft determination
was a really good and easy read (the sort of thing that a consumer might
actually read and understand !!!). Pipes & Wires will revisit PR09 when the
final determination is released in November.
UK – meeting energy loss targets
Introduction
Reducing distribution losses
seems to have an increased importance as distributors come under pressure to
reduce CO2 emissions. This article examines a recent case in the UK
where OFGEM refused to relax ScottishPower’s
distribution loss targets.
Background
Each distributor in the UK has a
loss reduction target set by OFGEM, which is expressed as a percentage of the total
number of kWh distributed. If the distributor out-performs its target, it is
rewarded with additional revenue and conversely if it under-performs its target
it is penalised.
When ScottishPower calculated its
original loss targets for the 2005-10 price control, it had included the losses
associated with supplying large customers in southern Scotland directly from
its transmission network when it should’ve omitted those losses (because
strictly speaking, they are not distribution losses as they occur on the
transmission network). When ScottishPower asked for an increase in its
distribution loss targets it also sought an increase in the loss targets for
the transmission network (which should’ve been omitted).
OFGEM’s decision
OFGEM’s decision was as follows...
·
Refused to relax the loss targets for the distribution networks.
·
Allowed an increase for loss targets for customers supplied by the
transmission networks
The impact of this decision is
that ScottishPower will not be able to recover £49.4m from the first 4 years of
the prince control. However, had OFGEM also refused to relax the transmission
loss targets, ScottishPower would have been unable to recover £58.8m.
Energy policy
Czech Republic – examining the nuclear policy
Introduction
So far Pipes & Wires has
examined the nuclear policies of Holland, Spain, France, Sweden, Germany and
the UK. This article takes a marked shift to the east for a look at the nuclear
policies in the Czech Republic, a country that generates about 31% of its
annual 83,000 GWh from nuclear power.
A rocky beginning
Going back to the unified nation,
Czechoslovakia’s nuclear industry had its beginnings way back in 1956 when it
was decided to build a 120MW nuclear station at Jaslovske Bohunice
(which is now in Slovkia). The plant was based around the KS 150 which is a heavy water
gas-cooled reactor and had the key advantage of being able to use indigenous
unenriched Uranium reserves – perhaps an early recognition of the need for
self-sufficiency.
Construction at Jaslovske
Bohunice was plagued with difficulties, and wasn’t completed until 1972.
Following a series of accidents in the mid-1970’s, the government decided
against the large investment program necessary to improve its safety and
operational performance and proceeded to decommission the plant and also to
cancel a planned second reactor.
Momentum develops
While Jaslovske Bohunice was
still under construction, plans for 2 new stations each with 4 Soviet VVER-440 reactors (a variant form
of pressurised water reactor) were confirmed. The first station, at Jaslovske
Bohunice, was commissioned in 1978 whilst the second station as Dukovany
was commissioned in the mid 1980’s.
In the late 1970’s, two further
stations were planned – one at Temelin
based on 4 VVER-1000 reactors (but eventually cut back to 2) and one at Mochovce
based on 4 VVER-440 reactors.
Accession to the EU
One of the conditions laid down
by the EU in 1997 for intending member states was that all nuclear plants had
to achieve western safety standards within 7 to 10 years. It’s not clear
whether this was a cynical poke at Soviet-era VVER and RBMK reactors knowing that those
reactors could never achieve Western standards and would need to be shutdown
(putting those countries on the back foot economically) or whether it was
motivated by genuine safety concerns. However a report by the Western European Nuclear Regulators
Association in 2000 revealed that nuclear operating practices in the Czech
Republic are comparable with those in the West, and the Czech Republic was
admitted to the EU in 2004.
Current plans & policy positions
Recent plans include building 2,
possibly more, large reactors to replace Dukovany sometime around 2020 and
construction of a 1,500MW reactor at Temelin about 2020 with a second reactor
at a later date.
Nuclear power does have
reasonable support (about 60%, not much different to many other EU countries),
with many seeing it as the only way to avoid an impending energy shortage and
meet emission reduction targets. Next month Pipes & Wires will examine
Lithuania’s nuclear policy.
Germany – which way for nuclear ?
Introduction
Pipes
& Wires #77 examined Chancellor
Angela Merkel’s back-peddle on the planned nuclear shutdown that would see
about 17% of Germany’s generation capacity closed down by 2021. That article
ended by noting that Pipes & Wires would re-visit this issue after the 17th
Federal election in September 2009, so this article provides a bit of
pre-analysis of issues and likely outcomes.
A quick summary of the shutdown policy
The 14th
Bundestag was dominated by Gerhard Schroder’s Social
Democrat Party (SPD) which won the 1997 election. The coalition enacted the
Nuclear Exit Law in 2000 which has already seen 3 plants closed down with more
to follow. However the 16th Bundestag under Merkel announced an
intention to re-negotiate those shutdowns but recognised that her Christian
Democratic Party’s (CDU) coalition agreement with the SPD would require the
Exit Law to stay in place until the September 2009 election.
Views heading into the 2009 election
Merkel announced in early July
that the CDU would reverse the Exit Law if it wins the election and can form a
coalition with the Liberal
Democratic Party (LDP). However opposition within the ranks of coalition partner
SPD seems as strong as ever, with environment minister Sigmar Gabriel urging
Merkel to reconsider her stance and order the immediate shutdown of all
remaining nuclear stations.
Media comment suggests that the SPD
are on the way out as public opinion shifts toward “phasing out the phase out”
(but appears to stop short of approving new nuclear stations). Funnily enough,
the big boost to “phasing out the phase out” might come from the unexpected
quarter of the green movement (traditionally one of nuclear’s strongest
opponents) which sees nuclear as one of the only means of achieving emission
reduction targets.
Complicating the issue
A series of nuclear plant
trippings over recent weeks during which the lights stayed on have added
apparent weight to the SPD’s arguments that Germany could shutdown its’ nuclear
stations with no loss of supply. One can’t help but think whether that argument
confuses the lights staying on in the short term in the absence of nuclear
plants with long-term security of supply margins. I guess a good analogy would be
driving your car around with no spare tire ... sure you do it for a short time,
but you probably wouldn’t want to do it for an extended period.
As the battle lines appear to
become more divisive, Pipes & Wires will make further comment once a
post-election government has formed.
Europe – unbundling lines and energy
Introduction
Progress on unbundling Europe’s
energy markets tends to be glacially slow interspersed with sudden flurries of
activity, as many potentially conflicting political views have to be
reconciled. And that’s without considering the spectrum of industry views
ranging from threatening the entrenched order to creating profitable
opportunities. This view examines recent progress
Background
Unbundling of line and energy is
at the heart of neo-liberal energy reform, and was around long before the EU seemed
to turn down that path. Concern had arisen that the benefits of competitive
energy markets resulting from directives EC 1996/92 and EC 2003/54 were not
actually happening, and this was supported by an investigation by EU
Competition Commissioner Neelie
Kroes in 2005. One of the conclusions of this report was that there was
insufficient unbundling of lines and energy to support real competition. The EU
subsequently set out a preferred approach of full ownership separation and a
less preferable approach of operational separation (wherein owners relinquish
operational control of networks to an ISO).
One of the great flurries of
activity amongst the glacial progression was the announcement in early 2008
that German utility E.On had offered to sell
its transmission subsidiary E.On Netz
(which would include 4,800MW of generation) in return for the dropping of a
possibly damaging anti-trust investigation. This represented a significant
breaking of ranks with both the German government and the 3 other German grid
operators.
Early July 2008 saw the EU Parliament reject forced
unbundling of vertically integrated gas businesses, siding with many member
states. The diluted draft law would require internal separation … the much
applauded “third way” … which represents a significant watering down of the ISO
option. In regard to electricity, however, it seems the EU is determined to
have nothing less than full ownership unbundling.
Recent moves
June 2009 saw agreement reached
between the EU and Members of the European Parliament (MEP’s) on the Third
Internal Energy Market Package which is expected to take effect in September
2009, and member states will then have 18 months to implement the Packages’
requirements into their own legislation. Key elements of the Package include
strengthening the separation of lines and energy and promoting investment in
grids (the lack of which was seen as a barrier to strong competition).
Not surprisingly, early movers
such as E.On and Vattenfall are already
trying to sell their grids, although the current financial crisis has dampened
the ability of potential buyers to raise funds.
That’s probably a good place to
end what seems a long, long discussion of unbundling at an EU policy level,
however there will undoubtedly be plenty of fodder for future articles on
member states policy, industry structural changes and of course individual
deals.
Energy markets
NZ – controversy in the electricity market
Introduction
Electricity pricing in New
Zealand has always been controversial, ever since I was a kid growing up in the
days of cheap hydro electricity. This article tries to cut below the political
furor over the recent Ministerial
Review Of Electricity Market Performance 2009 to identify the real issues,
and also to see if there is in fact a “right answer” or whether “right” is
relative to the way you look at the situation.
Readers should note that this is
completely separate from the Commerce Commission’s report on the possibility
that electricity market participants may have abused dominant positions (which
embodies the Wolak report)
Background
On 1st April 2009 the Minister of Energy,
Hon Gerry Brownlee,
initiated a review of the electricity market by a Technical Advisory Group. The
terms
of reference included market design, regulation and governance but
specifically excluded ownership of SOE’s and price control of lines. The Review was released
on 12th August.
Key findings of the Review
The Review expresses the view
(and it’s hard to argue against it) that “a well-functioning electricity market
should provide a reliable supply of electricity at competitive prices, that is
prices which are as low as possible consistent with ensuring reliable supply
over the long-term” and goes on to note that many see this objective as not
being met with apparently excessive price increases and frequent supply crises.
The Review’s findings include the
following....
·
Price rises may be at least partly justified by the decline of
cheap Maui gas and the need to build new capacity, although the rate of retail
price increases appears excessive in comparison to the cost of new generation.
·
Public conservation campaigns may be a lower cost alternative than
building generation to cover every contingency, however the way in which dry
years are managed could be improved.
·
Transmission reliability and capacity could be improved.
The Review’s recommendations
include improving the management of dry years (including the possibility of
asset swaps), restraining upward pressure on generation costs, improving the
processes for grid investment, improving retail competition, replacing the Electricity Commission
with an Energy Markets Authority including transferring grid investment
approval to the Commerce Commission.
So is there a “right answer” ???
The above quote from the Review
seems a good starting point to argue from, and it is very hard to argue against
the proposition that it’s all about secure, reliable supply at the least
possible cost. So it seems that, unlike many other public policy issues, there
is a “right answer”.
Spain – consolidating the energy market
Introduction
Over the years Pipes & Wires
has examined several attempted mergers of Spanish energy companies that
would’ve seen the industry consolidate (albeit not in Spanish hands) if those
mergers had been successful. This article steps back from the detail of those
individual mergers to examine the industry as a whole and the relative size of
each of the players, which hopefully give a sense of perspective.
Spain’s energy suppliers
Spain generates about 287,000 GWh
per year (of which it consumes about 260,000 GWh) and also consumes between
1,100 and 1,200 PJ of natural gas per year (but only produces about 2 or 3 PJ).
Hence Spain is an exporter of electricity but an imported of gas. Key players
in the industry include...
·
Endesa, with 10,000,000
customers and annual sales of about 120,000 GWh.
·
Iberdrola, with annual
sales of about 100,000 GWh.
·
Union Fenosa, with about
3,500,000 customers and annual sales of about 33,000 GWh.
·
Gas Natural, which has a
share of the gas market of about 84%.
The energy champion
Readers may recall from several
years ago that several European countries focused on the formation of national
energy champions against a backdrop of ceding power to Brussels and concerns
over security of national energy supplies. Germany certainly got its energy
champion as E.On acquired Ruhr Gas, whilst France got its energy
champion from the merger of Suez and Gaz De France. There was hope that as the
ownership of Spanish utilities reshuffled that a national energy champion
would’ve emerged, but alas that champion never emerged.
Consolidating the players
So, just to re-cap on the
consolidation of the industry, the following mergers have occurred...
·
Endesa – both E.On and Gas Natural made unsolicited bids for
Endesa in early 2006, but the final victors were Italian utility ENEL in conjunction with Acciona which made a lightning raid on
Endesa’s share register in July 2007.
·
Iberdrola – way back in 2003 Gas Natural made a bid for Iberdrola,
whilst more recently Electricité De France and
Spanish construction company Grupo ACS
launched a bid in February 2008 but which then went quiet, possibly as EDF
turned its focus to the UK and the US.
·
Union Fenosa – successfully acquired by Gas Natural in mid-2009
after Grupo ACS sold its 45%.
·
Gas Natural – following their strategy of becoming a major player
in the Spanish electricity market with unsuccessful bids for Endesa and
Iberdrola, Gas Natural have finally been able to play a role in consolidating
the industry.
So while clear consolidation of
energy players within Spain has not really occurred, Spanish utilities have
played a significant part in consolidating the European energy market.
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).
Conferences & events
·
The
Energy Roundtable (20th October, Wellington) - the time
has never been better for the energy sector to converge together to network,
learn, do business, debate and drive growth.
Leading the way this event brings leaders and thinkers to connect and
collaborate over one day of candid discussion on the future of energy supply
& demand, and the business and political implications of both. In Conferenz signature style, you will hear
just frank talk and ideas.
·
NZ Institution of Gas
Engineers Spring Technical Seminar (21st – 2nd
September, Auckland). Contact the Secretary of the NZIGE on (06) 349-0136 or
pick here.
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
loss, damage or exposure to offensive material from linking to any websites
contained herein.