Pipes & Wires

THE JOURNAL OF ENERGY & INFRASTRUCTURE THOUGHT LEADERSHIP

Issue 88 – November 2009

 

From the director…

 

Welcome to Pipes & Wires #88, an edition so full of nuclear stuff it probably glows in the dark (it also includes a change of font from Arial to Calibri which seems a bit easier on the eyes).

 

The regulatory decisions front seems quiet at the moment however a couple of significant impending decisions are noted. The energy policy section includes 3 articles on nuclear, ranging from policy formation to scrapping over what appears to be a tax on continued nuclear operation. We also examine a couple of big deals and the associated trends and close with an examination of 2 energy market issues.

 

Pipes & Wires will be back in January or February, so I’d take this opportunity to wish you and your loved ones a merry Christmas and a safe and happy vacation.

 

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Regulatory determinations

 

Expected decisions

 

The following decisions are expected over the next couple of months...

 

·       UK water & sewage final decisions (late November 2009).

 

·       Queensland & South Australia electricity distribution draft decision (late November 2009).

 

·       Victorian electricity distribution draft decision (about April 2010).

 

Pipes & Wires will make comment as these decisions are released.

 

NZ – the draft default reset for April 2010

 

Introduction

 

For those electricity lines businesses that are not considered to be consumer-owned, the Commerce Commission recently released a consultation paper on the draft default determination that will apply from 1st April 2010 to 31st March 2015. This article examines the key features of that proposed draft default determination.

 

Key features of the proposed draft default reset

 

Key features of the proposed draft default reset are...

 

·       The starting prices for 1st April 2010 will be the prices applying on 31st March 2010 ie. simple rollover.

 

·       The annual rate of change of prices will be 0 ie. X = 0%.

 

·       The notional revenue within each assessment period must not exceed the allowable notional revenue.

 

·       Have a system reliability (SAIDI) less than the specified target.

 

Next steps

 

The publication of the above consultation paper is part of an ongoing process. Pipes & Wires will make further comment as the Commission publishes further decisions.

 

Disclaimer

 

This article summarises a lengthy and detailed paper which affected parties should read in its entirety. Utility Consultants, its shareholders or directors accept no liability for any action or failure to act made on this article.

 

Energy policy

 

Belgium – settling the nuclear dispute

 

Introduction

 

In countries that don’t yet fully support nuclear power it seems increasingly common to use nuclear power as a bargaining chip, especially to extract commitments to invest in renewables (which perhaps reinforces the view that we only need nuclear until renewables really take hold). This article examines a recent spat between GDF Suez and the Belgian authorities.

 

Background

 

The important background issues to this story are...

 

·       GDF Suez subsidiary Electrabel operates 2 nuclear plants in Belgium – the 2,840 MW Doel and the 2,985 MW Tihange plants – which generate 90% of Belgium’s nuclear electricity. These 2 plants comprise 7 reactors of which the 3 oldest were scheduled for closure in 2015 and the remaining 4 by 2023.

 

·       If closure is postponed, Electrabel would benefit financially. The business daily De Tijd has estimated this could be as much as €12b if the lives are extended 10 years.

 

·       The Gemix Report concluded that Belgium would face severe energy shortages if the closure was enforced, prompting the current government to propose overturning the previous government’s decision to close all existing nuclear plants between 2015 and 2025.

 

·       The Belgian government has demanded a contribution from nuclear generators to the state coffers of between €215m and €245m over the 2010 to 2014 period. One interpretation of this is that the government simply wants a share of Electrabel’s extra profit (presumably beyond what it would be entitled to gather as normal company taxes).

 

Recent manoeverings

 

As of mid-October 2009 the government wanted Electrabel to enter into a written agreement to pay €500m which comprises a €250m levy and a €250m contribution to a renewable energy fund. This is in addition to the €250m levy paid in 2008 which Electrabel is challenging in the Constitutional Court.

 

Understandably Electrabel refused to enter into an agreement, whereupon the government indicated it would legislate to force all nuclear operators to pay the levy (and apparently also include a clause prohibiting the CREG from demanding that the levy be returned to customers).

 

At the time of writing this article, no clear resolution was apparent. However Pipes & Wires will re-examine this in the new year as this is an important public policy issue.

 

UK – pressing ahead with nuclear

 

Introduction

 

Previous issues of Pipes & Wires have examined the UK’s proposed new generation of nuclear power stations to replace the rapidly aging Magnox and PWR stations in the face of ever-increasing demand. This article examines the recent announcement of 10 nuclear sites as part of the wider shift to a low carbon economy.

 

Background

 

Almost 5 years ago news emerged that Tony Blair’s government was planning a new generation of 10 nuclear power stations, however due to the political sensitivity of the whole nuclear debate it was shelved until after Labor was returned to power in the May 2005 general election. Pipes & Wires #47 noted that demand was increasing at about 0.7% per year, and it was expected that by 2015 demand may exceed capacity by about 20% whilst nuclear generated electricity will fall from 25% of the UK’s total to only 4% if the closure of aging plants proceeds as planned (only 1 existing station was expected to still be operating by 2025). More recently, uncertainty over supply of Russian gas has emerged as an additional concern.

 

Hence the problem is significant and the time is short. The scientific community acknowledged that renewables and low-emission fossil generation will play a role but also acknowledges it is unlikely that they will be able to meet demand. Blair’s politically ambitious nuclear program did hit a bump in the road when High Court Judge Sir Jeremy Sullivan ruled that the consultation (presumably the substance) was “seriously flawed” and the process was “manifestly inadequate and unfair”. Sullivan went on to rule that in relation to the nuclear waste issue the process “was not merely inadequate but also misleading”, however these rulings don’t seem to have derailed Blair’s plans.

 

More recently, in January 2008, Gordon Brown’s government confirmed its commitment to a cleaner and more secure energy future that included nuclear.

 

Announcing the sites

 

In mid-November 2009 Secretary of State for Energy, Ed Milliband, announced possible sites, which include...

 

·       Kirksanton, Cumbria (proposed by RWE) – green field, adjacent to a small wind farm.

 

·       Hinkley Point, Somerset (proposed by EDF)

 

·       Sizewell, Suffolk (proposed by EDF)

 

·       Kingsnorth, Kent

 

·       Owston Ferry, Lincolnshire

 

·       Druridge Bay, Northumberland

 

·       Bradwell, Essex

 

·       Hartlepool, County Durham

 

·       Wylfa, North Wales

 

·       Heysham, Lancashire

 

·       Sellafield, Cumbria

 

·       Braystones, Cumbria

 

EDF’s proposal to build additional stations at Dungeness in Kent was rejected by the government because of flooding and environmental concerns.

 

Global – does nuclear have a future ??

 

Introduction

 

In amongst Pipes & Wires analysis of the nuclear policies of various European countries the political battle lines are quite clearly drawn. Right wing governments are unashamedly supporting nuclear power ostensibly on its own merits whilst left wing governments (except France, which behaves as a right wing government in regard to nuclear power) seem to begrudgingly admit that nuclear probably does have a role in reducing emissions, but only until renewables take over, mind you. This short article examines an opinion piece that appeared in New Zealand’s Dominion Post newspaper last month entitled “No nukes please, we’re Kiwis”, but what really caught my attention was the prominence of cooling towers in the associated photo (if anyone recognises the photo, could they please advise whether it is actually a nuclear station).

 

The key themes of the opinion piece

 

The key themes of the opinion piece are (and any misquoting for the sake of brevity is solely my fault)...

 

·       Enthusiasm for nuclear power waned generally as waste disposal and cost overruns emerged, and specifically after Three Mile Island and Chernobyl.

 

·       Global warming is bringing nuclear power back into favor, quoting 440 nuclear power plants generating about 17% of the world’s electricity.

 

·       Fifty new nuclear plants are under construction, and another 300 are being planned.

 

·       The new Generation 4 reactors will extract 99% of the energy in the Uranium (instead of just 1%) and will emit hydrogen as a waste product – just what we need for fusion !!

 

The final point in the opinion piece is that Pebble Bed Modular Reactors are being mass produced in China and if New Zealand ever considered going nuclear it should just buy one from China.

 

So does nuclear have a future ?

 

Well, the facts seem to speak for themselves. Regardless of whether shutdowns are being postponed and new nuclear plants are being built for their own merits or in response to global warming, it appears that nuclear does have a future.

 

Straw poll

 

Please pick the link to email your response to Pipes & Wires...

 

·       I support nuclear power on its own technical merits.

 

·       I support nuclear power only because it will reduce emissions.

 

·       I don’t support nuclear power.

 

Mergers & acquisitions

 

E.On sells EHV grid to Tennet

 

Introduction

 

Normally E.On features in Pipes & Wires as a buyer, not as a seller. This article examines the recent announcement by E.On that it will sell its EHV grid to TenneT but goes beyond the mere facts of the deal to examine E.On’s emerging strategy and how this might shape the strategies and markets of the other European giants.

 

Background

 

The background to this deal appears to be both general and specific...

 

·       The EU Competition Commission’s determination to unbundle the European energy sector to foster competition foreshadowed what most of us figured would be flurry of deals, much the same as the Bradford reforms in New Zealand did in 1998 (Pipes & Wires #56, #58, #64, #74 and #85 examine this in detail).

 

·       E.On’s commitment to the Commission that it would divest its transmission grid subsidiary E.On Netz and 4,800 MW of generation capacity in return for the Commission dropping a possibly damaging anti-trust investigation.

 

The proposed deal

 

E.On will sell its 380kV and 220kV transmission grid business Transpower Stromübertragungs GmbH to state-owned Dutch transmission utility TenneT tentatively for €1.1b with the final figure taking consideration of routine matters closer to the settlement date of 1st January 2010. Various analysts had estimated E.On’s grid to be worth much more, in the region of €1.5b to €1.75b, however a statement from E.On indicates that those values do not adequately reflect the future investment requirements or tightening regulation.

 

The Transpower grid assets comprise almost 11,000 km of lines and 115 substations which will compliment TenneT’s 9,000 km of lines and 246 substations, and does not include E.On’s regional grids which will continue to be owned by E.On Energie.

 

Inferring E.On’s strategy

 

On the face of it, the sale of the grid could be taken to infer E.On’s preference for selling lines and retaining the energy (generation and retail) business. However, in this instance, selling the lines was a regulatory concession so maybe it’s too early to say for sure. However, I’ve got a gut feeling that E.On’s preference will be for the energy segment of the industry where it can use its’ expertise and portfolio of generation and retail markets to create unregulated returns.

 

Possible strategies of the other giants

 

Can we infer anything about the strategy of the other European giants such as RWE, Electricité De France, ENEL, Vattenfall and Iberdrola (with apologies to any that I’ve omitted)? Again, it’s probably a bit early to tell as many recent acquisitions have included vertically integrated businesses. However a couple of recent manoeverings stand out as providing possible clues...

 

·       Pipes & Wires #86 examined the unbundling of RWE’s UHV transmission grid business RWE Transportnetz Strom into a subsidiary called Amprion. That article hypothesised that this was an emergence of a preference for selling lines and retaining energy.

 

·       Pipes & Wires #87 examined Electricité De France’s moves to sell its UK wires business EDF Energy, in addition to its previous acquisition of British Energy and subsequent pronouncements about building additional nuclear generation. EDF’s pursuit of Constellation Energy in the US also seems to have a strong emphasis on the energy side of the business.

 

Granted that one swallow doesn’t make spring (or whatever that old saying is), but these are significant moves by 2 of the really big players that suggest a preference for energy rather than lines. A further twist will be how this influences the strategy of the “not quite first movers” because after all not everyone can sell lines and retain energy ... someone will have to own the lines (and the emerging picture is that it will be various classes of funds whose risk profile matches the modest but predictable returns of a wires business).

 

Market implications

 

A key feature of the deal is that TenneT’s footprint now extends into Germany ... “so what ?” some might ask. The critical element seems to be that the Dutch will now have easier access to Germany’s low-cost coal-fired generation rather than being stuck with their own more expensive gas-fired generation. One can only guess that E.On spotted that selling the grids to TenneT would give them a good entry point into the Dutch market, and good on them !!. However my guess is that displacing gas-fired generation with coal may not sit easily with the climate change people.

 

The politics of it all

 

Politics always seem to lurk just below the surface of many of these big deals ... Pipes & Wires has previously noted the attempts to form energy champions in France, Germany, Spain and Romania. In this case it seems the Dutch still seemed a bit raw that Nuon was sold to Vattenfall (Pipes & Wires #80) and Essent was sold to RWE (Pipes & Wires #78), so no time was lost in trumpeting state-owned TenneT’s acquisition of Transpower.

 

UK – Veolia looks to sell the UK water business

 

Introduction

 

Asset sales to reduce debt are becoming increasingly common as utilities discover that maybe they’ve bitten off more than they can comfortably chew. Following Pipes & Wires #87 examination of Electricité De France’s planned sale of EDF Energy this article examines Veolia’s planned sale of a 49% stake in its UK water business.

 

Background

 

Veolia is a global water, environmental services, energy and transportation conglomerate. As part of its aggressive €4b expansion strategy, Veolia acquired 3 UK water companies – Three Valleys, Folkestone & Dover and Tendring Hundred.

 

The sale process

 

A few months back Veolia hired Morgan Stanley and HSBC to sell 49% of its stake in Veolia Water UK as part of plan to raise €3b from asset sales over the next 3 years. Veolia hopes to get about €500m from the 49% sale which would suggest a slight premium to the regulated asset value of about €985m.

 

Similar to the bidding for EDF Energy, interest has been hot and is understood to include about 25 parties including UK and European infrastructure funds, Middle East sovereign wealth funds and the possibility of some incumbent water utilities who may bid for 100%.

 

Pipes & Wires will re-examine the sale process early in the new year.

 

US – progress on EDF’s bid for Constellation

 

Introduction

 

This article continues Pipes & Wires (#78 and #84) examination of Electricité De France’s bid for Constellation Energy. Several months ago EDF’s bid seemed to sink into a bit of a legal quagmire – this article briefly recaps that matter and examines progress to date.

 

The legal difficulties

 

The root of the problem appears to be a fear at Maryland state government level that Constellation subsidiary Baltimore Gas & Electric will be used as a cash-cow to fund Constellation and EDF’s wider activities. At first glance this would appear to give the Maryland Public Service Commission at least some jurisdiction over the deal. However this ignores the various structural and procedural arrangements that would be put in place as part of the deal, such as EDF only appointing 1 of Constellation’s directors and ensuring that the sole appointee does not vote on BG&E matters nor have access to non-public BG&E information.

 

Progress over the last few months

 

Progress over the last few months has included....

 

·       Approval by the Nuclear Regulatory Commission to transfer Constellation Energy Nuclear Group’s license to EDF Development, Inc.

 

·       Approval from the New York Public Service Commission in regard to selling Constellation’s nuclear plants in New York State.

 

·       Clearance from the Committee on Foreign Investment to ensure that national security is not compromised.

 

·       Way back in February 2009 the FERC approved the deal on the basis that it would not be inconsistent with the principles of the Federal Power Act 1935.

 

Negotiations with the Maryland PSC are still continuing at the time of writing, and Pipes & Wires will provide further comment and analysis once this approval is granted.

 

Paying for it all

 

Pipes & Wires #87 noted EDF’s intended sale of its UK subsidiary EDF Energy to reduce debt, and considered whether selling a network business reflected a deliberate strategy of focusing on generation and energy. One thing does seem certain is that EDF’s debt woes don’t seem to have dampened its enthusiasm for expanding its’ US presence.

 

Energy markets

 

US – the Russian’s are coming !!!

 

Introduction

 

Fifty years ago the title of this article would strike fear into every heart in the West. This article / opinion piece examines the increasing reach of Russian gas utility Gazprom and suggests that the title of this article probably still should strike fear into every heart in the West.

 

Background

 

Previous Pipes & Wires articles have noted the UK’s concern about dependence on imported Russian gas (and indeed, imported Iranian gas that uses pipelines in the former Soviet states). Russia currently supplies about 25% of Europe’s gas, and claims to have about 17% of the world’s gas reserves.

 

The commercial and market aspects

 

Gazprom has recently opened a trading desk in Houston, with a view to capturing markets with LNG that it couldn’t capture with pipelines. Growth targets include 5% of the US market (about 60 PJ per day) by 2014 and 10% by 2019.

 

The geopolitics of it all

 

Reflecting on the last 35 years, it appears that the West has learned too little too late about dependence on Middle East oil, and the signs are that we are already failing to learn this lesson second time around in regard to depending on Russian gas. Unless I’m missing something, the emerging picture seems to be...

 

·       Long-term proven gas reserves are in Russia and Iran.

 

·       These 2 nations are proving increasingly hostile to the West.

 

·       The major gas pipelines to the West traverse politically unstable countries.

 

·       Russia in particular has demonstrated that it will turn off the tap.

 

So it seems that we need to get less dependent on gas, not more. This matter could quickly proliferate into a slagging match about nuclear, coal and emission reductions, so that’s probably a good place to finish.

 

Germany – consolidating the gas markets

 

Introduction

 

Pipes & Wires has previously examined the consolidation of the German gas market. This short article notes the formation of a common balancing company to aid consolidation.

 

Background

 

Historically Germany had over 20 gas transmission companies, and over 700 gas distributors (of which only a handful had more than 100,000 customers). The Bundesnetzagentur decided that “something less than 10” zones would provide more intense competition and liquidity, and subsequently announced that 7 market zones would be formed. To date, 19 market zones have been successfully consolidated into 12.

 

Progress on consolidation

 

News emerged that as of 1st October 2009 five gas utilities would be merging their market areas and forming a common balancing management company called GASPOOL. The 5 utilities are Gasunie, Ontras – VNG Gastransport, Wingas Transport, Dong Energy Pipelines, and StatoilHydro Deutschland. Balancing contracts between the 5 partners will be consolidated, whilst contracts between the 5 partners and other utilities will be transferred to GASPOOL.

 

Pipes & Wires will make further comment if the consolidation process takes any particularly interesting turns.

 

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.

 

Conferences & events

 

·       Smart Grids Summit (Wellington) – 23rd February 2010

 

Assorted cool stuff

 

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.

 

House-keeping stuff

 

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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.