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
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.