From the
director…
A
few hours after Pipes & Wires #98 was circulated, New Zealand suffered its’
worst natural disaster since the Napier earthquake of 1931. Many of our readers
and esteemed colleagues have been caught up in the Christchurch earthquake and
have had their lives turned upside down in an instant. To all those who are
grieving and hurting, our thoughts and prayers are with you.
This
issue of Pipes & Wires has a wide geographical and topical coverage, from
energy policy in Italy to grid investment in China and regulatory decisions in
Australia. So until next month ... happy reading.
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Energy policy
Italy – recharging electric cars
Introduction
Pipes
& Wires has recently examined the policy and regulatory developments around
recharging of electric cars in the United States, and in particular noted the
issue of using peak time (fossil-fired) electricity for recharging and how
off-peak recharging tariffs are emerging. This article examines recent policy
developments in Italy.
The AEEG’s views on recharging
The
Autorita per l’Energia Elletrica e il Gas (AEEG) has submitted a
memorandum to the Lower Chamber
setting out its’ view on recharging of electric cars, which are broadly as
follows....
·
Consumers can request an electricity
supplier to install an additional supply point in private, communal or
corporate parking areas with each supply point having a meter specifically for
electric cars. This reverses a previous rule that prohibited more than 1
connection per house.
·
The “other purpose” tariff will be
applicable regardless of whether of the connection is within a house or a
business.
·
The energy price will be set by each
supplier, and may differ from the prevailing domestic tariff.
The issue of peak-time recharging
It
is not clear from various media releases exactly what the AEEG’s view on
peak-time recharging is, although it could be inferred that individual energy
suppliers may include a time-of-use component in their recharging tariff that
will discourage peak-time recharging. Key issues to emerge from this could
be...
·
Given that a sudden reversal of a
previous prohibition has occurred simply to accommodate electric cars, one
wonders how politically acceptable restricting any-time recharging might be.
·
If the incentive to recharge at off-peak
times is signaled by an energy supplier, will it also correctly include
transmission and distribution congestion signals.
Pipes
& Wires will continue to examine both the trends and the specifics of
electric car recharging as decisions emerge.
US – securing peak MW’s
Introduction
Pipes
& Wires has followed various developments in the US state of Maryland over
the years, including smart metering and political posturing around
re-regulation. This article examines recent plans to secure peak MW’s and then
discusses what might be going wrong if no one is willing to invest in peaking
plant.
Previous events in
Maryland
Pipes
& Wires #72 noted that Governor Martin O’Malley proposed
publicly-owned peaking plant to avoid price spikes on hot summer days with the Baltimore Metropolitan Council’s
reservoirs that supply Baltimore and 5 surrounding counties apparently forming
the underlying model of O’Malley’s thinking. The background to this was
Maryland’s deregulation in 1999 which had led to higher electricity prices
(while those of us in the industry might appreciate that rising prices signal
supply shortfalls, the rest of the population and the politicians didn’t
appreciate that finer point of economic theory).
Around that time the Maryland PSC also
released a report forecasting rolling brown-outs by 2011 if no new capacity was
built.
Proposal to secure peak
MW
The
Maryland PSC recently sought comments on its plans to request proposals for constructing
up to 1,800MW of regulated generation, or alternatively enter into long-term
contracts to purchase up to 1,800MW. It appears that many took the opportunity
to comment, with key concerns being raised is that the PJM is working to
relieve transmission constraints into Maryland and that that the proposed
payment mechanism would impose a future liability on all Maryland electricity
customers.
Why not leave it to the
market
On
a broader note, perhaps we need to consider why providing peak MW’s shouldn’t
be left to the market. Without wanting to create a parallel debate about how
well markets deliver GWh, it would probably be fair to say that markets deliver
GWh better than they deliver MW (and I’m happy to be corrected by those more
knowledgeable about the specifics of market design). So I guess this would
suggest 2 possible approaches...
· Include a peak MW
mechanism in the existing market design that will send clear signals to
investors.
· Take a regulated
approach and recover the costs through non-market mechanisms such as levies.
Maryland’s policy makers may well still be a bit
raw about their experiences with markets, so a preference for a regulated
approach may well be more politically acceptable. What remains to be seen is
whether it will lead to a least economic cost solution. Pipes & Wires will
check back on this issue in a few months.
China – investing for the future
Introduction
Most
of us are well aware that the Chinese economy still seems to be going strong
(or perhaps easing just a bit), indeed many of us have probably attributed high
steel, copper, cement and glass prices to that growth. This article looks at
the State Grid Corporation’s fixed asset investment plans simply from the point
of view of the $$$ which are a bit mind-boggling.
A bit about the State Grid Corporation
The State Grid Corporation
was established in 2002 as a government owned enterprise which employs
1,500,000 people, transmits 3,000,000 GWh per year and claims to be the largest
electric utility in the world. A quick look at their website reveals a whole
bunch of AC and DC
projects in the 400kV to 1,000kV voltages ... like some utilities might
list distribution projects (seriously ... it is worth a look) !!! So these guys
are definitely big !!!
The investment plans
Over
the next 5 years State Grid plans to invest about US$49b in the 2011 financial
year, of which about US$44b will be focused on grids. This will be followed by
a further US$210b of investment over the following 4 years.
The grid investment strategy
That’s
enough of the mind-boggling $$$ ... let’s examine the strategy. Four key issues
appear to be driving State Grid’s investment strategy...
·
Reliability – the existing grids are
aging rapidly, hence renewals must be a priority.
·
Capacity – energy transmitted is
expected to double from the 3,000,000 GWh transmitted in 2008 to about
6,000,000 GWh by 2020.
·
Interconnection of regional grids –
existing provincial grids are only weakly connected, hence the investment plan
includes 3 west-to-east lines each of 20,000 MW capacity.
·
Connecting renewables – China is
committed to having 15% of its electricity renewable by 2020.
Privatisations
Romania – privatising the grids
Introduction
The
Romanian government recently announced plans to sell partial stakes in a number
of energy companies including electricity transmission
company Transelectrica
and gas transmission company Transgaz.
This article quickly examines both those companies and then considers what the appetite
for such stakes might be and how those stakes might fit the strategy of likely
buyers.
A bit about Transelectrica
Transelectrica
is a joint-stock company established in 2000 and is currently 74% owned by the
Ministry of Economy and Commerce to own and operate Romania’s national
transmission grid (in 2006 a 10% stake was listed on the Bucharest Stock
Exchange). The company has a market capitalisation of about €1.1b.
A bit about Transgaz
Transgaz
is the 74% owned by the Ministry of Economy and Commerce which owns and
operates about 13,000km of high-pressure pipelines. Annual gas throughput is
about 16 billion m3, and annual revenues are about €360m.
The proposed privatisation process
The
government has proposed to sell a further 15% of both Transelectrica and
Transgaz in June 2011 and September 2011 respectively, along with a 15% stake
in gas producer Romgaz in December 2011. It
is expected that these 3 stakes will sell for about €170m, which would appear
to value the equity in the 3 companies at about €1.1b. A quick look at some
financials (for Transelectrica anyway) would seem to support this apparently
low target price, and suggests that some “business improvements” may be
required.
Possible bidders
In
the past, such privatisations have attracted the interest of most of the
western European giants, such as E.On, RWE, ENEL, EDF and Vattenfall.
The last few years have, however, seen a few marked shifts in their respective
appetites for acquisition, along the following lines....
·
Re-thinks of strategy after analysis
has revealed that some acquisitions have not delivered the anticipated value.
·
The increasing pressure to separate
lines and energy that has provided more obvious opportunities in western Europe.
·
The need to sell assets to reduce debt.
·
A migration of capital from lines to
energy.
Likely fit with bidder’s strategy
It’s
hard to imagine what use a 15% stake might be (it probably wouldn’t even get 1
seat on the board) especially if a significant restructuring is required to
deliver an acceptable ROE. So Pipes & Wires will leave this issue until
something more solid emerges.
Regulatory decisions
Romania – increasing electricity
transmission tariffs
Introduction
Pipes
& Wires #91 examined the 5.3% tariff increase assigned to Romania’s
grid operator Transelectrica. This
article notes a further tariff increase applicable from 1st January
2011.
A bit about Transelectrica
Transelectrica
owns and operates the 220kV, 400kV and 750kV grids in Romania which are
administered in 8 geographical regions, and also provides market operation
services. Because of the interconnected nature of the grids in south-eastern
Europe, Transelectrica is also involved with the European Network of Transmission
System Operators for Electricity (ENTSO-E).
The tariff increases
The
Romanian energy regulator ANRE has allowed
Transelectrica to increase its tariff from €3.93/MWh to €4.34/MWh, an increase
of about 10.4% applicable from 1st January 2011. As noted
previously, Transelectrica intends to invest about €1b over the next 10 to 15
years.
Aus – the Queensland gas distribution draft
decision
Introduction
Pipes
& Wires #96 examined APT
Allgas’ proposed Access Arrangement for its’ Queensland gas network (which
also crosses into NSW) for the period 1st July 2011 to 30th
June 2016. This article examines the key
features of the Australian Energy Regulator’s
(AER) draft decision.
Key aspects of the proposed draft
decision
Key
aspects of the draft decision are set out in the following table (which will be
completed as the revised proposal and final decision progress)...
|
Parameter |
Proposed AA |
Draft decision |
Revised AA |
Final decision |
|
Total
OpEx |
$110.12m (nominal) $102m (nominal 10/11) |
$93m (nominal 10/11) |
|
|
|
Total
CapEx |
$139.05m (nominal) $129m (nominal 10/11) |
$125m (nominal 10/11) |
|
|
|
Opening
capital base |
$421.6m (nominal) |
$424m (nominal) |
|
|
|
Closing
capital base |
$559.9m (nominal) |
$562m (nominal) |
|
|
|
Rate
of return |
10.3% (post-tax nominal vanilla) |
9.96 (post-tax nominal vanilla) |
|
|
|
Debt
risk premium |
3.85% |
3.93% |
|
|
|
Revenue
requirement |
$372.1m (nominal) |
$345m (nominal) |
|
|
Pipes
& Wires will make further comment as the decision process progresses.
Russia – increasing the grid tariffs
Introduction
Russia
is a country that doesn’t get much coverage in Pipes & Wires,
however this article examines the recent tariff increases determined for the Federal
Grid Company (FGC).
A bit out the Federal Grid Company
The
FGC was established on 1st July 2008 as a separate company from the Unified Energy System (RAO-UES) to
consolidate 54 regional power grids comprising 121,000km of lines and 796
substations with voltages ranging from 35kV to 1,150kV. FGC is a joint-stock
company in which the Russian Federation owns 79.11%, with about 470,000 minority
shareholders owning the remaining 20.89%. The shares are listed on both the RTS
and the MICEX.
The tariff determination
In
late December 2010 the Federal Tariff Service
(FTS) announced the tariffs that will apply to the FGC for the regulatory
period from 1st January 2011 to 31st December 2014....
|
Year |
Tariff (RUB/MW-month) |
ROR (new
capital) |
ROR (legacy
capital) |
|
|
Remainder of
grid |
North Caucasus
& Stavropol |
|||
|
2011 |
116,782.52 |
46,029.88 |
11% |
5.2% |
|
2012 |
148,257.05 |
58,435.58 |
11% |
6.5% |
|
2013 |
179,538.84 |
70,765.31 |
10% |
7.8% |
|
2014 |
206,910.98 |
81,554.06 |
10% |
9.1% |
This
tariff determination was originally set for the 3 year period 1st
January 2010 to 31st December 2012, but was subsequently extended on
a “3 + 2” basis to cover an additional 2 years. It is useful to note the
application of differing ROR’s for legacy and new investment, which will be
important to encourage FGC’s RUB950b (about €23b) investment program for the
period 1st January 2010 to 31st December 2014.
Aus – the South Australian gas
distribution draft decision
Introduction
Pipes
& Wires #96 examined Envestra’s
proposed Access Arrangement for its’ South Australian gas distribution networks
for the period 1st July 2011 to 30th June 2016. This
article examines the key features of the Australian
Energy Regulator’s (AER) draft decision.
Key aspects of the draft decision
Key
aspects of the draft decision are set out in the following table (which will be
completed as the revised AA and the final decision emerge)...
|
Parameter |
Proposed AA |
Draft decision |
Revised AA |
Final decision |
|
Total
OpEx |
$335.69m (real 08/09) $344.1m (real 10/11) |
$260m (real 10/11) |
|
|
|
Total
CapEx |
$506.9m (real 08/09) $520m (real 10/11) |
$415m (real 10/11) |
|
|
|
Opening
capital base |
$1,030m (nominal) |
$1,018m (nominal) |
|
|
|
Closing
capital base |
$1,595.4m (nominal) |
$1,420m (nominal) |
|
|
|
Depreciation |
$180.6m (nominal) |
$211m (nominal) |
|
|
|
Rate
of return |
10.64% (nominal post-tax) |
9.96% (nominal post-tax) |
|
|
|
Debt
risk premium |
3.39% |
3.93% |
|
|
|
Revenue
requirement |
$1,165m |
$985m |
|
|
Pipes
& Wires will provide further analysis as the process progresses.
Mergers & acquisitions
UK – PPL buys E.On UK wires business
Introduction
Long-time readers might remember that E.On’s well-founded “On Top” strategy underwent
a bit of a re-think (Pipes
& Wires #81, #88,
#92,
#93,
#94,
#95
and #96).
Key aspects of that re-think included the sale of the US wires business and
what appears to be a migration of capital from lines to energy. So the sale of
the UK wires business probably shouldn’t be a huge surprise. This article
examines the emerging deal.
Background
E.On acquired Powergen in 2002, which by
that stage also included the former East Midlands
Electricity in the UK, and Louisville Gas
& Electric and Kentucky Utilities in the US. In 2004, E.On then
acquired the former Midlands
Electricity in the UK. More recently, PPL acquired E.On’s US wires
business and has now sought to expand its UK operations by acquiring E.On UK’s distribution networks
which supply 5,000,000 customers.
The
deal
PPL will pay US$5.6b in cash and assume a
further US$800m in debt for both networks. This represents a 30% premium over
the regulated asset value (RAB), which compares favorably with the 25% premium
that Electricité de France sold its subsidiary
EDF Energy for last year. PPL shares
rose just over 4% suggesting the markets’ approval of the deal whilst E.On’s
shares dropped slightly.
Other bidders for the networks are thought
to have included Cheung Kong Infrastructure
and MidAmerican Energy
Holdings, both of which own neighboring distribution businesses in the UK.
The
enlarged PPL
Closing of the deal (expected in April
2011) will result in PPL’s existing Western
Power Distribution business tripling in size from 2,600,000 customers to
about 7,600,000 customers and stretching from
Cornwall through South Wales and Birmingham to Nottingham and Lincoln.
Pipes & wires will make further comment
as the deal closes.
Historical interest
UK – the secret life of the national
grid
BBC
4 recently screened three 1-hour documentaries about the history
of the UK’s national grid (which is a timely follow on from the article
entitled “Battle Of The Currents” in Pipes
& Wires #95). The link to BBC 4 may not work for readers outside of the
UK, so fortunately its’ been broken into smaller segments and uploaded to You
Tube in 15 minute segments as follows (if anyone can find the links to the
segments not underlined that would be really cool)....
·
Episode 2 segment 1 of 4.
·
Episode 3 segment 4 of 4.
A bit of light reading…
Book review – “Switching On The King Country”
Helen Reilly’s latest
book examines electricity in the King Country area of New Zealand’s north
island from the beginnings of electric light in 1911 through to the present era
(2008). In 220 pages jammed packed with stories, anecdotes, interviews,
photo’s, maps and drawings the book chronicles the development of the Waitomo,
Wairere and King Country Electric Power Boards and the Taumarunui, Ohakune and
Raetihi Borough electricity departments and the eventual formation of The Lines Company and King Country Energy. The chapter headings
include....
·
From candlelight to electric light 1911
– 1924.
·
Power in the borough is in short supply
1924 – 1939.
·
Rural communities are eventually
electrified 1939 – 1958.
·
Consolidation and expansion 1959 –
1969.
·
Upgrades, amalgamations and reforms
1970 – 1989.
·
A decade of government reforms and
company development 1989 – 1999.
·
Coming to grips with separation 1999 –
2007.
·
New challenges for rural electricity
companies 2008 -
For
those (like me) that enjoy history this book is a must have. Order yours for
the exceptionally low price of $39.95 (includes NZ postage and packaging) from
the King Country Electric Power Trust by picking here.
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.
·
Marlborough Will Shine Through.
·
Two Per Mile.
·
Live Lines (the old ESAA journal)
Conferences & training courses
The following
training courses will be run by Conferenz...
·
Fundamentals
of the NZ electricity industry – Auckland, 25th – 26th
May 2011 (note revised date)
·
Fundamentals
of the NZ electricity industry – Wellington, 4th – 5th
May 2011.
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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.
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