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Issue 2 – August 2018 From the editor’s desk Welcome to Pipes & Wires Europe #2. “Pipes & Wires Europe” is a monthly newsletter sent out to our customers to inform them about current market developments. It includes an analysis of important news mainly in the European energy industry with critical comments on feasibility and chances of success for new plans, regulations and investments. “Pipes & Wires” is originally developed for the Australian and New Zealand market and also includes news from the US. Relevant market news from these regions are also included. In this second issue, we start with a discussion of wholesale price volatility, and the impact of increased VRE penetration. We then look at the developments of electric vehicles in Europe, and contrast it with a specific example in the US. Moving on, we have a look at the heat wave again – but this time from the perspective of Scandinavian countries – before opening the debate around smart meters. We conclude with merger activity from August relevant to our customers. Subscribe Subscribe to Pipes & Wires by sending us your details
What we’re seeing
• Price volatility rising in wholesale
energy markets
• VRE increasingly prevalent in
global energy markets
• Rise in renewable energy share
of energy supply causes
uncertainty
• Price rises not de facto negative,
as they increase investment
incentives even with policy
uncertainty in the EU and
globally
• Electric Vehicles receiving
further support from customers
and governments
• Despite increasing market share,
EVs not yet disrupting fossil fuel
markets
• Disconnects between policy and
regulation continue to be a
problem for EV growth
• Disconnect based on desire for
EVs and chargers, but no-one
willing to cover the costs
• Summer heatwave impacting
Scandinavia...
• ...but for a different reason
• Heat declines water reservoirs in
countries like Sweden, Finland
and Norway, requiring energy
imports from central Europe
Price volatility, increasing VRE penetration and unstable policy – Discussing the impact We open this edition of Pipes & Wires Europe with a look at price volatility in the wholesale market for electricity. In last month’s edition of Pipes & Wires, we opened with a look at the energy transition in Europe and worldwide, and concluded that policy uncertainty, and especially the threat of declining demand and renewable energy prices are the principle challenges that need to be overcome to make the transition to renewable energy successful. This month, we have a look at the opposite spectrum of the problem, and we discuss how wholesale price volatility and increasing variable renewable energy (VRE) penetration in the market shed new light on the price problem of renewable energy.
The emerging picture of price volatility Wholesale electricity markets are showing increasing volatility. Key reasons for that volatility include: • Higher gas prices • Withdrawal of coal-fired generation • Increasing VRE penetration The last two issues obviously go hand-in-hand, but one way or another are shifting the supply curve leftwards relative to the demand curve. The whole issue of price spiking seems to break down to a couple of key issues: • Upward price spikes can often be reflected in higher end-user prices. • Downward price spikes hollow out the revenue available for legacy generation. • More frequent spikes require quick-start generation to run more often. From this perspective, we realise a range of issues. Higher end-user prices alongside downward price spikes means that both energy suppliers and consumers suffer from price volatility, as uncertainty makes accurate prediction hard for suppliers, and high costs are obviously worse for consumers. The first question here is how this is related to VRE penetration:
Increasing VRE penetration
Getting a single, analytically sound picture of the exact VRE penetration in each market would be a big job,
however in amongst various media articles that use precise electrical terms like demand, average demand
and energy interchangeably it is clear that the penetration of VRE is increasing. Moreover, those increasing
VRE penetrations are usually stated triumphantly. The issue with VRE is precisely because supply is much
harder to adjust than with traditional sources of energy. So price hiccups are more to be expected.
Identifying the problem
The first issue we need to identify is whether price spiking is caused by high VRE penetrations, or simply
correlated with it. Given that wholesale prices are set by the interaction of supply and demand in a market,
and that supply curves are now moving left and right more often it does seem likely that it is actually
causal rather than simply correlated, given the inherent variability of renewable energy generation (since
the generated energy is hard to store).
Choosing the best way forward
It would seem there are several broad ways forward…
• Do nothing, and allow both the magnitude and frequency of price spiking to continue (most likely
increase). This will most likely see further exit of secure generation, exacerbating the price spiking.
• Amend the market mechanisms. This could be anything from averaging prices over a range of half-
hours and possibly adding floors and caps to the MWh market, to introducing new mechanisms
that fairly pay quick-start generation (eg. a MW market like in the UK, or a fixed annual fee like
what E.On requested a few years ago).
• Limit the penetration of VRE. This could include capping the penetration of VRE to some percentage
of maximum demand, through to encouraging coal-fired generation to stay in the market. Both
approaches are undoubtedly against the wish to switch to greener energy, and will slow down the
energy transition.
The bright side Increases in prices of renewable energy mean that companies and suppliers choosing to invest into VRE face higher expected returns to investment. This can be a pivotal decision-maker, as it means investment does not have to rely on further policy support, such as tariffs or subsidies for renewables. As such, the question whether price volatility itself is negative becomes even more pressing. While it causes uncertainty, it also shows that it can circumvent the uncertainty with regards to policy, and allows for long-term investments irrespective of governments in the EU and abroad. Conclusion Price spikes are always negative for consumers, and price volatility increases uncertainty and hence also risk for suppliers, as predicting supply becomes harder. The inherent problem of inflexible energy generation through renewables is hard to avoid with current technologies, and as such increasing VRE penetration has a negative impact on the market as a whole. However, with regards to long-term viability of VRE as an investment opportunity, rising prices are beneficial. If additionally prices both rise and fall, as price volatility suggests, then consumers have a relatively low price to pay for the benefit of receiving more, cleaner energy. If this mindset can be accompanied by more policy clarity, as discussed in last month’s edition, then the damages can be kept under control, and the benefits of VRE can be reapt.
Electric Vehicles - The Green Alternative...? Vehicles not relying on fossil fuels, at least in theory, seem to be a great way to support the energy transition and reduce our reliance on fossil fuels. However, they are often criticised, and rightly so, for not being truly "green", as the energy powering the battery is often still coming from coal or gas plants. Additionally, most EVs still don't really get past the 100 mile mark before requiring a re-charge, which can be significantly harder to do, since there are only about 150,000 EV chargers in Europe (which translates to roughly about 1 charger for every 5000 people). While the number of petrol stations is similar, EV chargers especially normal chargers take between 4-12 hours to provide a full charge. As such, an electric vehicle is still not always a popular investment for car-enthusiasts around the world. However, recent policy changes and the increasing share of renewable energy in energy generation worldwide means EVs are becoming more attractive. Large cities, like London, offer incentives to EV owners, such as free parking in central London boroughs, and fast chargers around the city. Norway, producing almost all of its energy through hydropower, is a good example of a country that can truly promote EVs as the green alternative to traditional cars. Manufacturers are seeing sales double on a year- by-year basis, and the world is said to be up to one third more energy efficient, given the growth of electric vehicle sales running on green energy. However, there are still doubts. Cars alone are not enough to make the change for a successful energy transition happen, and everyone knows that government incentives are only temporary, and will not be sustained in the long-term (once more people have EVs in London, don't expect parking to stay free). This coupled with most of the energy growth in the world coming from countries like China and India means that the change is only gradual, providing little to no disruption in the short term for the fossil fuel industry.
In the next article, one specific case in the US will be discussed, showing one example of policy disconnectedness, illustrating the problem of policy supporting an in theory desirable, but once it comes to cost/benefit not always optimal outcome. US – Regulating Emerging Technologies Nevada approves EV charger cost recovery Introduction The cautious “chicken & egg” approach to building EV chargers seems to be swinging towards “build the chargers and the EV’s will follow”, and this is probably helped in part by policy pressure to build charging networks followed by the all-important approval of cost recovery. This article examines the approval of an EV infrastructure program in the US state of Nevada. Key features of the Nevada Electric Highway program The Nevada Electric Highway program plans to install chargers at specific locations on all of Nevada’s highways, beginning with US 95 between Reno and Las Vegas (about 440 miles). Each station will include two Level 2 Chargers and one DC Fast Charger. The NPUC’s approval Senate Bill 145 was recently signed into law, which broadly authorises a range of state-wide initiatives including various detailed provisions for funding the Nevada Electric Highway. NV Energy expects to begin drawing down the allocated funding around September 2018.
Conclusion The last few years have seen some disconnects between policy and regulation across many jurisdictions, wherein one branch of government wants various electricity sector transformations (smart meters, solar panels, batteries and EV chargers) but another branch of government won’t allow the costs of those initiatives to be recovered. So the whole EV charging idea seemed to fall into this uneasy hiatus in which everyone knew that the simple answer is to allow electric companies to recover the cost of providing and operating EV chargers. My observation is that the regulatory framework and resulting decisions in Nevada (on the whole emerging technologies thing, not just EV’s) seem to be getting close to the right answer … not perfect, but close … and certainly much closer to the right answer than some other jurisdictions. Scandinavia’s heat wave – and the cooling of prices Introduction In last month’s edition of Pipes & Wires Europe we had a look at the summer heatwave in Europe, and its different effects and central Europe specifically, when compared to the US. This month we have a look at the effect of the heatwave in Scandinavian countries, where the heat ignited wildfires and depleted water reservoirs and hence hydropower – one of the most important sources of energy in the North of Europe.
The end of July – Guaranteed Heat… Scandinavian countries are amongst the countries with the largest hydropower generation plants in the world, with Sweden set to reach its renewable energy goal of 2030 with the help of wind turbines this year already, while in Norway hydropower accounts for 93% of total installed capacity. This makes them frontrunners in renewable energy generation. However, the flip-side to this is overreliance on hydropower plants, putting these countries at risk of supply shortage during adverse weather periods. This summer heat-wave is one of these examples, with Sweden, Norway and Finland having at least 15 TWh less potential hydropower stored in their reservoirs than normal. This called for external support, requiring electricity imports from other countries in Europe. And as such Sweden this summer became a net importer of energy from Germany, rather than a net exporter, which the country has usually been. A lot of this energy is from coal-fired generation, since Germany is facing reduced wind-energy output this summer. This has made this over-reliance on hydropower has been costly, both for consumers with rising prices in July, and for the environment, as coal is worse than gas or other renewables. All of this came alongside strong wildfires, hitting the Northern country hard this summer. The Start of August – Guaranteed Heat! July seemed to be a rough hit for Nordic countries. However, good news came in early August, with forecasts showing wetter weather coming for the hydropower reliant countries. This pulled prices down again, and further more got to the point that winter power is guaranteed. The fear, according to the water resources and energy directorate of Norway (NVE), of power not sufficing throughout winter was limited from the get-go, and while levels were low in the dry month of July, power could be imported from Sweden, Denmark and the Netherlands, if necessary, reducing reliance on for example Germany. Conclusion Scandinavian countries are undoubtedly front-runners when it comes to renewable energy generation. Sweden is a clear example that renewable energy goals can be achieved – and even early. While water-levels can temporarily be below average, and periods of higher prices and imports of emission-intensive energy are possible, as long as water levels are still in acceptable margins, good management of the supply and grid meant limits damages to short periods. Overall, the costs of hydropower this summer were only limited, and the benefits of clean energy still outweigh the drawbacks of sometimes relying on other countries. Northern- Europeans an be at ease now that they won’t be left in the cold this winter.
August 2nd, 2018: Ofgem fines npower for missing advanced meter deadline – A difficult debate Introduction In April 2009, the Government introduced a new licence requirement requiring suppliers to roll-out advanced gas and electricity meters to their medium-sized non-domestic customers by 6 April 2014. Ofgem has missed this deadline, and has failed to take all reasonable steps to install advanced meters at 4,000 of their 22,400 meter points, additionally replacing 200 electricity meters with non-advanced meters, hence breaching one of their licence conditions. This led to a £2.4 million fine by the Office of Gas and Electricity Markets (Ofgem). This article discusses advanced meters and why advanced meters are met with mixed views. Advanced Meters The UK government describes smart meters as follows: “Smart meters put consumers in control of their energy use, allowing them to adopt energy efficiency measures that can help save money on their energy bills and offset price increases.” These smart meters form the Advanced Metering Infrastructure (AMI) desired by the government, strengthening grid security and allowing for a two-way communication (consumers and suppliers can read the meter readings in real time, avoiding estimated bills). These smart meters will provide the readings in pounds and pence, allowing consumers to adjust their consumption pattern to peak and off-peak energy demand in the grid, saving money in the process. The Debate Ranging from fear of a Trojan Horse, worries about a kill switch (suppliers remotely switching off energy supply) and concerns whether smart meters really even save consumers money at all, the £11bn scheme to put 53m devices in 30m homes and small businesses by 2020 in the UK is rightly so widely criticised. While
providing real-time information to consumers and helping grid security for example by monitoring dips in
wind- or solar energy supply as the share of renewable energy in the grid increases, smart meters in theory
have palpable benefits to both consumers and suppliers (know more about consumption patterns, to secure
the grid).
In last month’s edition of Pipes & Wires Europe, we looked at the Massachusetts’ Department of Public
Utilities’ decision to reject advanced metering proposals. We noted that the DPU initially stated that
advanced metering functionality lays the foundation of grid modernisation, but then upon rejecting
advanced metering proposals seemingly changed their mind and said that grid-facing technologies (e.g.
Advanced DMS, voltage optimisation etc) lay the foundational framework for grid modernisation. This shows
that opinions on advanced metering technology is mixed, not just from consumers, but also from regulatory
bodies.
Conclusion
Ofgem’s fine to npower shows the firm belief of the UK regulatory body in the benefit of smart meters and
advanced metering technology. Improvements in technology generally have positive impacts on consumers,
as more accuracy allows for better planning, budgeting and not being over-charged for unconsumed
electricity.
However, to benefit consumers, savings generated need to outweigh the costs of installing smart meters, as
well as teaching use and reduce “fear”. If the benefits of smart meters are not communicated to the
consumer, they will be met with resistance, and the high costs will not pay off.
Mergers & acquisitions
Below you will find a summary of relevant recent European merger activity from August.
Approved
August 21:
— French utility Engie and French supermarket chain Casino’s photovoltaic subsidiary Greenyellow to set up
a joint venture (approved Aug. 21)
• GreenYellow was setup by Groupe Casino, a French mass retailer, in 2007 as an affiliate specialised
in solar energy and energy efficiency solutions, with 150 MW of operating facilities and 1200 active
contracts• Engie is a French multinational electric utility company, focused on low-carbon power generation,
mainly based on natural gas and renewable energy, alongside lobal networks and customer solutions
• The joint venture was setup in the hope to extract more revenue from the solar production for B2B
August 23:
— Jera Trading, which is a joint venture between Jera Co and EDF Trading Ltd (EDFT), to acquire EDFT’s LNG
trading business (approved Aug. 23)
• JERA Trading (JERAT) is a Japanese multinational utility-backed coal trading company and wholly-
owned subsidiary of JERA, the world’s largest buyer of liquified natural gas (LNG)
• EDFT, a subsidiary of EDF S.A., an integrated energy company in the UK, entered the joint venture
with JERA after a successful collaboration on coal and freight trading through JERAT, holding 33% of
the shares
• JERAT’s acquisition of EDFT’s LNG trading business aims to optimise LNG on a global basis, and over
time develop a clear pricing signal for LNG in Asia
New listings
August 7:
— Italian gas company Spigas, which is controlled by Germany’s EnBW Energie BadenWürttemberg, and
Italian peer Canarbino to acquire joint control of Italian gas company Miogas (notified Aug. 7/deadline
Sept. 12/simplified)
• Spigas is one of the leading Italian operators in terms of volume of gas transported, and is part of
VNG, a natural gas company (part of German company EnBW)
• Canarbino is a vertically integrated company in the energy supply chain, established in 2010,
operating along the gas and power supply chain in Italy
• Miogas Srl provides natural gas distribution services in Italy, operating an integrated network of
natural gas pipelines.
August 16:
— Norwegian investment company Akastor, Japanese trading company Mitsui & Co and Japanese
container shipping company Mitsui OSK Lines to acquire joint control of subsea oil and gas services
company Akofs Offshore (notified Aug. 16/deadline Sept. 20/simplified)
• Akofs Offshore, a provider of vessel based subsea well construction and intervention services to the
oil and gas industry is fully owned by Akastor
• The two Japanese companies Mitsui & Co and Mitsui OSK Lines will acquire 25% of the shares of
Akofs from Akastor each, while the remaining 50% of the shares will remain with Akastor
• Initial net cash release for Akastor at time of transfer will be USD 142.5 million, and guaranteed
preferred return to Mitsui and MOL during the first six years of operations is limited to about USD
46 million.August 23:
— Kuwait’s sovereign wealth fund Kuwait Investment Authority to acquire oil and gas pipeline firm North
Sea Midstream Partners from private equity firm ArcLight Capital (notified Aug. 23/deadline Sept.
27/simplified)
• ArcLight Capital Partners, a private equity firm focused on energy infrastructure assets, agreed to
sell its stake in North Sea Midstream Partners Ltd. to Wren House Infrastructure Management
• The assets include a 67% operated stake in the Shetland Island Regional Gas Export System pipeline
and a 100% stake in the Frigg UK pipeline
• Wren House Infrastructure Management is the infrastructure arm of the Kuwait Investment
Authority fund
• ArcLight Capital formed North Sea Midstream to focus on midstream oil and gas infrastructure
assets in and around the North Sea.
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. These articles also summarise
lengthy documents, and it is important that readers refer to those documents in forming opinions or taking action.
UMS Group Europe and Utility Consultants Ltd accepts no liability for action or inaction based on the contents of Pipes & Wires,
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