TRANSMISSION INVESTMENT (or - Living on the Reliability knife-edge) Gordon Jardine 2 April 2004
It’s about RELIABILITY “the (UK) regulator’s concern to reduce costs to consumers should now be tempered by a greater emphasis on ensuring that electricity network owners have the financial resources to secure a viable, long term electricity supply” UK House of Commons Committee 2004
And so says a major user “I would like to acknowledge and congratulate Powerlink for your commitment to ensuring more reliable and quality electricity supply throughout South-East Queensland” “If the Refinery experiences power failure, even for a short period, we experience an unplanned shutdown which can affect the plant for a considerable period of time” “investment in energy infrastructure … has helped ensure reliable electricity supply to business customers including Caltex” Caltex Refinery Manager - 5 March 2004
Overview • How the existing capex framework delivers very good outcomes for customers • How the proposed framework - as written - creates a serious threat to reliability • Is it possible to create a light-handed, capped framework which delivers better outcomes than the present framework?
Some background • PQ capex allowance $1040 M = replacement life of 45 years and load growth 3. 5% p. a. • BUT…. . load growth so far is 6. 6% p. a. , and now forecast at 6% for next 3 years • Material difference - now MUST accelerate network development (and capex spend) in the face of accelerated load growth in order to maintain reliability • To deliver mandated reliability, actual capex spend MUST exceed original allowance
Good outcome for customers • Reliability can be maintained … “Just in time” • TUOS price path in Qld is flat in real terms • Get no customer complaints about TUOS (only 8% of total delivered cost) • DO get customer concerns about reliability, and requests about assuring future reliability (major customers to government)
Ex-post review by ACCC • PQ confident it can justify extra capex spend … load growth : around 6% p. a. vs allowance based on 3. 5% p. a. • Peak demand for 2003/04 summer: - 10% POE forecast was 7380 MW (at time of reset) - actual 7934 MW • Well documented Regulatory tests: - 9 major ($23 M to $71 M); plus 9 small, so far • Regulatory tests included capex cost sensitivity; no major blow-outs
Ex-post review by ACCC • Regulatory tests supported by retailer/distributor which pays the TUOS from its capped retail price - very compelling • Grid is very heavily loaded and high load growth - thus negligible optimisation risk • Review should not be traumatic for ACCC or PQ
“Just in time” Reliability • 2 major augmentations in SEQ commissioned on 13 December 2003 • First new record demand on 23 December 2003 • New network elements were needed to ensure reliability of supply - only 10 days to spare! • In a high load growth environment, no time for “regulatory roadblocks” • Or for dispute provisions which allow “nimbies” and vexatious parties to delay
Litmus test for new framework • Benchmark - outcomes vs. existing framework • Can reliability be maintained if load growth accelerates? • For accelerated load growth: Action needed - immediately accelerate network development (capex spend) Offered - STOP (“off ramp”) for a regulatory review • New framework FAILS the reliability litmus test !
“Regulatory Roadblocks” • ACCC document contains various proposals for the regulator to “pull over” sets of projects during the period eg large, uncertain, new load growth, etc…. . • These roadblocks don’t add value, but do cause delays and reliability risk • They convert “just in time” to “way too late”
Apparent policy shift ? • FROM: “ensure reliability, with some risk to TUOS price” • TO: “ price is sacrosanct, reliability is sacrificeable” • NOTE: Reliability is NOT discretionary
This is NOT the UK UK Qld Load growth p. a. 1. 8% ~6. 0% Grid standard N-2 N - 1 or less Grid topology Meshed Long, thin
Capital Expenditure Profile AREA OF HIGH RISK EXPOSURE 350 300 Regulated capex allowance 250 200 150 100 50 Regulatory Period 98/99 99/00 00/01 01/02 02/03 03/04 04/05 Year 05/06 06/07 07/08 08/09 09/10
Is there a better way ? • Possible to design a light-handed, capped capex framework which: - enables reliability to be maintained - minimises the risk of regulator-induced reliability failures - avoids windfall gains • Requires a “paradigm shift” in thinking, away from UK/low load growth experience with its presumptions of predictability and stability
A formularised capex cap for reliability capex • Cap for reliability/load growth capex = f (actual load growth in regulatory period) • Thus, cap automatically adjusts each year in response to load growth • No delays to development if load accelerates - no need for “regulatory roadblocks” or “off ramps” • No need for regulator to estimate capex/load growth - a low estimate could threaten reliability
A formularised capex cap for reliability capex • Eliminates windfall gains due to load forecasting error (over-estimate) • Retain Regulatory test (in simplified form) • Could use hybrid approach - list of projects for year 1 (where there is a high degree of certainty); then formula for years 2 through 5 • End-of-life replacement capex ( predictable, but variable period-to-period) can be readily added in.
Other matters • Non-reliability augmentations e. g interconnectors / intra- connectors : exclude from cap, handle on an individual project basis as they arise, using full-blown Regulatory test , with ACCC as final arbiter • Disputes - no “nimby” disputes on any projects - and, for reliability projects, only those paying material extra TUOS can dispute
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