Submission on the Consultation Paper Transmission Pricing Review: - High Level Options

Transcription

1 7 December 2009 Transmission Pricing Review Kate Hudson Electricity Commission PO Box WELLINGTON 6143 By Dear Sir/Madam Submission on the Consultation Paper Transmission Pricing Review: - High Level Options 1 Powerco Limited ( Powerco ) welcomes the opportunity to comment on the Electricity Commission s (the Commission ) consultation paper Transmission Pricing Review: - High Level Options (the Paper ). We firstly make some general observations, followed by specific comments and lastly, have attached answers to some of the Commission s specific questions. Some initial observations 2 There may be too much reliance on price as the primary mechanism to promote efficient outcomes in the New Zealand ( NZ ) electricity system. The fact is that NZ has an electricity market which is far from perfect, operating on a transmission system which is fundamentally a natural monopoly. In such a system one cannot expect price alone to produce efficiency in its multitude of forms. 3 The Transpower Pricing Methodology ( TPM ) is a cost allocation methodology of infrastructure not dissimilar to say, our national roads. There is no right or wrong answer on this cost allocation, only degrees of fairness and subjective opinion. We also note that the present fixation on locational signals may be ignoring the fundamental basis of any generation investment, which is largely influenced by the location and availability of raw energy resources with which to generate electricity. 4 Assumptions also appear to be made that the transmission system is one which should have the ability to quickly adapt and change in a flexible manner to cater for changing generation and spot load developments. This appears to miss the fundamental point that the transmission system is largely static and changes can only occur through incremental and expensive timely developments. It takes significant time to plan and cater for future loads and generation and to build new transmission. This all has to be performed using forecasts based on a large number assumptions about

2 the future eg the Commission s Grid Planning Assumptions and Statement Of Opportunites. The transmission system will therefore naturally have inefficiencies with either over investment or under investment at any point in time. This is not wrong. Pricing principles should be reviewed first 5 Powerco notes that the Commission is not proposing to review the pricing principles since it may be replaced with an authority that has different statutory objectives and outcomes. One would have thought that the pricing principles are somewhat fundamental to the whole process. 6 Stata Energy Consulting s ( Strata ) paper, Transmission pricing issues identified by thetransmission Pricing Technical Group TPTG, identifies some individual members opinions, one of which is that there is lack of clarity regarding the pricing principles and their application and that a review of these could provide improved clarity of the intention of these principles. In addition the Commission s own paper, paragraph 2.2.2, identifies that it is the Commission s desire to begin with first principles. Further, Frontier Economic s work on Identification of high-level options and filtering criteria identifies that: In virtually all circumstances it will not be possible to give equal weight to all of the pricing principles due to conflicts between them. 7 The Commission s paper focuses on locational issues and Frontier s approach has been to identify locational cost allocation issues as high level. Powerco's view is that this is not appropriate as the Pricing Principles should be reviewed first. The Transmission Pricing Methodology ( TPM ) is nothing more than a cost allocation methodology which is complex, subjective and multi dimensional and therefore, easily tangled. It is through clear principles that one can review the subject more clearly and methodically. 8 The Commission s principle objective as given in section 172N of the Act, for delivery of electricity focuses on the words efficient, fair, reliable and environmentally sustainable. Powerco agrees that the pricing principles are directed at promoting various aspects or dimensions of economic efficiency. These can conflict as noted in Frontier s paper, Theory of efficient pricing of electricity transmission services, July An example given was that achieving allocative efficiency at a point in time may not be fully compatible with promoting dynamic efficiency. Powerco therefore thinks that it is the pricing principles that should be reviewed first before looking at any specific locational issue. Should transmission dictate generation and load location? 9 The Commission and its consultants are focussing on locational price signals on the assumption that efficient price theory necessitates changes and better differentiation. It may be that the Commission is relying too heavily on price as an economic signal in a system which is not a perfect market. 10 The Paper (paragraph 3.2.7) suggests that participants should locate in areas where they are least likely to bring forward further augmentation of the transmission system. This is not necessarily the best view as it assumes that the transmission system should dictate where generation and load and population growth should locate. It is Powerco s opinion that it is the generation and load that should dictate the required transmission.

3 11 One of the pricing principles cited by Frontier is that pricing should signal locational advantages for investment in generation and demand. The Commission s paper also expands on this topic and Paragraph says.these three factors will tend to undersignal the importance of participants locating in areas where they are least likely to bring forward further augmentation of the transmission system. Is the Commission suggesting that investors in generation ignore the location of raw energy sources? Also should future load location be dictated by existing transmission? Powerco believes that transmission investment has a primary propose of transporting, not dictating plant and load location. 12 The Commission cites one example of an issue with the present arrangement in terms of generation investment where a generator choses to transport electrical energy instead of transporting raw energy in the form of gas closer to a larger load centre (Auckland). This one example is hardly a reason to abandon the status quo. It is natural for generation to locate plant near raw energy sources where these are available (most raw energy sources cannot be transported apart from gas and maybe coal). In addition there may be many other strategic reasons for the particular generator to transport electricity vs gas. 13 Powerco agrees with the statement made in the Strata paper, Transmission pricing issues identified by the TPTG, that, Location signals are limited to connection charges, the slightly tilted Regional Coincident Peak Demand ( RCPD ) charges and HVDC charges. (It is possible that these may be adequate when combined with nodal pricing and the GIT). 14 Powerco believes that locational signals are already adequate and that the location of generation has more to do with availability or lack therefore-of of raw energy resources in a specific location. Powerco also believes that there are already strong incentives for embedded non-peaking generation but that this is not an alternative to transmission since it cannot be relied upon. Nodal Pricing 15 In terms of the basic form of the current transmission charges, it is nodal pricing which captures losses and constraints. TPM connection charges capture specific transmission investment costs for a participant. TPM interconnection charges are just a catch all for the balance of revenue needed by the Transmission owner and paid for by the load or consumers. 16 The paper appears to assume that it is the loads and generators that should work to remove network constraints, whereas it should be the Transmission owner that should have the major role of doing this. Powerco presently is of the view that it is the losses and constraints captured in nodal pricing that should signal to Transmission owner the need for new investment. Powerco does not believe that these locational nodal price differences should necessarily dictate where new load or efficient generation should be located. 17 The Paper does highlight some anomalies with nodal prices, in particular paragraph This suggest some failings with nodal pricing which need to be addressed and the Commission s other paper on scarcity pricing suggests this could be remedied with scarcity pricing mechanisms.

4 Transmission pricing should be simple and transparent 18 The Paper cites Frontier s paper, Theory of efficient pricing of electricity transmission services. Frontier s paper in-turn cites transmission pricing principles by Green and also by Brunekreeft et al. One of which is that pricing should be simple and transparent. Powerco at present believes that more weight should be given to this principle to avoid any unnecessary complexity in any future TPM. 19 The current TPM offers a fairly reasonable balance from recovery of transmission costs in the energy market (nodal pricing) and from market participants using its connection and interconnection charges. Although there might be some room for equity changes, a move to a complex methodology seems hardly warranted. 20 Powerco wonders if participants and hence the Commission may be taking the approach to the TPM to the extreme. After all, the basic objective of the transmission system is to transport electrical energy from the cheapest raw energy sources to the loads. Transmission is a natural monopoly and a basic infrastructure just like our national roads. 21 Investment in transmission is lumpy, dictated by changing generation and load characteristics. The generation and load characteristics are dynamic and expecting transmission to be efficient in any short run form is obviously not practical. The lumpy and sometimes inefficient nature of transmission in the short run is a natural occurrence just as in the case of roads. 22 There is some benefit to have a simple TPM like the current arrangement and one has to question whether there is any major fundamental economic anomalies that warrant some of the more complex options the Commission might be considering. Should price be linked to service? 23 Powerco notes in Strata s paper that some members of the TPTG highlighted that price is not related to service. Powerco s view is that transmission services are a natural monopoly for which there is full cost recovery via the TPM. There are existing performance incentives on Transpower and these could possibly be expanded in more detail to the individual customer level if not done already. Introducing this to the TPM would unnecessarily complicate the cost allocation methodology and the potential reallocation of costs. This service level incentive is better placed in conjunction with the Commerce Act as it presently resides. Reactive power 24 The subject of reactive power, its generation and demand, its flows, its links to the stability of a complex non-linear system and its influence on power delivery, is obviously wide ranging and complex and worthy of a separate consultation. To simplify things, Powerco presently considers that static reactive compensation is best treated as a transmission asset. Since it also

5 can have such a wide ranging effect on the system, a single body such as Transpower should own it. Load flow based approaches to the TPM 25 Trying to allocate costs based on load flows has serious flaws. For instance the addition of spot loads or generation at times will alter load flows and load flow constraints. If someone was previously unaffected but then is, due to the addition of the new generation or spot loads, should they be responsible for having to pay for these constraints. At what point in time is the benchmark. It appears taking this path will be thwart with issues, problems and complexity. 26 The current approach, while not perfect, at least is reasonably widely accepted and understandable. The question is, has there been any identifiable fundamental flaws with the current TPM to warrant a major change? Specific Powerco comments on the current TPM and the RCPD 27 The previous TPM used to be provide a greater incentive to Powerco to manage its peaks, ie when the interconnection charge was based on GXP demands. The current TPM and regional coincident peak demand (RCPD, based on the 100 highest peaks across regions is likely to work well for the major transmission trunks and larger regions such as Auckland, Wellington and Christchurch. However, it is not so successful for regions that have spring peaks or driven by the dairy industry or other seasonal activities. Having said this, the benefit in the main centres probably outweighs the adverse outcomes for the other regions. 28 Specific answers to the Commission s questions are provided in the Table attached. Powerco is happy to discuss further our submission if required. Yours faithfully Paul Goodeve Regulatory and Business Manager Ph paul.goodeve@powerco.co.nz Powerco Limited Private Bag 2061 New Plymouth

6 # Question Response General comments in support of response. Q1 To what extent do you agree that nodal prices can provide efficient signals for the use of the transmission network? Nodal prices can provide signals but are unlikely to be effective. See our comments earlier in this submission. Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 To what extent do you agree that nodal prices can provide efficient signals for investment in generation and load projects? Do you consider that the nodal prices in New Zealand may be inappropriately suppressed due to the transmission system being augmented ahead of demand? Can you provide examples where a transmission alternative could have been undertaken instead of an investment in the grid? Do you agree that if locational transmission pricing signals are required to promote efficient participant investment decisions, both generators and loads ought to face these signals? Are there any other jurisdictions whose electricity market arrangements should be examined to assist in the development of high-level transmission pricing options for New Zealand? Do you agree that the summarised issues Frontier identified from the Strata report are correct and relevant? Are there other issues with the current transmission pricing that you think should be considered at this high level options stage? Do you think it is appropriate to focus on locational cost allocation issues as opposed to pricing structure issues at this high-level stage of the review? Are there any particular Pricing Principles that ought to be given precedence over others? Do you agree that it is not appropriate to review the Pricing Principles at this time? If not, why not? Do you think existing TPM, combined with the GIT and nodal pricing provide appropriate operational and investment signals to existing and prospective participants? See comments box. Agree Powerco is not aware of any other jurisdictions. Agree that these appear correct, but not sure of the relevance. Yes No Please see comments box No Yes Nodal prices already appear to provide sufficient locational signals. The summarised issues are from individual members of the TPTG and do not necessarily reflect the views of all participants. The pricing principles have been identified by the TPTG and Frontier as requiring review and clarification. This should be done before any further work into the cost allocation methodology. We think that there is too much focus on locational cost allocation issues when the first principles of the cost allocation methodology should be reviewed. Please see question8. If the pricing principles are indeed conflicting as others report then there needs to be clarification. At the end of the day there needs to be some sort of balance to the whole cost allocation methodology. The TPTG and Frontier identify the need for these pricing principles to be reviewed and clarified. This should be done taking into account possible changes to statutory objectives and outcomes for the potential new Electricity Market Authority. The basis for the HVDC charges appears to be working as the Commission notes given that the majority of the new generation has been in the North Island. High nodal prices in the Upper South Island identify the need for generation there. The fact that there is very little may be more to do with availability of raw energy

7 Q13 Q14 Q15 Q16 Q17 Please give examples or reasons for your answer. If not, are there relatively minor modifications that could be made to the existing regime to enable it to provide appropriate locational signals? Even if the existing approach does not provide efficient signals to participants, to what extent are participants investment decisions likely to be distorted as a result? Assuming there is a need for a locational element to transmission pricing, does the tilted postage stamp option provide a reasonable trade-off between signalling objectives and simplicity? What are submitters initial views on the economic merits of the augmented nodal pricing approach and are these likely to be outweighed by practical implementation considerations? Assuming there is a need for a locational element to transmission pricing, is loadflow modelling a reasonable basis for cost allocation? Please see comments box. Yes No resources suitable for electricity generation. There is perhaps some distortion caused by the HVDC charges. At the end of the day, the Commission through the TPM has some influence on where and if generation is built. But note Powerco does not believe any further locational signals are required or warranted. Sounds complicated and unlikely to be justified. We went down this path early. This produces its own set of complexities, the least of which is what is the benchmark time and characteristics that the load-flow should be based on. The system is dynamic and no day is ever generally the same. Q18 Q19 Q20 Q21 Q22 Q23 Q24 Q25 If so, do you have a view on whether the CRNP, ICRP or an alternative methodology is preferable? Are there any other high-level options that the Commission should consider? Is there merit in pursuing a PJM-style deep connection option in the New Zealand market? Are there aspects of connection charging that should be reviewed? If so, please give arguments why. Is it necessary or worthwhile to alter or clarify the existing treatment of transmission alternatives? Should either a USG or a voluntary insurance scheme be considered within the Commission s Review? Are there other options for linking service quality and pricing that you think the Commission should consider? If so, please give details. Do you agree that the Commission should consider a methodology for allocating the No Yes Maybe This would be helpful. Clarification always helps. An Unconditional Service Guarantee (USG )scheme may be helpful provide it does not just increased the allocated costs to all the other unaffected participants. Service level incentives are possibly better kept under the Commerce Act provided they can be expanded under that existing arrangement. Reactive power flows can be complicated but are very necessarily for the stability of the system and voltage support. It may better that these components are just

8 Q26 Q27 Q28 costs of existing and new static reactive power assets as part of the review? If locational hedging instruments were introduced that had the effect of muting nodal price signals, do you consider that locational signals should be enhanced through transmission pricing? Do you consider that the criteria outlined in this paper are appropriate criteria for filtering high-level options? Please outline your reasoning. Are there other criteria that you consider might be appropriate? Maybe treated as transmission assets. This depends on the extent of the effect of locational hedging. No Please see question 8