Transpower - Assignment Example

? Transpower Table of Contents I. Introduction 3 II. Transmission Upgrade Projects Are On-going and Massive 4 III. Status Quo, Transmission Investment Needs and Plans 5 IV. Implications for Costs, Returns on Investment, Funding 8 V. On Pricing Methodologies 10 VI. Requirements from the Statutes with Regard to Upgrading Transmission Facilities 11 VII. Fair Treatment of Different NZ Regions 12 VIII. Health Issues Tied to Transmission Lines 13 IX. Consumption Patterns for Power, Optimization of Supply and Demand via Legislation and Other Mechanisms 14 X. Tying It All Up 15 References 16 I. Introduction This paper examines the decision of Transpower to make major investments in the national grid. The analysis and examination will be done in the context of the need for such an investment; the implications of the investment in terms of funding, as well as the cost of the investment; the way all the regions of New Zealand fare in terms of the principle of fair treatment; the Electricity Commission's methodologies for pricing; the requirements from the statutes as far as enhancements to the grid infrastructure goes; issues tied to health with regard to the transmission lines; patterns of energy usage, as well as laws and incentives geared towards optimizing the demand and supply of power in the grid. The key question that needs to be answered in this paper is this: what are the major implications of putting up transmission lines in addition to the existing grid infrastructure in New Zealand? This analysis comes in the wake of an announcement from the New Zealand government, for instance, that there had been an allocation in the amount of $4.6 billion for the upgrading of the national power grid over the course of the next ten years, beginning in 2012, with the key purpose of the investments being the modernization of the grid and the setting up of infrastructure to ready the country for future increases in power consumption and demand. This fund is also earmarked to likewise improve reliability of power supply to consumers, both industrial and residential. On the other hand, the investment plan also takes a shot at the current state of generation and transmission in New Zealand, where generation facilities are centralized, and necessitate the kind of transmission infrastructure investments that could be limited and reduced by investing more in distributed generation moving forward. The idea is that transmission investments are not etched in stone as necessary, if generation is distributed, and if such facilities are located close to the demand. Where this becomes a reality, then there is a reduced need to build large generation facilities and the necessary transmission infrastructure needed to pipe the power to the consumers (Sustainable Energy Association, 2012). II. Transmission Upgrade Projects Are On-going and Massive The investment in additional grid infrastructure, in particular new transmission lines capabilities/capacities on top of the existing infrastructure, or as an addition to that, has been on-going, with the total capital outlay for those projects slated at $5 billion over the next ten years, as estimated by Transpower itself, and broken down into a number of key infrastructure projects, some on-going, and with varying completion dates. The key projects are said to be one, the upgrading of the transmission grid in the North Island, which is intended to erect a new link for transmitting power between Auckland and Whakamaru; two, upgrading of the transmission link between Northland and North Auckland, which entails putting up a 220 kV infrastructure link as well as two substations; three, the replacement of the pole used to link different islands in New Zealand via HVDC, specifically Pole 1; and four, the erection of a new transmission infrastructure between Whakamaru and Wairakei, that will be double-circuited (Transpower, 2012). The upgrading of the whole grid in the North Island is said to be among the largest of the current crop of on-going projects, with project completion slated in 2012, and with costs estimated at $824 million, or over a sixth of the total capital outlay estimate during the decade-long planning period. Also, this project is seen as one of the largest in the history of the grid, from 1960 onwards. This massive undertaking has three parts, one being the putting up of overhead lines of transmission rated at 400 kV, and running through to 186 kilometers of Northland; a substation and a switching station link, the latter being the second part; and four cables running underground from that substation (Transpower, 2012b). Various parts of the project have varying levels of completion, with stringing of the wires at 15 percent, access at 94 percent, foundations building at 90 percent, and the assembly portion of the project at 78 percent, as of the latest update (Transpower, 2012c). The project to upgrade inter-island HVDC lines meanwhile is estimated to have a total bill of $672 million, with the project expected to be completed by 2012, and with expected increases in total capacity for the link to be 1,200 MW. These capacity additions are to come in the form of new equipment to convert AC to DC in South Island as well as in North Island, specifically in the areas of Hayward and Benmore. This project replaces the antiquated Pole 1 with new infrastructure to be called Pole 3. The date of the commission of the facility is pegged at 2013 (Transpower, 2012d). Meanwhile, the Northland to North Auckland upgrade of transmission facilities project is estimated to cost $417 million, to run through 37 kilometers between the two locations, and is expected to be commissioned likewise in 2013 (Transpower, 2012e). III. Status Quo, Transmission Investment Needs and Plans The national power grid of New Zealand consists of the Northern and southern portions corresponding to the grid components in the North Island and in the South Island, with the southern grid generation mainly sourced from hydropower facilities, and with the Northern grid having a more diverse power source mix, from hydro to coal and to conventional fuels. The following assets comprise the New Zealand national grid at the moment (Transpower, 2012f): Asset Description Detail Length of HVAC and HVDC Transmission Line 11806 km HVAC Transmission Line Voltages 220, 110, 66, 50 kV HVDC Transmission Line Voltages 350, 270 kV HVDC Link Capacity (with two cables on pole 1) 700 MW* Substations 178 Capacitor Banks 124 Transformers (Units) 1116 Transformers (Banks – excluding HVDC) 343 Synchronous Condensers 10 Static Var Compensators (SVC) 4 Table Source: Transpower, 2012f Meanwhile, the plot below details the consumption/demand profile for the entire New Zealand grid over the past few years, broken down by North and South Island consumption. North region consumption makes up roughly two-thirds of total country consumption. Moreover, one notes that total consumption has been relatively flat over the past few years (Transpower New Zealand Ltd, 2012, p. 30): Graph Source: Transpower New Zealand Ltd, 2012, p. 30 Elsewhere, the need for continued investments in generation and infrastructure facilities for power in New Zealand is highlighted by a plot demonstrating how GDP is coupled to power consumption, so that general GDP growth should lead to increased consumption and demand for power in the country moving forward (Transpower, 2012g, p. 7): Graph Source: Transpower, 2012g, p. 7 Moving forward, meanwhile, Transpower details investments slated to keep the national grid up to par with future requirements, with the time horizon pegged at anywhere between a decade to fifteen years, with regard to the planning period, and the expected increases in demand, upgrades in technology, maintenance, and the general upkeep of the grid as the key drivers of investments for that planning period.. A table detailing such investments and needs is given by the firm in its planning report for 2012, and includes the upgrading of the transmission capabilities in the central area of North island; the upgrading of the transmission capabilities at Wairakei; and the upgrading of the facilities for transmission between south and north, with the latter being slated for consideration and approval in 2015. There are likewise a slew of other projects that have been made part of this plan, and are included in the table provided by the firm, under its economic investment report for the national grid during this long-range planning period (Transpower New Zealand, 2012, pp. 346-348). IV. Implications for Costs, Returns on Investment, Funding Data exists with regard to the future benefits that accrue to the New Zealand grid as a result of additional investments in infrastructure for transmission, indicating that these undertakings are positive financial investments with substantial returns over the life of the transmission facility upgrades (Meridian Energy, 2012, p. 1): Table Source: Meridian Energy, 2012, p. 1 As can be gleaned from the above table, the net present value of the investments in grid infrastructure, broken down by project, are positive for all the projects, with the greatest return accruing from project 2 above, for the upper Waitaki upgrade project, where the NPV value is $335 million for an investment of anywhere from $100 million to $300 million (Meridian Energy, 2012, p. 1). The above table hides certain considerations that are in place with regard to the evaluation of investments in the grid, that have been adopted and promulgated with the establishment of the government regulatory agency charged with this task, in the entity known as the Electricity Commission or the EC in New Zealand. The formulated set of criteria for evaluating grid investments has come to be known as the Grid Investment Test or GIT. The criterion for evaluation has come to be known in the GIT as the net market benefit. The net market benefit of possible investment alternatives are measured, and the investment alternative with the most pronounced net market benefit is the one chosen and approved. This latter step is the culmination of two other steps prior to this, which are the determination of different scenarios associated with a proposed project for the grid. The different scenarios are then considered and evaluated for their net market benefit. The third step entails assigning probabilities to each of the market scenarios, and computing the net market benefit for the most likely scenario. The time horizon for calculation of market benefit is 20 years, and this is essentially the NPV or net present value of the investment. Costs, meanwhile, are the costs to both the suppliers as well as the consumers o the electricity over the same two-decade period. Net market benefit is simply the difference between the two values above. The take is that it is now up to the EC, rather than to Transpower, to make approvals with regard to the kind of pricing that it is able to charge to its customers and off takers, making use of the the investment test above in determining where and how much Transpower is to make out of its investments in the grid ( Boyle et al., 2006). V. On Pricing Methodologies Transpower determines pricing of its services to its consumers on an annual basis, with the start of the year being pegged on the first of April, and subject to yearly review. The basis of its pricing is the so-called Transmission Pricing Methodology or TPM, promulgated by the government regulatory agency in charge of this aspect of the power grid of the country. The TPM stipulates how Transpower undertakes the allocation of its charges for different aspects of its services, from HVDC to connection as well as interconnection aspects. The TPM itself and Transpower's adherence to the TPM dates back to 2008 (Transpower, 2012h; Electricity Industry Participation Code, 2010). There is also an aspect of the pricing methodologies that pertain to the way the distributors price their services to end-customers. Here the distributors are taken to be part of the pool of customers that take in power from the Transpower grid and then distributes that power to consumers. The methodologies prescribed for this segment of the power supply chain are those that are based on market dynamics or market forces, as stipulated by the regulatory authorities. Stated another way, charges made to consumers must be aligned with the market pricing, in so far as those pricing methodologies promote transparency as well as efficiency in terms of the distribution of power, as well as in terms of the way such methodologies are practical to adopt and implement. Market mechanisms that are envisioned in this regard are those tied to contracting energy for the long term, as well as pricing that reflects the costs of capital associated with maintaining the distribution and transmission facilities, together with some profit based off on those capital costs, as a percentage of the capital costs for example (Smart Energy Universe, 2012). VI. Requirements from the Statutes with Regard to Upgrading Transmission Facilities Pricing methodologies in part shape the way Transpower plans upgrades to transmission infrastructure, because pricing affects viability, the amount of profits that can be had from investing activities, the return on investments, the payback period for such investments, and the kind of risks that are tied to investing in transmission infrastructure moving forward. As such, the pricing methodologies can be construed as constituting a set of statutory stipulations with regard to how transmission facilities are to be maintained and updated over time. For instance, the stipulation that market mechanisms are to guide pricing for distributors redounds to Transpower likewise having to keep in mind such market mechanisms in order to price its services to distributors, because distributors plan and execute their own capital outlays based on such market mechanisms, as stipulated by the authorities. This means that long-term contracts between distributors and consumers, especially industrial and commercial off takers of power, in part shape the way investments in transmission facilities are made. Likewise, market mechanisms also imply that the operators of the distribution networks as well as Transpower itself must be able to make profits on top of their investments in infrastructure. The overall take is that such stipulations on the rule of market forces/dynamics/mechanisms imply that those same stipulations likewise shape the amount, timing, and extent of the investments in enhancing the transmission infrastructure on the part of Transpower. Moreover, the presence of the EC that regulates and evaluates the investment proposals for new transmission facilities in the grid, via the use of the GIT, likewise signals that such regulations shape how, where and when such investments are made (Transpower, 2012h; Electricity Industry Participation Code, 2010; Smart Energy Universe, 2012; Boyle et al., 2006). There is also an aspect of the statutory requirements for upgrading grid infrastructure that is tied to the mandate from the national government to reduce reliance on fossil fuels, reduce carbon footprint, and increase reliance on renewable energy sources moving forward, to as much as all but ten percent of total energy generation in the country in 13 years time, or 2025. The implications for power generation and for power transmission of such a mandate are huge, given that renewable energy generation has the potential to be more distributed, and with the balance of energy generation in the two regions being heavily in favor of renewable energy especially in the southern region, as discussed earlier. More distributed generation translates to a change in the nature of transmission investment projects in terms of reducing investments in transmission from the large, central generation facilities, towards building more transmission facilities from more distributed, renewable energy-based generation facilities. This stipulation to up the ratio of renewable energy sources in the total country energy mix implies changes as well in the way transmission enhancement projects are conceptualized and implemented moving forward (Transpower, 2012; Sustainable Energy Association, 2012; New Zealand Government, 2007). VII. Fair Treatment of Different NZ Regions It is clear from the discussions on present and future grid investments that investments are geared towards meeting all demand in all parts of New Zealand. The interconnection projects between islands, for instance, takes into account the present and future demands of all geographies in the North and South. Demand is the primary consideration for investment. As such, fair treatment amounts to all of the varying regions receiving their fair share of investments in the grid, and that there is parity in intention with regard to making sure that all regions of New Zealand receive the same reliability and equal access to adequate power moving forward. In other words, fair treatment here can be construed as treatment with regard to the need for power being the primary consideration for upgrades or investments in new grid infrastructure for the different regions. This fair treatment extends to such things as the amount allocated for new projects in the grid for the different regions. Market forces will dictate when and how much new capacity, for instance, and new transmission infrastructure, are to be allocated to different areas of New Zealand (Transpower, 2012). VIII. Health Issues Tied to Transmission Lines The literature is mixed with regard to the health effects of transmission lines, especially in the long term, with some studies pointing to adverse effects on health associated with living or being near power lines for long periods of time, and with adverse health effects being especially pronounced among children. Children, as some studies have noted are especially prone to certain cancers, including leukemia, brought about by constant and prolonged nearness to electricity transmission lines. EMWatch, 2012; Trentham Environmental Action Campaign, 2004). On the other hand, other reputable sources discount that any such adverse health effects exist, or else such health effects have not been shown to be the direct cause of being near transmission lines, disputing the findings of those who say otherwise (Zeman, 2011). On the other hand, it may be good public policy to factor in any such adverse health effects when it comes to planning and approving new grid investment projects. For instance, it may be good practice to make sure that transmission infrastructure projects include provisions for limiting electromagnetic radiation leaks, the culprit behind studies that link transmission lines to cancers and other health issues. New projects in transmission that are near residential areas, for instance, need to be further evaluated, and alternatives where new facilities are out of residential locations ought to be considered more seriously (EMWatch, 2012; Trentham Environmental Action Campaign, 2004; Zeman, 2011). IX. Consumption Patterns for Power, Optimization of Supply and Demand via Legislation and Other Mechanisms As earlier noted, demand is seen as being correlated very tightly with the general level of the country's GDP, so that in general, the pattern of power consumption and generation in the country is shaped largely by the state of the economy, With the economy expected to grow in the long term, then so will the general level of power consumption in the country, and supply therefore ought to keep up with demand. This implies more investments in generation and in transmission moving forward, to match the trends in the economy (Transpower, 2012g, p. 7). As of the middle of the last decade, it was noted moreover that consumption was largely fueled by the need to power transport, that area which cornered 44 percent of all energy consumption in New Zealand in 2006, followed by the industrial and residential sectors, which together accounted for about 43 percent of all consumption (New Zealand Government, 2007, p. 11). As earlier noted, moreover, it is foreseen that the optimization of supply is partly a function of government stipulations to shift reliance away from fossil fuels and towards renewable energy, as well as to shift investments in the grid to align such investments towards the stated goal of sourcing up to 90 percent of all requirements for energy from renewables (New Zealand Government, 2007). X. Tying It All Up Transmission projects are on-going and massive, and the grid requires further massive investments moving forward to keep step with rising demand, which in turn is a function of general growth in the economy. The government has already earmarked a substantial amount for such projects in the grid for the next ten years, and many of the proposed projects are expected to be approved in the next two to three years. That said a host of factors are expected to shape the nature and size of such future grid investments, including health effects of transmission lines, the economics of such projects, government regulations, the shift to renewables, and the equitable distribution of projects among all regions, among others (Boyle et al., 006; EMWatch, 2012; Transpower, 2012; Sustainable Energy Association, 2012; New Zealand Government, 2007). References Boyle, G. et al. (2006). Real Options and Transmission Investment: the New Zealand Grid Investment Test. 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Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/f4689,69352567/APR2012CompleteFINAL.pdf Transpower (2012). Projects: Major Projects. Grid New Zealand-Transpower. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/projects Transpower (2012b). North Island Grid Update. Grid New Zealand-Transpower. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/nigup-home Transpower (2012c).North Island Grid Update- Project Update. Grid New Zealand-Transpower. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/n4812,426.html Transpower (2012d). HVDC Inter-Island Link Project. Grid New Zealand-Transpower. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/hvdc-home Transpower (2012d). HVDC Inter-Island Link Project. Grid New Zealand-Transpower. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/hvdc-home Transpower (2012e). North Auckland and Northland Grid Upgrade Project. Grid New Zealand-Transpower. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/naan-home Transpower (2012f). National Grid Today. Project. Grid New Zealand-Transpower. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/grid-today Transpower (2012g). Transmission Tomorrow. Retrieved 3 June 2012 from http://www.gridnewzealand.co.nz/f4697,50548795/transmission-tomorrow.pdf Transpower (2012h). Transmission Pricing. Transpower. Retrieved 3 June 2012 from http://www.transpower.co.nz/n5453,217.html Trentham Environmental Action Campaign (2004). Childhood Leukaemia risk doubles within 100 metres of high voltage power lines. Medical News Today. Retrieved 3 June 2012 from http://www.medicalnewstoday.com/releases/13440.php Zeman, G. (2011). Health Risks Associated with Living Near High-Voltage Power Lines. Health Physics Society. Retrieved 3 June 2012 from http://hps.org/hpspublications/articles/powerlines.html Read More