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Market Directions and Opportunities of Power Transmission in ASEAN Presented by Sarah Fairhurst Let’s start with a fundamental point: The Economic Role of Transmission • Electricity transmission is not essential for the supply of electricity to end users • Distributed local generation is possible, albeit with specific costs and performance characteristics • Electricity transmission network enables access to economies of scale in generation, access to location-specific resources, and access to backup and ancillary services When is transmission worth it, and when is it not? 1 The Lantau Group How does transmission lower electricity costs? • Economies of scale in generation: – Many types of thermal power station (particularly coal and nuclear power stations) are more efficient when built in larger sizes – Higher efficiency means that the cost of electricity generated from these power stations is lower than for smaller power stations – However, large power stations generate more power than is required in the immediate vicinity of the power station, and so to move the power to where it is needed, transmission must be built • Load and outage diversity – Electricity cannot be stored and load changes from minute to minute – Some single power stations connected to a load can manage these fluctuations, but many cannot – Transmission systems allow many different power stations to connect to many different loads, meaning the diversity in output of the power stations (outages) and the variations in the load can be pooled, lowering the overall costs of managing the systems 2 The Lantau Group Therefore transmission should only be built where it lowers costs • If you start from the premise that the purpose and role of transmission is to reduce the cost of delivered power, then a number of other points become obvious: – Transmission augmentations should only take place if the net effect is lowering the overall cost of delivered power – All transmission projects should be evaluated to ensure that they actually lower the cost of electricity – no “connection for the sake of connection” – The cost of electricity can be affected in many ways: • Changes in the use of specific power stations and the costs of those power stations • Changes in the merit order as a result of access to different resources • Changes in imports and exports (where applicable) • Lowered cost of ancillary services for system stability and backup Careful analysis is required before each project to ensure it lowers costs, taking into account ALL the impacts of the project and ALL the alternatives 3 The Lantau Group Should Network A connect to Network B? ? Network A 4 The Lantau Group Network B Should Network A connect to Network B? Size of each network? Marginal fuel of each network? Annual growth rate of each network? ? Network A Network B Only incremental benefits count… changing prices or moving costs from one network to the other do not! 5 The Lantau Group The benefits of an interconnection generally fall into three areas: 100 Ancillary Services 80 60 Capacity 40 20 0 6 The Lantau Group Energy The benefits of an interconnection generally fall into three areas: 100 Ancillary Services 80 60 40 20 0 7 The Lantau Group Capacity Operational benefits due to sharing of system reserves and standby capacity; diversity of load profiles Capacity savings where lumpy new build capital cost can be deferred due to sharing of resources Energy Incremental energy savings where lower cost fuels can be imported over the interconnector or where diversity of load profiles means plants can run more efficiently to meet the load shape Energy benefits: Transmission brings remote low cost generation sources to market • Some types of fuel are difficult to move (e.g. hydro) • Transmission is a benefit when: Full cost of generation Full cost of transmission Full cost of alternative generation • In all cases, it is important to take into account all the costs – including environmental costs and benefits; social costs (of displacement of people, for example) and the opportunity costs of the alternative fuels (that is, what better use might there be for scarce gas resources, for example) 8 The Lantau Group Example: Bakun Transmission Project • Bakun is a 2400MW hydro project in Sarawak, Malaysia • At the time of construction and commissioning, the output of the power station was larger than the total demand in Sarawak and the plan was to export much of the power to Peninsular Malaysia via a 300km HVDC transmission line • Financial analysis of the project indicated that the cost of hydro power plus transmission costs would be competitive in the Peninsular Malaysia grid, which is powered mainly by coal and gas • This transmission project has not occurred, mainly due to political and geopolitical issues and now Bakun is part of the Sarawak Corridor of Renewable Energy (SCORE) which is attracting industries with high energy demand to Sarawak. Transmission projects can bring low cost power sources to market but they are rarely without implementation hurdles 9 The Lantau Group Cost savings due to economies of scale in conventional power stations ($/MWh) Economies of scale are not infinite 10 The Lantau Group • As technological improvements mean the efficiency of smaller power stations increases, the benefits of having a small number of large power stations far from the load decreases Falling generation costs from small power stations • As the costs of smaller power stations such as renewables decrease, the benefits of economies of scale in generation decrease • As the distances involved in moving power from the large power stations increase, the benefits of transmission decrease Benefits of diversity also vary with the technology and geography Drivers of lower diversity benefits Drivers of higher diversity benefits • Bigger electrical systems • More use of intermittent generation • Larger distance from load • Cost of large power stations decreases • Cheaper standby generation costs • Significant low cost resources far from load that cannot be moved (e.g. hydro) • Cheaper fast-start flexible generation • Cheaper alternative options to move fuel (e.g. rail, shipping) The Lantau Group $6.00 $5.00 12 $3.00 $2.00 $0.00 The Lantau Group 1998-51 1999-8 1999-17 1999-26 1999-35 1999-44 2000-1 2000-10 2000-19 2000-28 2000-37 2000-46 2001-2 2001-11 2001-20 2001-29 2001-38 2001-47 2002-4 2002-13 2002-22 2002-31 2002-40 2002-49 2003-6 2003-15 2003-24 2003-33 2003-42 2003-51 2004-8 2004-17 2004-26 Total Ancillary Service Costs ($/MWh) Ancillary Service Benefits: Example Queensland – NSW Interconnector Pre QNI, the average cost was 1.55 $/MWh Commissioning of Queensland to NSW Interconnector $4.00 Post QNI the average cost was 0.56 $/MWh $1.00 Are transmission wires the only form of energy transport? • Obviously not: Transmission also competes with other forms of transportation • Do you move the electricity to the market, or put the power station closer to the load and move the fuel? • Most conventional fuels can move: – Coal can move on trucks (expensive); by rail (moderate) or by ship (relatively cheaply) – Gas can move by pipeline or by ship as LNG – Oil moves by truck or ship • Transmission therefore competes with these other forms of moving fuel but has a different cost structure – Fixed vs variable costs – Baseload vs peak operation 13 The Lantau Group Example from Philippines: Transmission wires vs gas pipelines • Part of the work undertaken for the Gas Master Plan in the Philippines was to assess where an LNG terminal should be located – the key question being: Is it better to move power via transmission or to move gas by pipeline? The analysis in this case was specifically for 3000MW of power station running at 50% load factor with a 12% rate of return. Other assumptions on power required may give different answers 14 The Lantau Group Example from China: Transmission wires vs coal by rail Cost of Transmitting Coal-fired Electricity vs. Transporting Coal from Datong to Shanghai 300 Cost of Electriicty (RMB/MWh) 280 260 240 220 200 180 160 300 400 500 600 700 Coal Prices at Datong Source: TLG Analysis Transmitting Electricity Transporting Coal The cost advantage of transmitting electricity declines as coal prices increase. At recent price levels (around RMB550/tonne at Datong), the economics of transporting coal and transmitting electricity are quite similar 15 The Lantau Group And input assumptions are not static either Figure 24 Natural Gas Pipeline Costs ($1000 per inch-mile) This is taken from an infrastructure report by IFC International in 2010 $110 Historical Projection $100 $90 $1000s per Inch-Mile $80 $70 $60 The figures used to underpin the Philippine analysis in 2013 were higher than the peak seen in this graph. Misc. Labor Material R.O.W. $50 $40 $30 $20 $10 29 20 26 20 23 20 20 20 17 20 14 20 11 20 08 20 05 20 02 20 99 19 96 19 19 93 $0 Average of large-diameter gas pipelines 30 to 36 inches FERC data compiled by Oil & Gas Journal 2010 to 2030 projections by cost component is based on trends from 1993 to 2004. Micellaneus includes includes surveys, engineering, supervision, interest, administration, overheads, contingencies, allowances for funds used during construction (AFUDC) and FERC fees. 16 The Lantau Group If we had used the projected 2013 numbers, gas pipelines would have been cheaper than wires for all distances Implications for Myanmar • Choosing which fuel to burn and which fuel to export is an optimisation problem and depends on the prices achieved for the export as well as the costs of burning an alternative in-country • What is important are the marginal costs – that is, the costs associated with a small change in output • What are the appropriate marginal costs of Myanmar’s indigenous fuels? – Marginal cost of hydro is the cost of new infrastructure plus the costs of any environmental and social remedies required – Marginal cost of coal would include the costs of any new coal transportationl infrastructure as well as the pure mining costs – If gas delivered to Thailand (or China) by pipeline or via LNG yields a particular net-back then, then this value becomes its marginal opportunity cost. • Given these opportunity costs, what are the economics of delivering baseload (and mid-merit) power to Yangon? 17 – The alternatives would include hydro by wire, coal by wire, renewables by wire, local gas transport by pipeline, LNG imports, and coal imports The Lantau Group Inter-regional transmission projects include commercial as well as economic constraints • Transmission lines linking different regions with different Governments, economics and policies face a number of difficulties – Who decides if the project is economic? – How are the benefits shared between the regions, particularly if one region is primarily an importer and the other an exporter? – How do the commercial arrangements work? • In addition to economics, politics is often also important: – Desire for self sufficiency – Concerns about security of supply – Issues about sharing resources at times of shortage (“we have no power and you sold OUR power to someone else?” – Limiting generation market power – Impacts on the value of other assets/electricity sales or exports – Trying to maximise the value of excess capacity 18 The Lantau Group Example: Australia’s Regulatory Investment Test (1) • Australia is a good example of interregional transmission issues as it removes the international context but leaves the fundamentals • A number of new transmission projects have been built in the Australian NEM since market start. These include: – Queensland to NSW Interconnector (QNI) – Victoria to Tasmania DC link (Basslink) – South Australia to NSW interconnector (originally SANI, later Murraylink) • The Australian NEM has a framework for reviewing inter-regional transmission linkages which identifies the net economic benefits of the project, compared with other alternatives (such as generation projects in the region short of power) 19 The Lantau Group Australia’s Regulatory Investment Test (2) • The regulatory investment test is intended to provide an ex-ante test of proposed investment projects • For major projects (>AU$5 million), transmission licensees have to provide costbenefit analysis of the project • Concerns have been raised over the effectiveness of the test – the regulator oversees the process (consultations etc.) but does not approve the conclusions of the test – the transmission licensee has a major data advantage over other stakeholders who may wish to challenge the test – the costs used in the test are not those used in the Regulated Asset Base (RAB) • Alternatives now being adopted in Australia are – central planning of transmission investments by AEMO (as in Victoria) – amendments to the NEM Rules, allowing ex-post review and disallowance of investments from the RAB The Lantau Group Australia has also tried other methods of incentivising transmission investment • If an interconnector links a region of low priced generation with a region that needs power – surely the market should be able to compensate for the cost of the line? • This was the theory underpinning “Market Interconnectors” at the start of the NEM – A market interconnector earns money by earning the difference between the energy prices in the two regions that it connects – A regulated interconnector earns money from all consumers, through transmission use of system (TUOS) charges that are set at a regulated rate • In order to arbitrage regional differences, Market Interconnectors needed to be DC rather than AC links. This made them more expensive and thus at a disadvantage to traditional AC lines • Market interconnectors built by separate companies (as happened) did not have the benefit of being able to reinforce other apects of the grid to assist the economics • Although two were built both have now converted into “Regulated Interconnectors” 21 The Lantau Group International Transmission projects add another layer of complexity again • Where transmission lines link different countries, not only do all the inter-regional issues come into play, but national issues, culture, history and geopolitics also have a starring role • The Memorandum on the ASEAN Grid includes little on economics, but rather stresses: – cooperation among the Member Countries in developing energy resources to strengthen the economic resilience of the individual Member Countries – exchange of experience and information on planning, construction and operation of interconnected systems, the acquisition of appropriate technology and methodology on all aspects of an interconnected system, and joint studies on transfer of electrical energy through interconnection – harmonisation of technical specifications, taxation and tariffs – harmonisation of regulatory and legal frameworks – Introduce institutional and contractual arrangements for power trade 22 The Lantau Group The ASEAN Grid – pipedream or pipeline….or LNG tanker? • The ASEAN grid is rolled out at conferences and discussed at various high level meetings … the map has not changed for years and little emphasis is put on any good economic analysis of the benefits • Since the Memorandum was signed, many changes have taken place in Asia – not least of which is the lowering cost of LNG terminals (via FSRU technology) and the increased number of countries installing them • This raises a key question not answered by any of the ASEAN grid studies: – Should Asia move power by transmission line or gas pipeline or LNG tanker? • LNG is not without issues but the commercial barriers may be lower as each component of the chain can operate with a degree of independence – Less need for harmonisation of technical transmission issues – Lower chain of interdependent project finance structures 23 The Lantau Group Almost none of these proposed LNG regas projects were around at the start of the ASEAN grid project Liquefaction Regasification Operating Constructing Planned Possible Bataan Rayong Batangas Thi Vai Son My Rotan Arun Brunei Kanowit Lumut Melaka Satu/Dua/Tiga Pengerang Singapore Bontang Tangguh Lampung DonggiSenoro Semarang Nusantara Source: TLG; www.globalnginfo.com 24 The Lantau Group 2014 Data Abadi But if both regions (countries) have the same marginal fuel cost, how can transmission linkages make economic sense? • The cost of LNG terminals and the cost of the LNG imported via the terminals is much the same across most jurisdictions • Which means transmission to arbitrage marginal gas value cannot be economic • If transmission is between gas producing and gas consuming areas, then on the face of it there may be value… BUT!... In this case, often the better solution is to import coal instead and so the marginal gas moves to a mid-merit role – Transmission of mid-merit electricity would operate at a low capacity factor, substantially decreasing the value of the transmission option • This then changes the transmission economics Transmission economics cannot be understood without a very clear understanding of the alternatives and the impact of alternatives on the dynamics of the whole system 25 The Lantau Group Extracted from a presentation by EGAT in 2013 26 The Lantau Group How realistic is this really? Let’s focus on a small part of the map… • This shows Sabah connecting to Palawan in the Philippines. • Palawans’ population is less than 1 percent of the total Philippines population • Palawan had a peak electricity demand of 39.7MW in 2013, expected to rise to 75MW by 2028 (yes – MEGAWATTS) • Palawan is not connected to the rest of the Philippine grid • The distance between the load centres in Sabah and Palawan is some 500km, most of it undersea Only sensible economic connections are likely to actually get built 27 The Lantau Group A good, economic framework for the ASEAN Transmission would: Have an over-arching policy which: • Encourages innovation • Fosters an environment where decisions are open, transparent, based on sound analysis and consultation (without being bogged down in bureaucracy) Has a regulatory environment which: • Rewards good decisions and allows the impacts of poor decisions to flow through to the decision maker (and not the customer) • Does not penalize good decisions that happen to have bad outcomes (luck is a factor) Is implemented by companies and government departments that • Question each decision • Review each investment for efficiency, appropriateness, size and timing 28 The Lantau Group Economics is one constraint on transmission; the other is TIME • Building transmission within a country, under the control of a well-financed utility with an adequately skilled workforce and a clear regulatory structure is slow • Building transmission where any of these applies is very slow: – Finance is constrained or expensive – The approvals regime is unclear – Few well trained linesmen – Land acquisition is problematic • Myanmar has a clear and pressing need for short term power to the people • It also has a long term need for sensible, prudent and economic development of its electricity infrastructure A key issue therefore is how to accommodate the short term needs while not making uneconomic long term decisions 29 The Lantau Group As with other countries, the issues are far larger than just transmission • Using domestic gas to fuel power stations may well be the highest short term value of gas • In the longer term, however, exporting gas to neighbouring countries and building larger coal fired power stations (plus transmission) may be a more economic option • This obviously risks stranding gas power stations in the future - or using short term (mobile) units in the short term while building an economic longer term strategy around cheaper fuel sources • Similarly, in the short term, mini-grids; distributed generation and renewables may be the fastest way to get power to people outside of the existing grid • Again, the build-out of these solutions needs to take into account the longer term expansion of the network, to the extent that this is economic 30 The Lantau Group In summary • Good outcomes generally result from good decisions • Good decisions: – Require a clear framework – Benefit from good data and information inputs – Are a product of good analysis – Should require the investor to take some of the risk of the outcomes – If the investor does not take any risk, should have a very well run and robust regulatory process to test the benefit of the investment before customers pay for it • The best advice for the development of transmission in ASEAN and in Myanmar is to put in place a policy and regulatory framework for good decision making • And allow the decisions made under that framework to guide development 31 The Lantau Group Contact Us For more information please contact us: By email Electricity Gas General Capabilities Inquiries [email protected] Networks Insight Rigour Direct Communications [email protected] [email protected] [email protected] [email protected] By phone Value +852 2521 5501 (office) By mail 4602-4606 Tower 1, Metroplaza 223 Hing Fong Road, Kwai Fong, Hong Kong Online www.lantaugroup.com 32 The Lantau Group