Part 3: Building the grid's capacity

Transpower New Zealand Limited: Managing risks to transmission assets.

In this Part, we look at how Transpower is managing risk while investing in the grid's capacity. We discuss and evaluate:

Our conclusions

Following the glide path, the grid became increasingly stressed and less reliable. Many grid assets are nearing the end of their useful life. Also, as the country's population and economy grow, these ageing assets must deliver more electricity. Therefore, the grid is becoming more stressed and less reliable.

We expected that Transpower would have a unified long-term strategy for future development and investment in the grid. Further, we would have expected that this strategy would have been developed in close consultation with Transpower's board. Given the problems identified with the age of the grid assets, the declining performance of these assets, and the capacity constraints with the grid, we expected that the strategy would have been a priority for the board and managers.

In 2003 and 2004, Transpower began developing a long-term strategy and published two discussion documents. Until 2010, the focus of these documents was on the first stage of development of the grid and the specific projects Transpower was putting in place. In early 2011, Transpower published a unified long-term strategy – Transmission Tomorrow.

Transpower staff told us that the 2004 discussion paper and the Annual Planning Report (which has been published each year since 2006) were used as a guide in place of a unified long-term strategy. However, because neither of these documents provides the necessary detail and direction that we would expect from a long-term strategy, we are concerned about the late developing of Transmission Tomorrow.

The 2003 and 2004 discussion documents focused on building capacity. This meant the work that Transpower has done on grid reliability since then has been tactical rather than strategic. It has not been informed by a unified long-term strategy that brings capacity together with reliability.

Transpower has begun a programme of major projects to increase the grid's capacity and resilience. Since the end of 2007, more than $2.7 billion of investment spending has been approved, with further investment expected during the next decade. Although we consider that the project approval process ensures that each of these projects is cost-effective and worthwhile in its own right, we cannot be sure that Transpower has the most cost-effective investment strategy until it completes implementing:

  • an effective integrated system for managing its assets;
  • a comprehensive risk-based approach to managing its assets; and
  • long-term targets for what Transpower considers to be an appropriate level of risk for the network and the associated network performance quality measures.

We note that some projects under way were identified in 2003/04 and were obvious priorities.

We noted that the Commerce Commission intends to monitor and assess Transpower's performance. Every year, Transpower will be required to report its progress improving performance and in implementing its main business improvement initiatives. This requirement to report and the Commerce Commission's monitoring role make us more confident that the work will be done in a timely way.

Developing a long-term strategy

In 2003, Transpower began developing a strategy. As a first step, in 2003 and 2004, Transpower published discussion documents. These discussion documents were not long term or unified in addressing capacity and reliability.

In late 2008, Transpower began a project – Transmission 2040 – to review its strategy for developing the grid. At its August 2008 meeting, Transpower's board approved up to $3.9 million for this project.

The board was updated on progress with the long-term strategy throughout its development. By September 2009, the following three main themes had been identified:

  • getting the right grid;
  • managing technological change; and
  • keeping future options open.

In November 2010, the strategy, now renamed Transmission Tomorrow, was presented to the board, which was pleased with the framework and tenor of the document.

In December 2010, the board was told that external reviewers had reviewed the strategy. A launch was planned for February 2011.

At its February 2011 strategy day, Transmission Tomorrow was presented to the board. The board noted and discussed the need for a framework to measure how Transpower performed against the goals by locking them into Transpower's key performance indicators.

We note that, although the board approved a budget for the strategy in August 2008, the strategy was not published until February 2011. We are concerned that Transpower's board did not require more timely developing of Transmission Tomorrow.

Transmission Tomorrow

The Transmission Tomorrow strategy document and a supporting document, Transmission Tomorrow – the enduring grid, were based on an analysis of the development requirements of the grid under a range of scenarios. The analysis established that the grid backbone would continue to be required under all scenarios, although the timing of the required upgrades was less certain. Transpower's strategy for developing the grid is now focused on increasing the use of the existing grid using, where appropriate, new transmission technologies.

Transmission Tomorrow describes Transpower's three main strategies (to improve how the grid performs, improve system performance, and improve reliability and resilience) that it will use to supply the increasing services the grid must provide. It outlines the need for four platforms that cover the network, asset information, people, and the corridors along which transmission lines and undersea cables pass.

Transmission Tomorrow includes committed initiatives to be completed within the next five years, potential outcomes within the next 10 to 20 years, and possible outcomes within the next 20 and more years.

How Transpower identified what major investment was needed

Early discussion papers

Transpower staff told us that the strategy set out in the 2004 discussion paper and the annual planning reports formed the strategy that Transpower adopted up to the publication of Transmission Tomorrow in February 2011. This appears to be the case in that the discussion papers identified the need for the main projects that were approved and are under way.

Annual planning reports

Since 2006, annual planning reports have been used to identify grid investment projects.

The annual planning report's role is to signal proposed and possible transmission investments within a 10-year horizon, so that market participants have more information about Transpower's plans.

The annual planning report is based on a full assessment of forecast transmission issues, and represents Transpower's view of how the grid can be managed during the next 10 years to provide reliability of supply and a competitive electricity market.

The annual planning report includes:

  • the forecast of demand and generation at each grid exit point and grid injection point during the next 10 years;
  • information about the existing transmission network;
  • system constraints and issues anticipated during the next 10 years;
  • a summary of potential transmission investment to alleviate the anticipated constraints on the system; and
  • information about other issues affecting transmission investment.

The report lists projects that have started, projects that have been committed to, and possible projects. However, as the report is not intended to be a risk-profiling or prioritising tool, it does not:

  • prioritise the work that needs to be done;
  • identify interdependencies between projects; and
  • classify projects by "risk" (although it does refer to "need").

Transpower's investment approval process

The investment approval process is the decision-making framework for preparing investment proposals. The framework has five stages, which involve:

  • identifying the need through the annual planning report process;
  • considering options to address the need – an initial options list is refined to a set of credible options, using specific criteria (cost, feasibility, and Good Electricity Industry Practice);10
  • assessing the costs and benefits of each option and identifying a shortlist of options – the decision rule for the preferred option is based on the maximum net benefits or the least net cost (depending on the investment purpose);11
  • preparing a proposal to confirm the preferred investment option; and
  • approved investments entering a detailed design (equipment and placement) stage.

Affected communities and stakeholders are consulted throughout the process.

The investment proposal is then presented to the Commerce for approval as part of a grid upgrade plan. A grid upgrade plan will usually cover several projects.

Transpower's investment programme

Transpower's tools to increase grid capacity mainly involve squeezing capacity out of existing assets,12 replacing the existing aged assets with new and larger equipment, and building new infrastructure such as lines and substations.

Capital spending has increased significantly in the last four years. Between 1995/96 and 2004/05, capital spending averaged about $100 million a year. Figure 3 shows the increased spending from 2006/07.

Figure 3
Transpower's capital spending from 2006/07 to 2010/11

Financial year ended 30 June $million
2007 284
2008 327
2009 331
2010 571
2011 733

Source: Transpower's annual reports.

During the next three years, Transpower's capital spending is expected to average about $790 million a year, with a peak of $844 million in 2012/13.

Since the end of 2007, more than $2.7 billion of spending has been approved. Further investment is expected during the next decade. The Electricity Commission approved four grid upgrade plans, covering 20 grid upgrade projects (in 2005, 2007, 2008, and 2009). Appendix 3 includes a list of the projects that the Electricity Commission approved as part of the plans to upgrade the grid.

Reliability needs have driven 15 of these projects;13 five were economic investments.14

How Transpower manages projects

We consider that the project approval process ensures that each project that is approved is cost-effective and worthwhile in its own right. We consider that the project governance structures and the processes for managing risks to projects are enough to identify, analyse, treat, and monitor project risks.

Skills, guidance, and tools

Because there was little investment during the glide path years, Transpower has not managed large projects. Therefore, its skill base in this area was lacking. Transpower recognised this and recruited qualified project managers and staff to improve its ability to carry out the large investment projects required.

Transpower's project management manual includes guidance on managing project risk. A risk register to record the intrinsic risk, controls, residual risks, and risk treatments is kept for each project. In addition, the Corporate Risk Register records risks to the timeliness and cost of projects, and any particular issues (such as land access).

The manual also deals with managing and reporting issues. (Issues are events that have occurred, while risks are events that might occur.) Issues are logged and tracked in an issues register.

The manual has electronic links to more detailed policies, procedures, and guidelines. For example, the project risk management section has an electronic link to Transpower's risk management policy, insurance policy, and seismic policy.

An online information management tool and data repository – Microsoft Project Server – supports project and programme managers. This tool allows the user to store project and programme-related information, such as schedules, management plans, and registers, within a specific workspace for the project or programme.

Project governance

The governance structure depends on the size and complexity of the project or programme.

Transpower's project governance structure includes a project owner, a project manager, and a reviewer. The project owner is often supported by a project advisory team whose role is to:

  • be accountable for the project outcomes and ultimately hold the final decisionmaking authority;
  • provide direction to the project;
  • ensure that the correct resources are committed;
  • be an advocate for the project manager; and
  • balance the interests of the project with those of the main stakeholders.

We reviewed the Project Management Plan of the Pole 3 Project. This project involves building and installing converter equipment at Benmore (in the South Island) and Haywards (in the North Island) to increase the capacity of the HVDC inter-island link. The equipment will replace the 45-year-old Pole 1 equipment at both substations.

Transpower has put in place robust project, technical, and commercial governance to cover the Pole 3 Project's complexity.

The risk that Transpower might adopt an inadequate or excessive investment strategy

The major investment decisions taken so far have been obvious priorities.

However, we cannot be sure that Transpower has the most cost-effective investment strategy until it completes implementing:

  • an integrated system for managing assets that provides one consistent source of asset information so that Transpower can make efficient decisions about whole-of-life managing of assets;
  • a comprehensive, quantitative, risk-based approach to managing assets that allows for risk to be traded off against the costs of mitigating the risk – essential for prioritising investments; and
  • long-term targets for what it considers to be the appropriate level of risk at a network level, and the associated network performance and quality measures.

In its draft decision on Transpower's operating and minor capital expenditure for the 2012 to 2015 period, the Commerce Commission notes that:

Many of Transpower's asset management practices are lagging behind international current practice. Furthermore, Transpower does not appear to use a robust and quantifiable approach to measuring and prioritising expenditure based on an assessment of risk … Transpower's current outdated practices raise concerns about the robustness of Transpower's forecasts. The Commission is also concerned that the use of outdated practices may negatively affect the effectiveness of the actual investment undertaken by Transpower.

Without a risk-based approach to asset management (supported by appropriate tools and systems) and a longer term view of the acceptable level of risk and associated network performance (including quality measures) there is a possibility that:

  1. Transpower's actual investment projects will not target the right areas (i.e. as determined by a risk-based approach) and, therefore, will be suboptimal in terms of maximising the benefit delivered for a given level of expenditure; and
  2. the overall level of investment is greater or less than that required to maintain risk at acceptable levels of performance demanded by current and future users. This may also result in higher-than-optimal whole life costs.15

A key conclusion from the Commission's review is that it is critical that Transpower makes significant improvements in its asset management capability, in terms of both systems and implementation of a risk-based approach consistent with current international industry practice. This will help ensure that the level of investment being undertaken is both efficient and sustainable, and also delivers the levels of service required by users of the grid both now and in the future.16

The Commerce Commission intends to monitor and assess how Transpower performs. Every year, Transpower will be required to report its progress on quality performance and in implementing its main business improvement initiatives.

Recommendation 1
We recommend that the board of Transpower New Zealand Limited actively monitor Transpower's progress against Transmission Tomorrow and the prioritised work programme.

10: Good Electricity Industry Practice principles require an electricity grid owner to act in a reasonable and prudent manner when managing its network, consistent with other electricity grid owners under comparable conditions, taking into account the size and age of the network and other associated safety and environmental factors.

11: For core grid investments, the analysis needs to determine the option that meets the need at least market cost. For non-core grid reliability investments and economic investments, the analysis needs to determine the option that maximises net market benefits.

12: Capacity can be squeezed out of assets by: thermal upgrades (increasing the operating temperature of assets to allow more current to pass); reconductoring (replacing conductors with larger capacity conductors); duplexing (adding a conductor to each phase); or installing equipment that helps maintain voltage stability.

13: Reliability projects are grid enhancement projects (previously regulated by the Electricity Commission and now by the Commerce Commission) whose primary purpose is to reduce expected unserved energy (power not being transmitted on the grid).

14: Economic projects are grid enhancement projects (previously regulated by the Electricity Commission and now by the Commerce Commission) that are not aimed primarily at reducing expected unserved energy and that have market benefits that exceed market costs.

15: It is possible that the lack of a risk-based approach could result in over-investment. However, given the condition of the network and historical levels of investment, the Commerce Commission considers this highly unlikely in the medium term.

16: Commerce Commission (27 June 2011), Draft Decision: Minor Capital Expenditure and Operating Expenditure Allowances, and Quality Standards to apply to Transpower for the Remainder Period of Regulatory Control Period 1.

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