Part 2: About the solar installation

2.1
In this Part, we describe:

• Alpine Energy’s interest in solar energy;
• the arrangement with the employee;
• what Alpine Energy told the Board about the solar energy trial;
• the agreement between Alpine Energy and the employee;
• the installation process;
• the solar energy trial; and
• how Alpine Energy calculated the sale price of the solar equipment.

Alpine Energy’s interest in solar energy

2.2
We were told that, in July 2012, Alpine Energy was in the early stages of establishing a photovoltaic trial at a substation that it owned in Tekapo. Photovoltaic energy involves the use of photovoltaic (solar) cells to convert sunlight directly into electricity.

2.3
Alpine Energy said the specific purposes of the trial were to test the equipment in a range of weather conditions and to enable the company to gather data to be used in electricity network modelling. The trial’s broader purpose was to help Alpine Energy understand how solar energy affected network load flow forecasts, power quality, and future revenue.

2.4
The trial involved installing solar panels and an inverter¹ at the Tekapo substation and was intended to last for one year.

2.5
Alpine Energy’s Chief Executive told us that the Tekapo trial did not include a formal proposal to the Board. This was because it was a low-cost trial that was covered under existing budgets and within the Chief Executive’s delegated authority. He said Alpine Energy did not have an explicit strategy in relation to renewable energy. However, the Board considered it had an obligation, as an energy company, to explore new technologies, both in their own right and in order to understand their effect on existing technologies.

The arrangement with the employee

2.6
At about the same time the Tekapo trial was being planned, Alpine Energy appointed the employee as a senior executive.

2.7
The Chief Executive told us he became aware that the employee was building a new house and thought this presented an opportunity for Alpine Energy to extend the solar trial at the Tekapo substation by installing similar technology on a residential property. The Chief Executive told us there was little “science” behind this idea and that it was really more a case of an opportunity presenting itself that he thought might benefit the company.

2.8
We asked whether Alpine Energy had considered other ways of carrying out a trial on a residential property. The Chief Executive told us he would have considered another employee’s house, if there had been one, but that he was not aware of any other employees being in the process of constructing a new house at that time.

2.9
The Chief Executive also said he believed that there would be advantages to installing the solar equipment on an employee’s house instead of a third party’s property, because:

• it might be easier for Alpine Energy to access the solar equipment for monitoring purposes; and
• there were likely to be fewer issues to deal with if Alpine Energy needed to repair damage to, or reinstate, the property once the trial was over.

2.10
The Chief Executive approached the employee about installing the solar equipment on the employee’s house. The employee told us that they were open to the idea, provided that Alpine Energy paid for the installation and operating costs of the trial. The employee also told us that there was a covenant applying to the location where the house was being built that prohibited reflective items being placed on the roof. Because of this, solar tiles would need to be used instead of the type of solar panels being used for the Tekapo substation trial.

2.11
Discussions took place between the Chief Executive, the employee, NETcon International Limited,² and a private supplier. We explain their roles in paragraph 2.21. These discussions proceeded to a point where a draft scope document was prepared and an in-principle decision was made to carry out another solar trial (that is, in addition to the Tekapo substation trial) by installing solar equipment on a residential house.

What Alpine Energy told the Board about the solar energy trial

2.12
In May 2013, the Chief Executive presented a memo to the Board to inform it of this decision. The Board was told that:

• the trial was expected to last three years and to cost about $37,000;
• the trial would involve installing solar tiles, a battery bank, an electric vehicle charging station, and an in-house display unit on a new private residential dwelling owned by an Alpine Energy employee; and
• at the end of the three-year trial the solar equipment would be sold to the Alpine Energy employee.

2.13
The memo explained that, because the costs for the trial would be covered by existing budgets, Board approval was not needed. However, the matter was being brought to the Board’s attention due to the relationship between Alpine Energy and the employee.

2.14
The employee was present at the meeting. The minutes of the meeting record that the employee declared a conflict of interest and took no part in the discussions. However, we understand that the employee remained in the meeting for a valid but unconnected reason.

2.15
In his memo to the Board, the Chief Executive explained the technical factors the residential trial was expected to look at:

• Using integrated battery storage to minimise the export of excess power into the grid and deferral of solar energy to meet evening customer peak demand periods.
• Considering the impact of using stored solar energy on a typical pattern of residential electricity use.
• Considering whether the battery system could be called on to feed electricity into the electricity network to help manage the peaks and troughs in demand (for network load management purposes).
• Assessing the potential impact of solar inverters on network power quality, including the impact on distortions in the frequency of current and voltage (the “harmonic” impact) caused by devices such as battery chargers that create abrupt short electricity pulses.
• Assessing the potential for clusters of houses with solar panels in low-load conditions to reverse network flows, impact on voltage stability, and exceed the distribution system capacity. That is, assessing what effect there is on the network when power is pushed back into the grid (when the electrons flow in the opposite direction).
• Ensuring that grid connected/solar battery systems have appropriate protection to prevent “back feed” into the network during a system fault.
• Assessing whether smart meters and in-home displays modify customer behaviour.
• Considering future integration of electric vehicle charging in the home and how this might work with a solar/battery system.
• Assessing the integration of solar power as part of a new house build (as opposed to retrofitting).

2.16
The memo also outlined the terms of the proposed agreement between Alpine Energy and the employee (see paragraphs 2.18 and 2.19). The memo concluded that, unless otherwise instructed, management intended to begin the trial in 2013/14.

2.17
The minutes of the meeting record that the Board noted the memo. No objections were recorded.

The agreement between Alpine Energy and the employee

2.18
The Chief Executive told us that there was no formal agreement between Alpine Energy and the employee for the trial. He said this was because he did not consider a signed agreement to be necessary for a $37,000 project. Instead, the terms of the agreement were set out in an exchange of emails between the Chief Executive and the employee.

2.19
The terms of the agreement (as set out in the emails) were that:

• the solar equipment would be incorporated into the new house at Alpine Energy’s cost;
• Alpine Energy would have the right to access the solar equipment during normal working hours after giving reasonable notice;
• Alpine Energy would have the right to read, interrogate, and analyse the consumption and load storage data from the solar equipment. This would be done predominately by means of remote reads, real time, anytime;³
• Alpine Energy would be responsible for maintaining the solar equipment;
• Alpine Energy would be responsible for arranging insurance cover for the
  solar equipment;
• either party had the right to seek to remove permanently the solar equipment on reasonable notice. Alpine Energy would then be responsible for making right the property;
• Alpine Energy would run the trial for three years;
• Alpine Energy had the right to connect an electric vehicle to the solar storage (at its cost); and
• at the end of the trial period, Alpine Energy would sell the solar equipment to the employee at half the depreciated book value or the price for a modern equivalent system, whichever was lesser.

2.20
We were told by Alpine Energy that, at the time of the agreement, the intention was that the final price would be half of the book value or half of the price of a modern equivalent system, whichever was less.

The installation process

2.21
The installation was project managed for Alpine Energy by NETcon International Limited. A private supplier designed the installation and supplied the parts.

2.22
The solar equipment was installed in stages as the house was built. We understand that the installation was expected to have been completed and the equipment operational by April 2014. This is based on the information provided to the electricity provider for connection purposes.

2.23
However, installing and completing the system was significantly delayed. This was because of several factors, including:

• required changes to the architect’s designs for the house and an amendment to the building consent application, as a result of including the solar tiles;
• delays in the overall building process;
• delays because of a decision to change the type of batteries that were installed and the associated changes required, in relation to how and where the battery unit would be housed at the property; and
• switching to an integrated battery and inverter unit due to software compatibility problems between the original independent units.

2.24
Based on the information that we have been provided with, the installation was finally completed and the solar equipment became operational by the end of May 2015. By operational, we mean that the solar tiles on the roof and the associated wiring were capable of generating energy that the household could use. This corresponds with when Alpine Energy capitalised the associated costs and started to depreciate the assets.

The solar energy trial

2.25
The Chief Executive told us that the trial was largely unsuccessful. He explained that this was because, at the time of the trial, the technology was very new and there were significant problems with it malfunctioning.

2.26
Examples of the operating problems we were told about included:

• the battery unit not working, such that any additional power generated was not stored for later use;
• a clicking noise when the electric hob was used at the same time as the electric vehicle was charging; and
• the battery charging from the grid at night (that is, when there was no solar power, rather than either charging during daylight hours or drawing from stored power).

2.27
The Chief Executive told us that Alpine Energy incurred costs in attempting to repair the technology, and that no useful data was obtained from the project. He said he initially decided to continue the trial because of the potential for new technology to emerge that could readily replace the current technology and fix the performance problems. However, ultimately the costs of repairing the monitoring technology outweighed the probable benefit and, given the escalation of costs, he decided to put the project on hold, rather than terminate it.

2.28
Both the employee and the Chief Executive told us that they considered invoking the provision in their agreement that allowed either party to seek to remove the equipment on reasonable notice. This would have triggered an obligation on the part of Alpine Energy to make good the property.

2.29
The Chief Executive told us that, although he considered this option, he elected not to pursue it. This is because he continued to believe an opportunity might arise in the future to change or update the equipment to get the data that Alpine Energy had wanted.

2.30
The Chief Executive said that, in putting the project on hold, the intention at the time was to continue to research solar technology but to do it using the next generation of solar panel hardware. He said this work has not occurred because research papers from overseas provide more meaningful data at no cost to
Alpine Energy.

2.31
Alpine Energy’s research on solar energy and battery storage has continued through NETCon International Limited (one of the companies in its group, now known as Infratec). Infratec designs, supplies, and installs commercial scale solar plants and battery storage systems in New Zealand, the Pacific, and Southeast Asia.

Ending the trial

2.32
In August 2017, the employee emailed the Chief Executive to ask about purchasing the solar equipment. In that email, the employee asked the Chief Executive to come back with a proposal based on the following factors:

• The initial estimated cost of the installation was about $10,000.
• The cost was to be depreciated over four years.
• It was intended that the employee would purchase the solar equipment from Alpine Energy after the third year.
• The actual cost was $51,871, which was being depreciated over five years from 30 June 2015.
• The system was not performing in the way they initially thought it would and was different to the one that was originally installed.

2.33
It is not clear where the employee got the figure of $10,000 for the initial estimated cost. The original estimated cost of the trial, according to the memo presented to the Board, was $37,000. However, we found reference in the documents we were given to an earlier estimate for an alternative system for $10,000. This alternative system did not include batteries.

2.34
It is also not clear where the reference to depreciating the solar equipment over four years comes from. The agreement between the employee and Alpine Energy set out two values that would be used for determining the price at which the employee would purchase the solar equipment at the end of the three-year trial period. However, the agreement does not specify a depreciation rate. The assets were depreciated over five years in Alpine Energy’s financial system.

2.35
In any event, it appears the employee’s query about buying the solar equipment did not come to anything. We understand this was because at that point, Alpine Energy believed there might still be a possibility of getting the technology to work and therefore collect useful data from it. The solar equipment remained on the employee’s house, with the trial still running (although no data was collected), for another year.

2.36
In August 2018, the employee announced that they would be leaving Alpine Energy and that their final day of work would be in March 2019. In both September 2018 and November 2018, the employee again raised the matter of transferring ownership of the installation. In correspondence, the employee refers to a previously agreed price of $3,000, although the employee was uncertain about whether that price was inclusive or exclusive of goods and services tax (GST).

2.37
In December 2018, the employee purchased the solar equipment from Alpine Energy for $3,000 excluding GST. Payment was made when the sale price was deducted from the employee’s pay in January 2019.

Costs of the trial

Capitalised costs

2.38
Based on the information we have seen, the total capital cost of the installation was $51,871.58. The total included the elements shown in Figure 1.

Figure 1
Elements of the capital cost of the installation

Note: The costs of the electric vehicle charging unit ($500 excluding GST) have not been included in the total amount that Alpine Energy capitalised.

2.39
The original estimated cost of the installation, as communicated to the Board, was $37,000. This was based on early quotes received at the initial discussion stages. The cost overrun appears largely because of the subsequent decision to change the type of battery used in the installation.

2.40
Our understanding is that any delay and/or additional cost directly attributable to the solar installation and decisions made by Alpine Energy were added to the overall cost of the solar equipment. For example, Alpine Energy paid the fee needed to amend the building consent application.

2.41
Conversely, where the relationship between any delay or cost increase was less directly attributable to the solar installation, there might have been other additional costs that were not covered by Alpine Energy. For example, the employee told us that they did not seek to recover costs associated with having to remain in rented accommodation for longer than originally anticipated as a result of delays caused by the installation of the solar equipment.

Operating and maintenance costs

2.42
Under the terms of its agreement with the employee, Alpine Energy was responsible for the solar installation’s operational costs.

2.43
These do not appear to have been separately recorded and in some instances might not have been separately identifiable. For example, insurance for the solar installation appears to have been covered under Alpine Energy’s overarching policy and, therefore, there was no specific or additional premium that related to the solar installation.

2.44
We understand, however, that the actual ongoing operating and maintenance costs associated with the installation were minimal.

How the sale price of the solar equipment was calculated

2.45
In the original agreement between Alpine Energy and the employee, Alpine Energy agreed to sell the solar equipment to the employee at the end of the three-year trial period for “half the depreciated book value or the price for modern equivalent – whichever is lesser”.

2.46
We were told by Alpine Energy that, the intention was that the final price would be half of the book value or half of the price of a modern equivalent system, whichever was less.

2.47
In the end, this was not the formula used to calculate the sale price, which we understand was agreed informally through verbal discussions and email messages.

2.48
We were told that the actual sale price of the solar equipment was the mid-point between “the estimated depreciated value of the panels” and “the cost of a modern equivalent.”

2.49
The Chief Executive told us that determining the sale price was “not an exact science” but was based on consideration of the following:

• The estimated depreciated value was based on the estimated cost of installing the solar equipment at the time the agreement was entered into (that is $37,000), and a useful life of five years (from the estimated start date of July 2013), resulting in an estimated depreciated value of $0.
• To work out the cost of a modern equivalent system, Alpine Energy used an estimate for a small residential system obtained in May 2018. That price was between $3,500 and $5,000. The Chief Executive told us it was assumed that the cost of a modern equivalent system would not include batteries because, if Alpine Energy were to run a similar trial again, it would not include batteries.
• The Chief Executive said the sale price for the solar equipment also followed a “rough rule of thumb” in the industry at the time relating to the cost per kilowatt of generating power. However, we have not been provided with any independent evidence or documentation to support this aspect of the calculation.

2.50
We were also told that, if no agreement on price could be reached, Alpine Energy would be required to remove the equipment and “make good” the employee’s house.

1: An inverter is equipment that converts the type of current produced by the solar panels (direct) to the type used in the residential electricity system (alternating).

2: NETcon International Limited (now known as Infratec) is a wholly owned subsidiary of NETcon Limited, which is in turn wholly owned by Alpine Energy.

3: For example, using a smart meter to enable real-time usage data to be accessed remotely through web portals and/or mobile phone applications.