Fundamental review of entry charging principles

UNC Transmission Workstream - 6th August 2009

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Introduction

National Grid is launching a fundamental review of entry charging principles.

This is in response to growing industry concern about the increasing rate of the TO entry commodity charge.

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Background (1): Summary of Entry Experience

Early Experiences (1998 - 2002) Bidding behaviour for entry capacity auctions resulted in significant

over recovery

This may have been due to; northern constraints and competition for St Fergus capacity, and limited experience of entry auctions

This resulted in charging methodology proposals that looked at resolving over recovery and reducing entry capacity floor/reserve prices.

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Background (2): Summary of Entry Experience

Recent Experiences (2002 - Present) Over recent years, auctions have resulted in under recovery, other

than when a constraint became material in the Easington area.

This may be due to; Increased experience of auctions and lack of locational competition for

capacity Increased certainty of capacity availability associated with baselines Profiling of capacity across the year The clearing obligation and zero reserve prices

This has resulted in the introduction of the TO Commodity Charge and its increasing rate over the years

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Background (3): Shipper Concerns with the Prevailing Charging Structure

Shippers have an incentive to ‘wait and see’ due to entry capacity price discounts on day ahead (33%) and within day (100%) auctions.

Shortfall in recovery of revenues by National Grid through entry charges is picked up through the Commodity Charge paid by all shippers.

This means that short term capacity buyers are having their costs paid by shippers who have previously paid the longer term rate for capacity.

It could be argued that this creates: cross subsidies between shippers who buy long term rather than short term cross subsidies between shippers who buy firm rather than interruptible effectively creates firm capacity from interruptible if firm capacity remains unsold. potential undue discrimination for new entry points which have no access to zero

priced capacity as there are no short term auctions.

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Fundamental review required

All of the above would suggest it is time to make changes and a number of potential solutions have been proposed e.g:

Remove day ahead and on the day discounts

Introduce different commodity rates depending on the price paid for capacity

Reduce the relative price of long term capacity

However as we have seen, with the constraint at Easington, it is possible to quickly move from under to over recovery.

Therefore we need to take a measured but timely approach, otherwise we could simply lurch from under to over recovery

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Fundamental review – what does this mean?

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Initial Analysis 2008/09 (FY) – TO Entry Revenue

National Grid has started to analyse the existing and future potential usage / bookings at entry points:

TO Entry Revenue (£250m excluding Pensions and Metering) - Capacity vs. Commodity

74%

26%

Entry Capacity TO Commodity Charge

£184m

£66m

Draft information for discussion purposes only

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Initial Analysis 2009/10 (FY) – TO Entry Revenue (forecast)

Draft information for discussion purposes only

2009/10 TO Entry Revenue (£293.4m excluding Pensions and Metering) - Capacity vs. Commodity

39%

61%

Forecast TO Auction Revenue (£m) TO Commodity Charge Revenue (£m)

£114.5m£178.9m

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Initial Analysis 2008/09 (FY) – TO Revenue by ASEP

TO Entry Revenue (£250m excluding Pensions and Metering) - Capacity vs. Commodity

74%

26%

Entry Capacity TO Commodity Charge

£184m

£66m

Entry Capacity Revenue (£184m) by Terminal

10.07%

25.93%

56.53%

2.71%

1.07%

1.90%

1.24%

AVONMOUTH LNG

BACTON

BARROW

BURTON POINT ONSHORE

CHESHIRE STORAGE

DYNEVOR ARMS LNG

EASINGTON

GLENMAVIS LNG

HATFIELD MOORS ONSHORE

HATFIELD MOORS STORAGE

HOLEHOUSE FARM STORAGE

HORNSEA STORAGE

ISLE OF GRAIN LNG

PARTINGTON LNG

ST FERGUS

TEESSIDE

THEDDLETHORPE

St Fergus

Bacton

Easington

Draft information for discussion purposes only

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Capacity Sold at St Fergus by Method of Sale

77%

10%5%8%

DADSEC

MSEC

QSEC

WDDSEC

Unsold

Obligated Capacity = 609,805 GWh/year

Initial Analysis 2008/09 (FY) – St. Fergus

Entry Capacity Revenue (£184m) by Terminal

St FergusBacton

Easington

St Fergus Entry Capacity Revenue by Method of Sale

91.97%

0.44%0.03%

7.55%0.01%

DADSEC

MSEC

QSEC

RMSEC

RMTTSEC

Total Revenue = £104.1m

Draft information for discussion purposes only

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Initial Analysis 2008/09 (FY) - Easington

Entry Capacity Revenue (£184m) by Terminal

St Fergus

Bacton

Easington

Capacity Sold at Easington by Method of Sale

1%

56%

1%

3%

7%12%

DADSEC

MSEC

QSEC

RMSEC

RMTTSEC

WDDSEC

Unsold

Obligated Capacity = 387,630 GWh/year

Easington Entry Capacity Revenue by Method of Sale

91.3%

0.5% 1.9%

0.3%5.9%

DADSEC

MSEC

QSEC

RMSEC

RMTTSEC

Total Revenue = £47.7m

Draft information for discussion purposes only

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Entry Capacity Revenue (£184m) by Terminal

St Fergus

Bacton

Easington

Initial Analysis 2008/09 (FY) - Bacton

Capacity Sold at Bacton by Method of Sale

32%

2%

1%

31%

2%

21%

DADSEC

MSEC

QSEC

RMSEC

RMTTSEC

WDDSEC

Unsold

Obligated Capacity = 650,941 GWh/year

Bacton Entry Capacity Revenue by Method of Sale

25.7%

65.8%

4.5%

2.2%1.8%

DADSEC

MSEC

QSEC

RMSEC

RMTTSEC

Total Revenue = £18.5m

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First thoughts

Not sure how many issues are generic – may be demand only?

Therefore most analysis will need to be undertaken at an entry point / sub terminal level

Obviously at an entry point level we may quickly reach issues of confidentiality

Views?

Other data worth analysing?

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Charging Objectives

In addition to the Licence obligations in relation to setting charges, what other factors should be taken into account?

Encourage long term bookings

Maximise use of existing entry points

Recover TO revenue through capacity rather than commodity charges

Other…..

Which is the most important?

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Process Going Forward

An entry charging review leading to revised NTS Entry Capacity charging arrangements may require

NTS Charging Methodology changes

Licence changes

UNC modifications

Initial discussions have taken place at the Gas Transmission Charging Methodologies Forum (Gas TCMF) which normally meets following the UNC Transmission Workstream

National Grid invites views on the process for taking these issues forward. Options include:

Continue within the Gas TCMF?

Raise a UNC Review Proposal?

Organise separate workshops?

Other?