Introduction
Primary objective is to update the SMP default values
A number of ways to achieve the objective:
Use ‘operational costs’ to reflect imbalance costs to SO
Use ‘market prices’ to reflect possible shipper actions to balance
SMP default values should essentially provide:
a commercial incentive to balance and,
a proxy for the use and valuation of system flexibility
We should also consider the interactions between the use of SMP defaults and the development of a Linepack product
Contents
Action from previous meeting
Overview of potential options
Other considerations
Recommendations
Action 004: Obtain & report balancing and operational costs faced by National Grid due to shipper imbalance (EOD) Balancing;
Residual Balancing trades (neutrality)
Financial impacts to SO Incentives
Operational:
Components are Compressors, Pipeline & Maintenance
Compressor usage is most likely to reflect marginal costs
However, approx 95% of compressor fuel is used to transport gas around system
National Compressor Fuel Usage
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Daily linepack change
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Compressor costs to derive default values?
Some initial figures;
In 2008/9 approx 3,894GWh of gas to fuel NTS compressors
5% of the above = 195GWh
In 2009 the gross shipper imbalance i.e. total amount of gas ‘cashed out’ was 28,378GWh, net 41.6GWh
Average SAP for 2008/9 was 1.89p/kWh
Possible methodology;
Multiply 5% of compressor fuel use by average SAP = £3.7M
Divide £3.7M by 28,378GWh = 0.0128p/kWh
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Further development of RG 291 options
1. Retain the current SMP default values
2. Remove the SMP fixed differentials
3. Base differentials on transportation charges
4. Update SMP default values with current Hornsea prices
5. Use Market prices;
a) Apply a % SAP or alternative market price
b) Use forward prices to calculate default
6. Existing Methodology
Any other possible options?
Criteria
Transparent Market & objective based Cost reflective Provide incentive for shippers to balance Does not cross-subsidise Facilitates competition Does not risk security of supply Does not hamper market liquidity Dynamic
Option 1 – Retain current default values
Retain SMP Buy default as SAP +0.0288p/kWh, SMP Sell as SAP -0.0324p/kWh
Pros
Comparing pre 2001 to 2009, the volume of gas ‘cashed out’ has decreased from 7% to between 2-4%
Reduction in neutrality costs to industry
Cons
Consensus of Review Group was that current values are potentially arbitrary (may not satisfy EU balancing rules)
Gas sources & flows in 2010 are different to 2001 (not reflective of market)
National Grid believes that ‘do nothing’ is not an option
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Option 2 – Remove SMP fixed defaults
Remove default cashout so that SMP Buy & Sell is set solely by Residual Balancing trades
What do we do use for days with no trades? SAP?
Pros
Removes arbitrary nature of defaults
Solely reflects Residual Balancing trades
Cons
Might reduce the shippers’ commercial incentive to balance
Increase in SO Residual Balancing actions?
Wider industry impacts e.g. Investment signals, NBP & Storage contracts
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Replace default SMP values with a number derived from NTS transportation rates
As per April 2010 statement, NTS commodity charges are; SO Entry 0.0194p/kWh, but not levied on Storage Sites
TO Entry 0.0196p/kWh
SO Exit 0.0194p/kWh
Could above be a proxy for system flexibility?
i.e. = 0.039p/kWh?
Pros Easily derived from existing charge methodology
Regularly updated in line with transportation rates
Cons Not reflective of true operational costs, commodity charges are volatile and reflect SO
under / over recovery from other charges
Option 3 - Base upon transportation charges Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Option 4a) - Update default values with current Hornsea prices
Update SMP default values to reflect current Hornsea prices
Pros: utilises existing methodology, reflects opportunity the ‘value’ of not obtaining gas from storage to balance
Cons: limited to Hornsea, not reflective of true operational costs
Auction Price (p/SBU) SMP Buy Default (p/kWh) SMP Sell Default (p/kWh)
2001 5.6 0.0288 0.0324
2010 9.3 0.0409 0.0419
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Option 4b) - Revise current methodology using range of Storage
Update existing methodology to reflect current storage prices and introduce methodology into UNC & update at least annually
Which gas sources should we benchmark?
Which prices do we use
Market based prices (if available)?
Ops Margins prices? E.g.
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
SMP Buy SMP SellRough 0.0313 0.0367Hornsea 0.1265 0.0885Avonmouth 0.1146 0.0820Glenmavis 0.1323 0.0917Partington 0.0871 0.0671Holehouse Farm 0.1058 0.0772Isle of Grain (average) 0.2452 0.1531
Option 5a) - Apply % of SAP
Add or subtract a % of SAP
For example Day Ahead?
2008/9 average DA price was 56.87p/Th (1.94 p/kWh)
Dutch TSO (GTS) model uses 10% for over delivery, 15% for under
Or, we could reflect original default cashout values / SAP % (based on 2001 average SAP)
Pros: ?, Cons: Arbitrary number, confusing calculation..
SMP Buy % SMP Buy Default (p/kWh)
SMP Sell % SMP Sell Default (p/kWh)
GTS 15% 0.2911 10% 0.1941
Original % 4% 0.0776 5% 0.0970
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Option 5b) – Utilise forward prices
Replace current default prices with figure derived from a price-spread based on market prices?
Assumption is that market prices should reflect all associated costs (e.g. storage etc)
Options;
SAP Day 1 less SAP Day 2?
WD less DA, or DA less WD (depending on which is larger)?
A rolling average of WD-DA premium?
Winter vs Summer Premium?
Reference to Project Discovery work e.g. encourage Seasonal Storage?
Pros: market based, dynamic.
Cons: Potentially confusing, no consistent default
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Example: Within Day vs Day Ahead 2008/2009
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Option 6 – Existing Methodology?
Update current defaults
Introduce existing default cashout methodology into UNC
Introduce regular (annual) reviews of input prices
Introduce a regular review of gas source inputs to ensure relevance
Current SMP Buy = 0.0288p/kWh
Current SMP Sell = 0.0324p/kWh
Possible scoring (for discussion)
Option 1 2 3 4a/b 5a 5b 6
Criteria
No
Ch
ang
e
Rem
ove
Tran
spo
rt Co
sts
Up
date
% S
ap
Market P
rice
min
imu
m
SMP Buy (p/kWh) 0.0288 SAP? 0.0309 0.0409 ? ? 0.0409
SMP Sell (p/kWh) 0.0324 SAP? 0.0309 0.0419 ? ? 0.0419 Transparent Market & Objective Based Cost Reflective Provide incentive for shippers to balance Does not cross subsidise Facilitates Competition Does not risk security of supply Does not hamper market liquidity Dynamic
Other considerations
IS
Development lead-times
Costs
SMP references within Industry contracts
NBP ’97 (trading) contracts
Storage
SO Incentive
Linepack
Price Performance Measure