Entry Capacity Substitution
Transmission Workstream – 6th August 2009
Agenda
Current Status
Methodology Statement: overview.
Charging Proposal.
Methodology Statement: retainers.
UNC Modification Proposal.
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Current Status
Three simultaneous processes with consultations aligned to complete prior to
Ofgem Impact Assessment.
Methodology Statement.
 Consultation started 24th July; closes 24th August.
 Submission to Authority for approval 7th September.
Charging Consultation.
 Consultation (draft) started 28th July;
 Formal consultation starts 11th August; closes 14th September.
UNC Modification Proposal.
 Propose submission to UNC mod panel following discussion today.
 Mod Panel meeting 20th August 2009.
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Methodology Statement: Overview
Transmission Workstream – 6th August 2009
Proposed Entry Capacity Substitution Methodology
National Grid is proposing a methodology that uses “retainers” to limit the exposure of
ASEPs to substitution.
 Based on the “Option Approach” discussed at workshops.
Retainer considered to better describe the role of the new product.
 Avoids confusion with existing Option products.
National Grid believes that this approach is a good compromise between the two
extremes of the Mechanical Approach and the Two-Stage Auction.
 Requires User Commitment
 Relies on Shippers’ assessment of needs not National Grid judgement.
 Relatively simple to implement.
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“Retainer” Approach
A retainer will prevent capacity at an ASEP from being substituted to a
different ASEP in response to an incremental signal elsewhere.
The retainer requires a signal and commitment from Shippers.
The retainer
 does not give rights to the Shipper to use the capacity covered by the
retainer;
 does not give the Shipper first option to buy the capacity; but
 it would keep the capacity at the relevant ASEP.
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What is the Retainer?
It is proposed that the retainer:
identifies and excludes capacity from substitution processes thereby protecting capacity for
the duration of the retainer;
is placed ahead of QSEC and applies for 12 months,
i.e. covers (normally) one QSEC and any ad-hoc QSECs before the next retainer window.
will be subject to a one-off NTS Entry Capacity Retention Charge. This will be a fixed price per
unit of capacity and will be the same for all ASEPs.
for the purposes of defining refunds the retainer nominally applies in respect of the 12 months
commencing Oct Y+4, i.e. from the default 42 month lead-time;
will still prevent capacity being substituted away if the incremental capacity is allocated earlier
or later than the default lead time;
The retainer will not:
prevent other Shippers (or the relevant Shipper) buying capacity at that ASEP in the period
covered by the retainer;
be sold in quantities above the quantity available in QSEC (usually 90% baseline – sold);
be available to non-Users. However, extending the process to non-Users could be an option to
be considered for 2011.
The Retention charge will be discussed on later slides
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Capacity Available for Substitution at Donor ASEPs
A key factor in the substitution process is to identify the amount of capacity
available at donor ASEPs that can be substituted. The retainer reduces the
available quantity.
Capacity.
90 % of
baseline capacity.
Available capacity for
substitution
(May be higher if
incremental capacity
has previously been
released).
Sold capacity
Time
Retained quantity
8
42 months
Default capacity release lead-time
at recipient ASEPs
Substitution Methodology – Associated Issues
National Grid is proposing an exchange rate cap of 3:1
 This is significantly lower than the cap applied to Transfer and Trades.
 With Shippers having an opportunity through the use of retainers to protect
capacity is an additional constraint on substitution by way of any exchange
rate cap appropriate?
Partial substitutions will be progressed
 Where appropriate incremental capacity will be met through a combination of
investment and substitution.
Entry Zones are proposed to be used for selecting potential donor ASEPs.
 Within zone, donor ASEPs would be selected on the basis of best exchange
rate. Out of zone, donor ASEPs would be selected on the basis of shortest
pipeline distance from the recipient ASEP.
Network Analysis will be undertaken to determine substitution opportunities.
 Analysis will be consistent with the Transmission Planning Code and hence
assessment undertaken to determine investment requirements.
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Charging Consultation - NTS GCM 18
The retainer requires a signal and commitment from Shippers.
The charging consultation NTS GCM 18 will
 determine the NTS Entry Capacity Retention Charge and
 ensure any revenue streams appropriately offset other NTS
transportation charges
The Licence requires that the charging methodology
1. Reflects the cost incurred
2. Takes account of developments within the transportation business, and
3. Facilitates effective competition between gas shippers and between gas suppliers
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Determination of Commitment Method A - 1
To determine a cost reflective charge National Grid has estimated the avoided costs of
entry capacity substitution.
If incremental capacity is released in a QSEC auction this results in incremental revenue and a
cost to industry.
Substitution avoids this cost.
 The potentially avoided cost has been estimated from the average of the capitalised
revenue drivers from the two ASEPs where capacity has been released during the present
price control.
 Have only considered the potential SO allowed revenue over 5 years which is the minimum
value.
Capital investment would result in TO allowed revenue for a further 40 years
Dividing by the maximum substitutable quantity gives a unit Retention Charge Rate (p/kWh)
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Determination of Commitment Method A - 2
METHODOLOGY A
Average Revenue Driver (£m)
A
£36.34
Substitutable Capacity (GWh)
B
2,283.0
Retention Charge Rate
(p/kWh)
C=(100*A)/B
1.5919
D
10.0
E
110.0
F=10^6*C*E/100
£1,751,106
C1=F/10
£175,111
Example retention of 10
mscm/d
Retained Daily Capacity
Quantity (mscm/d)
Retained Daily Capacity
Quantity (GWh/d)
Charge to retain 10 mscm/d
(£)
Retention Charge Rate
(£/mscm/d)
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SO Revenue over 5 years
Determination of Commitment Method A - Issues
This calculation would result in an initial rate for the NTS Entry Capacity
retention charge of £175,111 for each mscm/d of capacity retained.
This calculation
 has used a forward projection of historic costs and as such is not strictly
reflective of the costs incurred;
 requires a probability of whether incremental capacity would indeed be
signalled and whether it could be met by substitution; and
 The avoided costs assume all substitutable capacity is retained. If only half is
retained substitution could still occur.
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Determination of Commitment Method B
So National Grid has considered an alternative approach which would comply with the
other relevant conditions.
- takes account of developments within the transportation business;
and
- facilitates effective competition between gas shippers and between gas suppliers.
METHODOLOGY B
Minimum price over 32 quarters
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Example retention of 10 mscm/d
Retained Daily Capacity Quantity (GWh/d)
E
110.0
Minimum Price (p/kWh/d)
G
0.0001
Charge for retaining 10mscm at an ASEP (£)
H=(8*365)*G*E*10^6/100
£321,200
Retention Charge Rate (p/kWh)
I=H*100/(E*10^6)
0.292
Retention Charge Rate (£/mscm/d)
I1=H/10
£32,120
National Grid’s Proposal (Draft)
National Grid’s proposal (draft)
Methodology B is recommended, which uses the minimal capacity charge rate
of 0.0001p/kWh/day applying over 32 quarters.
This results in a Retention Charge for retaining 10mscm at an ASEP of
£321,200.
This should provide suitable encouragement to purchase a retainer whilst
providing an appropriate level of commitment to the industry.
Any revenue streams relating to retention charges would be treated as TO
revenue and adjustments to the TO commodity charge would result as
necessary.
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Summary
The Retainer Approach protects capacity, but only to the extent that it is
genuinely needed, as demonstrated by Shippers taking out Retainers.
A commitment is required from Shippers but this may be much lower than buying
the capacity.
National Grid is proposing that retainer charges are refundable if the capacity is
bought in later QSEC/AMSEC auctions.
The Retainer Approach allows and encourages Shippers to identify and
protect their needs.
The amount of protected capacity is determined by Shipper actions not
National Grid assumptions.
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Methodology Statement: Retainers
Transmission Workstream – 6th August 2009
The Retainer Window
It is proposed that:
The Retainer Window will be open for 2 “bid days” from 8am to 5pm;
There will be one day between the bid days;
Retainer requests will not be visible within the bid window but those granted shall be
published before 7pm on the bid day;
 This will consist of relevant ASEP and quantity.
 The same data on retainers granted will be included in the QSEC invitation letter.
Retainers will be requested via fax. A pro-forma will be developed.
Any retainers requested cannot be removed or amended except where the request submitted
is identified by National Grid as blatantly erroneous and is rejected.
 National Grid will accept no liability in respect of erroneous applications, but will
endeavour to resolve errors within the bid day. Those not resolved or rejected by 5pm will
be accepted as submitted.
 Any pro-rating due to retainers exceeding available capacity will be carried out at the end
of each bid day.
The Retainer Window will be run in January (see timeline).
 Avoid clash with AMSEC in February.
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Retainer Approach: Timeline for 2010 QSEC
Mid Jan
Retainer Window.
2 month notice
2 days plus
of charges*
1 day between Mid Feb
Mid Dec
QSEC
Invitation letter for
invitation
retainers issued
letter
Early June
Ad hoc invoice for retainers
as required
(and refunds in future years)
Mid Nov
NOV 09
DEC 09
JAN 10
7 Dec
Approval of
Methodology Statement
Charging Proposals and
UNC Mod Proposal
Mid Jan
Notice of
QSEC
charges
FEB 10
Mid Mar
QSEC
MAR 10
Feb
AMSEC
4 tranches with 2
days between
Precise dates for QSEC auction to be confirmed
* Notice conditional upon approval of charging proposals
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APR 10
MAY 10
Apr / May Bids Allocated 2 months – as defined in
UNC section B 2.6.7
N Grid Analysis
N Grid Governance
Ofgem Governance
JUN 10
JUL 10
Retainers: QSEC Capacity Allocation
Allocations in the year a retainer is taken out:Unprotected capacity will be allocated first, then the
retained capacity will be allocated
The maximum quantity of capacity at the relevant ASEP
is retained and therefore not substituted.
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QSEC Capacity Allocation In the year a retainer is taken out
Pre-auction capacity
Capacity
Baseline capacity
90% baseline
Withheld from QSEC
Retained Quantity
Unsold
Capacity
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Post-auction allocations
Unprotected capacity will be
allocated first,
then capacity under Retainer.
Withheld from QSEC
Refund
triggered
Retained Quantity
New Sold Capacity
“Unprotected”
“Unprotected”
New
Sold Capacity
Sold Capacity
Existing Sold Capacity
Retainers: QSEC Capacity Allocation
Allocations in subsequent auctions for refund allocation
Retained capacity will be allocated first, then unprotected
will be allocated
Therefore the maximum quantity of retained capacity at
the relevant ASEP is allocated in order to trigger a refund.
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QSEC Capacity Allocation In terms of calculating refunds
Post-auction capacity in
year Retainer applies
Capacity
Baseline capacity
90% baseline
Unsold
Capacity
(Oct 2013 – Sept 2014)
Allocations in subsequent auctions
Retained capacity will be allocated first,
then unprotected and withheld capacity.
Withheld from QSEC
Withheld from QSEC
“Unprotected”
Retained Quantity
“Unprotected”
Refund
triggered
Retained
Quantity
Capacity
sold
in 2011
Capacity sold in 2010
Capacity sold pre-2010
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Existing Sold Capacity
Retainers: QSEC Capacity Allocation…Effect of Permits
Substitution opportunities are assessed from a 42 month default lead
time
Except for when an incremental signal is received and accepted
earlier than the default.
 e.g. for March 2010 QSEC, allocations from July 2013.
Substitutable capacity is calculated as the smallest unsold/unretained quantity from the permit start date
For delaying permits, or requests for incremental capacity later than
42 months, substitutable capacity is still determined post-42 months.
Hence permits should not increase the quantity of capacity substituted from a
donor ASEP.
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Retainers: Refunds
Refunds are triggered solely by the allocation of capacity in the period 42-54 months forward from
QSEC when the retainer is taken out and will be paid after the final opportunity to obtain capacity,
within the QSEC and AMSEC auctions, for this period has passed.
Applies regardless of which Shipper is allocated capacity – need for capacity proven.
Full allocation of capacity = full refund.
 Extent of refund is triggered by extent of allocated capacity, not the price for allocated capacity. Price
of capacity and retainer charge are not related.
 Refunds will be pro-rated if not fully allocated.
 Refunds will be pro-rated if more than one Shipper has relevant retainers, and the capacity is not fully
allocated, irrespective of individual Shipper allocations.
 Refunds will be determined on the basis of the quarters (or months) of maximum capacity allocation
before and after the auction. This identifies the maximum quantity of retained capacity that is
subsequently allocated. See later slide.
For each ASEP, refunds will be allocated, according to the formula; e.g. for Shipper A
Shipper A retained capacity
retained capacity (all Shippers)
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*
retained capacity allocated (all Shippers)
retained capacity (all Shippers)
Retainer fee
* (all
Shippers)
Retainer Fee Refunds
Refund if capacity obtained
for any month in this period
Retainer taken
QSEC auction
Period covered by Retainer
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
For a retainer taken out in 2010 a refund may only be triggered by capacity
allocation for Q4 2013 to Q3 2014 made pursuant to a QSEC or AMSEC auction.
Why limit to QSEC / AMSEC?
• Reserve price applies to these auctions so capacity retained cannot be obtained
for zero cost.
• Does not apply to RMTTSEC due to interaction with Transfer and Trades.
Why limit to Q4 2013 to Q3 2014?
• Default date for release of incremental capacity and hence substitution.
• To use a longer period would increase the duration over which retainers need to be
tracked and more interacting auctions would need to be considered.
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Retainer Fee Refunds
Refund if capacity obtained
for any month in this period
Option taken
QSEC auction
Period covered by Option
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
Period covered by QSEC 11
QSEC 11
Period covered by QSEC 12
QSEC 12
When can a refund be triggered?
• Whenever capacity is allocated for Q4 2013 to Q3 2104
in a QSEC / AMSEC
• Hence, can only be in QSEC March 2011 or March
2012; or
• AMSEC February 2013 or February 2014.
•NB 2014 AMSEC can only allocate capacity for
Q2/Q3 2014.
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Period covered by AMSEC 13
AMSEC 13
Period covered
by AMSEC 14
AMSEC 14
Refunds - example
E.g. Retainer taken in 2010. Applicable period for refunds is Q4 2013 to Q3 2014.
The refund will be determined from peak sold level after auction minus peak
sold level before auction (capped at retained quantity).
Capacity
Baseline capacity
90% baseline
Shipper
commitment
Withheld from QSEC
Withheld from QSEC
Withheld from QSEC
Withheld from QSEC
“Unprotected”
“Unprotected”
“Unprotected”
“Unprotected”
Retained Quantity
X
Peak sold
before auction
Retained Quantity
Retained Quantity
Retained Quantity
Capacity up to 2010*
Capacity up to 2010*
Capacity up to 2010*
Q4 2013
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* And including QSEC 2010
Q1 2014
Q2 2014
Capacity up to 2010*
Q3 2014
Refunds - example
E.g. Retainer taken in 2010. Allocations made in QSEC 2011 or later.
The refund will be determined from peak sold level after auction minus peak
sold level before auction (capped at retained quantity): Y - X
Capacity
Baseline capacity
90% baseline
Withheld from QSEC
“Unprotected”
Actual Shipper
Y
booking
X
Peak sold
after auction
Retained Quantity
Withheld from QSEC
Withheld from QSEC
Withheld from QSEC
“Unprotected”
“Unprotected”
“Unprotected”
Retained Quantity
Capacity sold 2011
Capacity sold 2011
Retained Quantity
Capacity sold 2011
Capacity up to 2010*
Retained Quantity
Capacity sold 2011
Capacity up to 2010*
Capacity up to 2010*
Capacity up to 2010*
Q4 2013
Q1 2014
* And including QSEC 2010
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Q2 2014
Q3 2014
UNC Modification Proposal
Transmission Workstream – 6th August 2009
UNC Modification Proposal
What does the proposal do?
The proposed entry capacity substitution methodology will introduce a new charge: the
“NTS Entry Capacity Retention Charge”.
The proposed UNC modification will create the new charge within UNC.
Why do we need a modification to UNC?
The Retention Charge is a Transportation Charge “in respect of transportation
arrangements under the Code” – UNC TPD Section B1.7.1(a)(i). Hence to enable
National Grid to invoice for the charges they need to be defined in UNC.
Defining the charge as a Transportation Charge enables treatment of retainer charge
revenues within the appropriate transportation revenue streams.
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UNC Modification Proposal: Relevant Objectives
How does the proposal better facilitate the achievement of the Relevant Objectives?
Standard Special condition A11 (c)
 Promotes the efficient discharge National Grid’s Licence obligations by facilitating the
introduction of entry capacity substitution as required by Special Condition C8D
paragraph 10
Standard Special condition A11 (a)
 Promotes efficient and economic operation of the pipeline system by facilitating the
introduction of entry capacity substitution thus reducing the need for investment to
meet the demand for incremental entry capacity.
Standard Special condition A11 (f)
 Promotes efficiency in implementation of UNC as it facilitates administration of charges
for retainers.
Disadvantages?
None identified; if substitution proposals are not approved it is expected that the Authority would
reject this proposal.
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UNC Modification Proposal: Other Impacts
Impact on Security of Supply
 Whilst concern has been expressed at the possible effect of substitution on
security of supply these concerns do not apply to this modification
proposal which, in itself, only introduces a new transportation charge.
IT Systems
 No impact on IT systems is envisaged. Charges would be invoiced, and
refunded, via ad-hoc invoice functionality. A specific invoice charge item
could be created in future if necessary.
33
UNC Modification Proposal: Timetable
Aim to align consultation on Modification Proposal, Methodology Statement and
Charging Consultation as much as is practicable.
Aim to have all three proposals with the Authority prior to, or very soon after,
commencement of Ofgem’s Impact Assessment.
Activity
Discussion at Transmission Workstream
Submit to Mod Panel (subject to workstream agreement)
Issue for consultation (subject to Mod Panel approval)
Closeout for representations
Mod Panel recommendation (accept at short notice)
FMR submitted to Authority
Proposed date of implementation
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Date
6th August 2009
20th August 2009
11th September 2009
17th September 2009
8th December 2009