PARCA: Incentive Arrangements
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Purpose
To detail our initial thoughts and seek your views on potential
incentive arrangements under a PARCA solution
These initial thoughts are based upon our May 2012 RIIO business
plan submission
Annex B delivering Connections and Capacity
The following slides cover the following:
Capacity Delivery Incentive (to replace the permits scheme)
Pre-capacity Allocation Proposal
We believe that the incentive arrangements detailed in these slides
compliment the PARCA solution and bring additional benefits to
industry
We do not consider that the PARCA solution is reliant on
revised incentive arrangements
Note: The following slides do not indicate the acceptance or otherwise
of the RIIO final proposals by National Grid NTS
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Capacity Delivery Incentive - initial thoughts (1)
We recognise that a customer may value both:
the early delivery of incremental capacity against default lead times
an appropriate risk versus reward balance being applied where
National Grid NTS consider delivery of incremental capacity in excess
of default lead times
The PARCA solution currently being discussed has the potential to result
in allocation of Capacity much closer to the capacity delivery date
Planning activities occur prior to Capacity allocation under the PARCA
solution
The Capacity allocation becomes the trigger for starting any required
reinforcement
We therefore believe it is appropriate to reduce the licence defined capacity
delivery lead times to 24 months (from the October following capacity
allocation). This lead time would be applicable to:
the post-capacity allocation activities of the proposed PARCA solution,
and/or
incremental capacity made available in the QSEC auction and Enduring
Exit Applications (where no revenue driver is required)
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Capacity Delivery Incentive (2)
We are therefore seeking your views on our initial thoughts
for a Capacity Delivery Incentive as an alternative to the
permit scheme arrangements
The scheme would incentivise National Grid NTS to meet a
customers request for early Capacity delivery where possible
and apply an appropriate risk / reward balance
The scheme would incentivise National Grid NTS to carefully
consider delivery of Capacity, reserved through a PARCA,
outside of default lead times and apply an appropriate risk /
reward balance
We do not believe that an incentive scheme should allow
National Grid NTS to extend project specific lead times
beyond [12 / 24] months without requiring Ofgem consent
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Capacity Delivery Incentive (3)
Accelerating capacity delivery quicker than the default obligated lead time,
is likely to have an associated cost
Based on prior experience of accelerating projects we believe it costs
~10% of total construction costs to accelerate a reinforcement project by
one year
We have reviewed several large reinforcement projects, comparing their
construction costs and additional capacity generated to calculate a
monthly acceleration cost per GWh/d
This has concluded that on average the cost of accelerating a project is
~£10,000 per GWh/d per month (09/10 prices) and that £10,000 per
GWh/d per month is appropriate as the value of the incentive
These costs have been calculated based on the cost of acceleration,
however we also consider that the incentive scheme should be
symmetrical
Equal values would apply as the penalty for extending lead times
beyond the later of the default or that requested by the customer
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Capacity Delivery Incentive Proposal (4)
Our initial thoughts on the scheme parameters are:
Zero target
No upfront cash allowance enables the incentive to be applied on a
project specific basis
100% sharing factors on National Grid
We believe that as this incentive is within our control, we should be
exposed to 100% of the costs
100% upside creates an appropriate tension between cost recovery
and out-performance
No caps and collars
The benefits of this incentive should not be limited
We do not anticipate unlimited risk
The number of projects on an annual basis is limited
£10,000 per GWh/d per month delayed or accelerated
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Capacity Delivery Incentive Proposal (5)
Initial Thoughts (continued):
Proposed for the remainder of the RIIO-T1 period from April 2014
The incentive would be cashed out annually
This is in line with RIIO incentives detailed in Final Proposals
Incentive would be ‘played’ prior to the formal capacity application method i.e. we
would indicate our ability to deliver in the invitation letter for the relevant
auction/application window
The incentive would only apply where the customer values it or where we cannot
meet the obligated lead time, or a later date requested by the customer
The incentive would only apply where:
The customer wants the capacity early and we have committed to this
The customer wants the capacity from the default lead time or later and we are
unable to commit to this
The following diagrams demonstrate the application of the proposal
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Illustrations 1
(a)
NGG agrees to
deliver
capacity
Customer
wants
capacity
Incentive earned
Capacity allocation
24 months
Default
capacity
delivery
(b)
Customer wants
capacity
NGG agrees to
deliver
capacity
INCENTIVE
Incentive
penalises
Capacity allocation
24 months
Default
capacity
delivery
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Illustrations 2
(c)
Customer
wants
capacity
NGG agrees
to
deliver
capacity
Incentive
penalises
Capacity allocation
24 months
(d)
Default
capacity
delivery
Customer
wants
capacity
NGG agrees
to
deliver
capacity
INCENTIVE
Incentive
penalises
Capacity allocation
24 months
Default
capacity
delivery
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Illustrations 3
(e)
NGG
agrees to
deliver
capacity
Customer
wants
capacity
No incentive applies
24 months
Capacity allocation
Default
capacity
delivery
(f)
NGG can
deliver
capacity
Customer
wants
capacity
No incentive applies
24 months
Capacity allocation
Default
capacity
delivery
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Capacity Delivery Incentive (9)
Where a PARCA has been agreed, we would indicate our ability to
deliver at the conclusion of Stage 1a
This indication may suggest earlier or later than the
obligated timescales
For capacity signalled through the QSEC / Enduring Exit
applications we would indicate our ability to deliver early in the
invitation letter prior to the auction/application window (as per
permit arrangements)
Where lead times have been adjusted under the proposed
incentive and we are unable to deliver within these adjusted
obligated lead times, the buyback regime principles would apply
(see illustrations (g) & (h))
Where a customer is not ready to deliver or offtake gas, we would
not be obliged to buyback, as per current UNC principles
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Proposal Illustrations 4
(g)
NGG
agrees to
deliver
capacity
Customer
wants
capacity
NGG actually
delivers capacity
Incentive earned
Buyback
Capacity allocation
24 months
Default
capacity
delivery
(h)
Customer
wants
capacity
NGG agrees to
deliver
capacity
Incentive penalty
NGG
actually
delivers
capacity
Buyback
24 months
Capacity allocation
Default capacity
delivery
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Pre-capacity Allocation Reporting
In our May 2012 business plan submission we considered that a reputational incentive is initially
appropriate for the Cap/con pre capacity allocation activities
We continue to believe that National Grid NTS should be obliged to make information available
to industry with respect to these activities and welcome views on this
is it appropriate?
should this be a reputational incentive in the licence, or a reporting obligation in the UNC or both?
We believe that a reporting obligation under the UNC in relation to the time taken to progress
through pre-capacity application activities has merit
allows change through the UNC governance process
licence and UNC change not dependant on each other
This would oblige us to report on the time taken to progress through the key stages of the
PARCA process to the point where we provide a formal capacity signal
This reporting would include the timescales relating to:
Identification of preferred route corridors
Completion of the Environmental Impact Assessment
Stakeholder engagement activities
The submission of a Development Consent Order (where required)
Any others?
A mid-term RIIO-T1 review may be appropriate, to consider the form of future incentives around
planning activities
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PARCA – Proposed Licence Changes
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PARCA Solution – Funding (1)
3 different funding mechanisms applicable to the PARCA
Schedule 1a
Pre-Capacity Allocation Revenue Driver
Post-Capacity Allocation Revenue Driver
Works for Schedule 1a are proposed to be treated as Excluded Services and can be
covered by the Special Condition 11C – Services to be treated as Excluded Service
This could be achieved by one of the existing categories or some text included to
add clarification relating to PARCA works
We also need to consider how a potential reservation fee may impact the licence.
We intend to share our further thoughts on the reservation fee next month
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PARCA Solution – Funding (2)
Generic revenue driver methodology would detail the process of how the
revenue drivers are calculated
Licence would need to recognise two revenue drivers for each project
Add the principles underpinning the phasing of the two stage Revenue
Driver (pre & post-capacity allocation) as proposed under the terms of the
PARCA to the licence
Under current RIIO Licence drafting Revenue Drivers are funded:
Special Conditions 5F (Entry) and 5G (Exit)
20% in year y-2
80% in year y-1
1% in year y and any subsequent formula year to the end of the RIIO-T1
period
Updates would be required to these conditions to include the Pre Capacity
and Post Capacity Allocation Revenue Driver phasing to replace the 20%
and 80% with those profiles proposed
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PARCA Solution – Funding (3)
Termination Credit due to Termination of PARCA
It is proposed that a new term is introduced to Special
Condition 2A of the Licence to allow the Allowed Revenue to be
adjusted to compensate industry for any monies already
recovered from Transportation charges following Termination of
the PARCA
The term would adjust the next available years revenue
following receipt from the PARCA signatory terminating the
contract
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PARCA Solution – Lead Time
As aforementioned, we believe it is appropriate to reduce
the licence defined capacity delivery lead times to 24 months
(from the October following capacity allocation). This lead time
would be applicable to:
the post-capacity allocation activities of the proposed
PARCA solution, and/or
incremental capacity made available in the QSEC auction
and Enduring Exit Applications (where no revenue driver is
required)
This could be applied through licence change
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PARCA – Anticipated Timeline & Next Steps
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Ofgem
Industry
National Grid
Mar
Apr
May
Time line
Jun
Jul
Aug
2013
Sept
PARCA Consultation Process
UNC Legal Text, Proposed Licence Changes,
Updated (Draft) Methodology Statements,
PARCA Contract, Process Flow Diagrams
Mod submitted
to UNC Mod
Panel
Oct
Nov
Dec
Jan
Mod Panel & 15
Days Consultation
Process
Work
group
report
Mod
Panel
Feb
Mar
Apr
2014
May
Mod, Licence and Methodology
Statements Implemented
Licence
Drafting
Consultation
Participation
Industry Workshops
Consultation & Workshop
Participation
Consultation & Workshop
Participation
Consultation
Participation
Mod
Decision
Licence
Drafting
Formal Licence
Consultation
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