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2. Life Before Long Term Auctions. ?Transco" undertook centralised system planning ? TBE Process ? continues todayObligation to sell entry capacity to Seasonal Normal Demand 10%System built to deliver 1:20 peakFrom this planning and scenario analysis, Investments were put to the regulatorIndust
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1. GRI NW Investment Workshop Chris Logue, European Policy Manager, 4th June 2010
The Hague
2. 2 Life Before Long Term Auctions “Transco” undertook centralised system planning – TBE Process – continues today
Obligation to sell entry capacity to Seasonal Normal Demand +10%
System built to deliver 1:20 peak
From this planning and scenario analysis, Investments were put to the regulator
Industry perception of “Gold Plated” system
Investments made under: Statutory (1:20), Power, Flexibility, Emissions or Other (primarily replacement) categories
3. 3 Auctions Long term auctions began in 2003
Auctions provided
Equal opportunity to obtain capacity
Price discovery
Simple allocation process (at least to start with)
Mechanism to manage entry capacity constraints
4. 4 Quarterly System Entry Capacity QSEC (Quarterly System Entry Capacity)
Held every March
Offers capacity from 18 months out for 15 years (i.e. Sept’08 offer capacity for April 2010 to March 2025).
Cleared price auction
Reserve Price (P0) and up to 20 incremental price steps – up to 150% of baseline
Potential for incremental signals (i.e. release new capacity)
To release new capacity, bids must pass an NPV test in accordance with the Incremental Entry Capacity Release Statement (IECR)
5. 5 Quarterly System Entry Capacity
6. 6 Quarterly System Entry Capacity – The Economic Test If bids are above Baseline capacity:
Incremental Entry Capacity Release (IECR) test undertaken
Is the Net Present Value (NPV) of bids over an 8 year period higher than 50% of capitalised Unit Cost Allowance?
If so, Baselines are permanently increased
This may involve capital investment
If not, National Grid may wish to consider releasing non obligated entry capacity
Incremental capacity release has a 42 month lead time
Incentives to reduce lead time
Opportunity to extend lead time e.g. in case of planning/construction issues
7. 7 2006 Regulatory Decision – The Story National Grid had committed initial St Fergus capital based upon signals and market assessment in 2002 – then completed the Investment by 2005
Ofgem accused NG of placing insufficient weight on “important new information on the location of large new sources of gas supply” during their “go / no go” review in 2003
Initially, Ł75m of NG’s capex was excluded from the RAV
8. 8 2006 Regulatory Decision Ofgem believed NG had not provided adequate justification for the expenditure incurred
They concluded that, since this project was initiated in the early days of the new entry regime, it would be inappropriate to exclude it from the RAV altogether
The effect of this is to allow Ł56 million to enter the RAV at the time at which the expenditure was incurred
9. 9 2007 – Further Regime Changes Introduction of baseline substitution
substitute capacity from another ASEP
Introduction of trade and transfer
capacity moves to those who value it most
New form of revenue driver introduced
Old form still exists for previous releases
Automatically becomes baseline after 5 years
10. 10 2007 – Further Regime Changes Opportunity for accelerated release
Release in 6 months prior to incremental obligated
National Grid NTS keep 100% of revenue
Permits
National Grid can “play” a permit if investment period cannot be met (42 months on entry)
Can “gain” a permit if can deliver earlier (and signal received)
Investment buyback incentive
11. 11 Summary Constant regime change
Regulatory intervention has led to investment processes using quantifiable and auditable methodologies
Economic test has become the “only show in town”
more cautious investment
associated pros and cons
Long Term auctions do not necessarily provide long term signals….
Users may take a commercial view not to signal
Original regulatory intentions get lost and changed
Selling so far out makes regime change more difficult/complex