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Review Group 291 – Balancing Arrangements Default Cashout

Review Group 291 – Balancing Arrangements Default Cashout. Workshop 3 – 21 st June 2010. 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

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Review Group 291 – Balancing Arrangements Default Cashout

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  1. Review Group 291 – Balancing Arrangements Default Cashout Workshop 3 – 21st June 2010

  2. 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

  3. Contents • Action from previous meeting • Overview of potential options • Other considerations • Recommendations

  4. 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

  5. Current SMP Buy = 0.0288p/kWh Current SMP Sell = 0.0324p/kWh 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

  6. Further development of RG 291 options • Retain the current SMP default values • Remove the SMP fixed differentials • Base differentials on transportation charges • Update SMP default values with current Hornsea prices • Use Market prices; • Apply a % SAP or alternative market price • Use forward prices to calculate default • Existing Methodology Any other possible options?

  7. 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

  8. Current SMP Buy = 0.0288p/kWh Current SMP Sell = 0.0324p/kWh 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

  9. 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

  10. Current SMP Buy = 0.0288p/kWh Current SMP Sell = 0.0324p/kWh Option 3 - Base upon transportation charges • 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

  11. 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

  12. 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.

  13. Current SMP Buy = 0.0288p/kWh Current SMP Sell = 0.0324p/kWh 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..

  14. 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

  15. Example: Within Day vs Day Ahead 2008/2009

  16. Current SMP Buy = 0.0288p/kWh Current SMP Sell = 0.0324p/kWh 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

  17. Possible scoring (for discussion)

  18. Other considerations • IS • Development lead-times • Costs • SMP references within Industry contracts • NBP ’97 (trading) contracts • Storage • SO Incentive • Linepack • Price Performance Measure

  19. Recommendations • Baseline ‘Option 6’ • Update fixed defaults using current default values & relevant sources • Incorporate methodology into UNC • Update methodology on an annual basis, or when new relevant UK gas sources become available • Further develop Operational Costs & Market based default?

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