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GDN Charging Structure

GDN Charging Structure. Bill Bullen Managing Director, Utilita. Seasonality of Gas Demand. Gas demand is seasonal and volumes vary significantly over the year (4:1) – especially in residential sector Cost base is fixed but driven by high winter demand If income is related to consumption:

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GDN Charging Structure

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  1. GDN Charging Structure Bill Bullen Managing Director, Utilita

  2. Seasonality of Gas Demand • Gas demand is seasonal and volumes vary significantly over the year (4:1) – especially in residential sector • Cost base is fixed • but driven by high winter demand • If income is related to consumption: • there will be a shortfall during summer months • there will be volatility due to colder/warmer winters • It’s always been like that! • why change the charging structure now? • what reduction in price did it give?

  3. New 95:5 Charging Structure • Intended to give more stability against year-on-year weather variation • DN charges represent only 20% of customers’ bills • But with summer consumption only one quarter of winter consumption the DN charge amounts to over 40% • Negative gross margin for suppliers during the summer months (June to August) • Funding issue transferred from network operators to suppliers

  4. Cost of Capital • Who is best placed to fund the shortfall in revenue during the summer: • Lowest cost of capital is network operators • Shift away from this means that customers’ bills will rise • There is a competition issue because smaller suppliers are likely to have a higher cost of capital than larger suppliers

  5. Efficient Pricing Signals • Cost reflective • Even better if they reflect MARGINAL costs • No meaningful relationship between capacity charge based on AQ and customers’ usage • AQ “deadband” of +/- 20% • Weather correction • Estimated profile factors • Costs driven by winter demand – therefore have higher charge during winter

  6. Solutions • Return to 50:50 split • or at least to a split that gives some positive gross margin during summer (NB this is dependent on summer/winter gas wholesale price differentials) • Modify cash collection from smaller suppliers • this should not hit overall DN cashflow significantly

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