Impact of change in DN charging methodology on DN embedded storage facilities

1. Impact of change in DN charging methodology on DN embedded storage facilities Nick Wye

2. Overview • Current charging methodology has 50:50 split between capacity/commodity • Embedded storage sites, like NTS connected facilities operate on the basis of accessing interruptible exit capacity • Storage facilities have unpredictable load factors, especially when compared to more traditional offtakes, however, generally they will have significantly lower load factors • DNPC03 is due to take effect from 1 October 2008 • Introduces a capacity/commodity split of 95:5 • In order to “neutralise” impact on interruptibles, they pay 47.37% of the equivalent firm capacity charge “Currently charges for firm and interruptible supply points vary depending on the Network and the supply point load factor. The proposal that interruptibles pay a proportion of the capacity charge will keep the typical distribution transportation charging benefit of being interruptible at its current level. The only change relative to the NTS is therefore how the discount is calculated, not in the level of charge.”

3. Effect of DNPC03 • Under the current NTS charging regime, this will make DN embedded storage significantly more expensive than its NTS counterparts • NTS Connected Facilities under the current arrangements will continue to enjoy a free interruptible service • Existing and potential facilities may be rendered “uneconomic” by the change • May lead to storage points being driven to become NTS connected, incurring uneconomic connection costs • These outcomes are clearly undesirable from economic and security of supply standpoints

4. Load Factor Analysis from DNPC03 consultation Broad load bands do not identify or highlight specific cases. For example, a Load Factor of around 10% would see charges increase by @600%, but consultation stated “Supply points which have a lower load factor than the network average are likely to experience a small increase in their total charges” Hence, we do not believe that the Impact Assessment accounted for embedded storage extreme load factors

5. Legitimacy of the charges for embedded storage • Capacity charges are based on peak day usage. • Peak day usage for storage is not coincidental with peak day demands within the network • View of NTS in relation to SO Storage Commodity Charges • “As such, storage has been considered to be part of the wider system and has avoided charges that have been placed on Users of the system at system points that physically flow gas into and out of the system.” • “SO costs (other than compressor fuel and incentive performance costs) are largely fixed andnon-locational and are associated with the provision of the system operator functionality. As a consequence, these costs have historically been recovered from the end of the supply chain (i.e. flows to end-consumers) and not from parties within the supply chain.” • Ofgem stated in its conclusions to “Entry Arrangements for connecting to DNs” • “ The commonly held view was that the provision of firm capacity should incur entry capacity and commodity charges. There was less agreement however, as to the terms of payment with regard to the provision of interruptible capacity. Ofgem’s initial view that interruptible capacity should only incur commodity charges was queried by one respondent, who considered that as an interruptible entry point was likely to utilize firm capacity most of the time it was only appropriate that capacity charges be paid too. An additional charge to cover NBP access for trading gas was proposed by another respondent. The principles of cost reflective and non discriminatory charges were considered to be suitably addressed by the majority of respondents to the existing GDN Licence.” • Ofgem agreed that interruptible capacity at entry should not attract a charge and should only attract a commodity charge. So why should exit be different?

6. Cost Contributions Table produced in DNPC03 consultation document

7. Cost Contributions – Validity in relation to embedded storage • Removal of Repex and depreciation from Direct Costs • Peak day related costs – not relevant to storage • Removal of Repex, depreciation and Operating costs from Direct Costs • Removal of Repex, depreciation and Operating costs from Direct Costs and Licence Fees and Formula Rates from Indirect Costs • Removal of Indirect Costs which should be recovered from shippers delivering to customers, otherwise “double dipping”. This would be consistent with NTS approach with storage providing a “parking” service. • Believe there is a strong case for an additional charging function designed to accommodate embedded storage sites

8. Summary • The DNs did not adequately consider the impact of the reforms on embedded storage facilities • In particular did not consider extreme load factor scenario • The increase in charges are likely to render facilities uneconomic • The treatment of such embedded facilities is inconsistent with those operating at the NTS level • The charges do not recognize the unique utilisation patterns of storage as capacity charges are based on peak day utilisation • Storage facilities should not contribute to the costs of the system as they do not inject at peak times • Storage facilities reduce the need for overall investment in the network by providing flexibility to the network through their injection/withdrawal behaviours. This is a non-valued service • Ofgem has stated that in terms of entry capacity, it does not believe that interruptible users should attract a capacity charge • A new charge for embedded storage? • Short-haul tariffs designed to ensure that connections are made on an efficient basis • CSEPs have own charging function based on different usage of network tiers

9. Mod Proposal 210 An enabling Mod which permits the DNs to charge Interruptible Supply Points on a different basis to current arrangements i.e. levy LDZ capacity charges We do not believe that this Mod should be implemented as full impacts of DNPC03 not clearly considered - did not adequately take account of sites with low load factors such as embedded storage facilities