0504 - Development of a Demand Side Response Methodology

1. 0504 -Development of a Demand Side Response Methodology 02 July 2014

2. AGENDA Development of a DSR Methodology • Development Background • Broad Structure of proposed DSR so far • Key Issues • Proposed Workgroup Schedule • Issue 1: • What is the DSR Product – Turn Down to/ Turn Down by

3. DSR Development Background

4. Significant Code Review (SCR) Security of Supply (SoS) Background • Ofgem Raised in January 2011 • Aim of the Gas SoS SCR: • to reduce the likelihood, severity and duration of an emergency; • ensure market arrangements provide appropriate incentives on shippers to maintain SoS • In the context of the Customer: Key issue the SCR sought to address was: • cost of involuntary demand reduction in an Emergency, i.e. Firm Load Shedding (FLS) is not factored into cashout price, therefore much of the risk sits with consumer; Developappropriate payment arrangements for voluntary and involuntaryDSR

5. SCR Proposed DSR Compensation Payment Price (without DSR Methodology in place) • Daily Read sites Firm Load Shed at GDE Stage 2 will receive a DSR payment based on; Unit Price = 30 day average SAP price (set on the Day preceding entering into Stage 2 GDE) per kWh Entitlement for this payment will be for each day of the Daily Read site’s curtailment during the GDE (subject to stage 3 isolation).

6. Introduction of the DSR Licence Obligation • Ofgem’s SCR SoS Review – Final Policy Decision issued 12 February 2014 Included as part of consultation: A Draft Licence Obligation on NGG to develop a DSR Mechanism in consultation with the industry. (Statutory Licence Consultation Summer 2015)

7. Proposed DSR Licence Obligation • Draft Licence Condition on NGG to; • Develop a draft DSR Methodology, in consultation with stakeholders; and • Submit the DSR Methodology, to the Authority, by March 2015 • Where directed by the Authority run a trial (paper based) of the DSR Methodology; and • Report back to the Authority on the outcome of the trial; and • Subject to the trial, implement the DSR Mechanism and Methodology by winter 2016/17.

8. DSR Methodology and Mechanism Timescales 2014 2015 2016 ? Summer 2014 Stat consultation on Licence changes 12/02/2014 09/04/2014 01/10/2016 01/03/2015 ? ? ? ? May 2014 – Jan 2015 ? May – Jul Sep - Dec Feb - Sep Run Trial (subject to Authority Direction) Industry Development of a draft DSR Methodology & DSR Mechanism Final Modification and consult System Design, Build, Test & Implementation Consultation closes SC8I draft published Implement methodology & mechanism Submit a draft Methodology to Ofgem Submit report on trial to Ofgem Ofgem decision

9. SC8I – ‘Development and Implementation of a DSR Methodology for use after a GDW’ proposed timeline

10. Development process so far: • Since April, NGG has held DSR Development meetings with industry parties (End Users, Shippers and Suppliers) to understand needs, opinions, concerns and ideas • New engagement opportunities with ~ 60 stakeholders • Outcome of meetings, and Ofgem SCR SoS policy decision consultation responses, provide initial building blocks for DSR Methodology draft strawman • Continued development of DSR Methodology would now benefit from a more centralised collaborative industry engagement.

11. UNC Modification 0504

12. Initial Structure of the Proposed DSR

13. DSR Licence Condition • Ofgem’s key principles for DSR Development are: • To create “route to market” for additional DSR and not prevent commercial interruption from emerging • Reveal price for DSR and factor into Cashout • Minimise market distortions, and • Be compatible with existing market arrangements

14. Feedback suggests that any DSR mechanism should focus on providing the Customer with;

15. Key Features of the DSR Mechanism

16. Key areas of the DSR Methodology We need to ensure that development of key areas complies with key principles set out the DSR Licence Condition

17. Key Issues

18. Ofgem’s Final Policy Decision Document • Ofgem’s view is that: a DSR methodology would be unlikely to meet the principles if it included: • CCGT involvement; • Option fees; • And there was merit in development of: • A market based mechanism facilitated by the SO Ofgem expressed support for the development of a market based approachas described by NGG

19. Issues identified by the Industry Resolution of these Issues needs to be consistent with the key principles set out the DSR Licence Condition

20. Proposed Workgroup Schedules

21. 0504 Workgroup meeting schedule: Contact the Joint Office of Gas Transporters to request attendance on: Tel: 0121 288 2107 Email: enquiries@gasgovernance.co.uk

22. Scheduling of Issues and development areas Planning and agreement of schedule and agenda items

23. Turn Down To Vs Turn Down By

24. What is the product – Turn Down To versus Turn Down By or hybrid ? Example 1: Example 2: Expected Volume available to NGG Scheduled Offtake for Day Reduced offtake Actual Load Offtaken On Day Increased offtake Actual Load Offtaken On Day Scheduled Offtake for Day Need to fully understand the issues and requirements of Customers, Shippers and NGG

25. Features of the DSR mechanism – Offer Volume • Offers to be for a volume of energy (kWh) • End User may offer several tranches of volume • For instance: @ 6 Hours notice 5% (plant can run between 100% and 95%) 10% (Minimum Operational Load = 85%) With high risk of tripping off costed in to offer 3 day Start up costs ~ £0.5M 55% (manufacturing shut down) 30% site minimum Gas required to protect plant load

26. DSR mechanism three way party interaction End User Offers to reduce gas offtake Shipper Offers Volume on the OCM (to NGG only) NGG Accept Offers for volume certainty of volume & level cashout exposure certainty of volume for safety purposes cost and risk mitigation

27. Turn Down To:

28. Turn down by DSR product:

29. DSR as a Risk mitigation tool • Would expect Gas prices to rise during a sustained period of high supply demand deficit. • We have been told that prices may reach levels where it may not be economic to continue to manufacture. • The DSR mechanism may provide a risk mitigation tool to recover some of the costs which result from reduction in production. • Reduction in gas offtake may help maintain more critical loads and avoid the system progressing into emergency

30. Next Steps • Draft initial strawman proposal - August • One page, high level email summary of discussions and updates on key issues and developments to be issued following each workgroup session. • DSR expressions of interest Feedback Survey to be published to End Consumers. • Any further views/issues/concerns you may wish to discuss further please get in touch: Claire.thorneywork@nationalgrid.com Tel : 01926 656383: or Darren.lond@nationalgrid.comTel:01926 653493