Energy Market Issues for Biomethane Projects Workshop - 31 October 2011

1. Energy Market Issues for Biomethane Projects Workshop - 31 October 2011 RIIO-GD1 Environmental Incentives

2. Environmental Incentives in RIIO-GD1 supporting distributed gas / biomethane Extract from “Decision on strategy for the next gas distribution price control - RIIO-GD1 Outputs and Incentives. Table 3.1 Summary of output measures and policies that contribute to environmental objectives”

3. Extract from “Decision on strategy for the next gas distribution price control - RIIO-GD1 Outputs and Incentives. Table 3.1 Summary of output measures and policies that contribute to environmental objectives”

4. Connection policy Connection and use of system charging for distributed gas • Deep vs shallowish connection charging policy • Gas – currently has deep connection charging i.e. network reinforcement funded by connecting producer • Electricity – have a shallowish connection boundary – therefore distributed generation incentive is used to incentivise network operators to undertake efficient reinforcement investment • Reflects benefits of losses reduction and potential voltage support • Not a volume driver • Any changes to the connection charging policy would need to reflect benefits to the network (and other users) • RIIO-GD1 sets out GDNs to review charging methodologies and propose modifications where there is an objective rationale (to be considered on their merits)

5. Connection policy Industry currently considering UNC Modification 0391 – Distributed Gas Charging Arrangements • Ofgem will consider in due course • Will also consider any evidence that distributed gas entering at distribution level provides benefits to the network to justify other network customers funding these connection costs • Argument for connection boundary to remain deep to encourage competition in provision of connection assets In event of a boundary change • GDNs would need to recover certain expenditure on entry connection through their allowed revenue • RIIO-GD1 provides a mechanism similar to that of DG to incentivise efficient investment • Initially log up efficient costs to be assessed at a later stage (re-opener triggered or end of price control) • Incentivised cost pass through mechanism could be implemented if there is sufficient information to assess efficient connection costs

6. Capacity issues Differences between electricity and gas networks affect ability to offer priority access and dispatch Gas • Technical aspects of connection still need to be resolved (e.g. gas quality, injection equipment) • Localised gas networks • Planning is done on peak capacity • Insufficient firm demand to offer firm contracts • Constraints on moving gas to where there may be demand - still to be resolved Any incentive to offer firm capacity contracts would have to be funded by all network customers • Insufficient information is currently available to demonstrate benefits to the network to justify other customers funding these costs RHI • Provides support for producers through payment for energy generated for use • Does not fund connection costs

7. Current position • A range of mechanisms are in place / being put in place to encourage bio-methane connections • There is currently insufficient information available on efficient costs associated with the connection of distributed gas to the grid to justify additional incentives at this time • There are differences between technical aspects of gas and electricity networks which mean that priority access and dispatch for distributed gas cannot be similarly incentivised as for electricity • We have a duty to balance the interests of all stakeholders

8. RIIO-GD1 – Environmental Impacts Process followed Policy consultation process for next price control (RIIO-GD1) • Environmental Working Group meetings • Discussions on proposed incentives / reporting requirements • Consultation (17 December 2010 – 4 February 2011) • Consideration of submissions Decision on RIIO-GD1 policy • Published 31 March 2011 http://www.ofgem.gov.uk/Networks/GasDistr/RIIO-GD1/ConRes/Documents1/GD1decisionoutput.pdf