Gas Charging Review Place your chosen image here. The four corners - PowerPoint PPT Presentation

Gas Charging Review Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Sub Group October 2016

Agenda Area Detail • Introductions Quick introduction to the group • Terms of Reference Discussion and review of draft Terms of Reference • Quick reminder of the current framework, the LRMC Model, key GB Charging inputs, difference between Entry and Exit Capacity Framework • Use of Commodity, key inputs. • Sensitivities of inputs to the model for Entry and Exit capacity • LRMC Model Discussion on how these meet Objectives (Relevant, Stakeholder and EU) – rolling item • Overview of model developed so far, key inputs CWD Model • Discussion on model, options to explore, issues and resolutions • Visualising the changes – how to compare options Sharing Models and • Discussion on how best to share the relevant models and outputs outputs from these workshops • Issues , options and Summary of discussions and issues, options and actions from today’s meeting. actions • Next Steps Outputs to NTSCMF and further development at future workshops This agenda can be flexible to facilitate the development at the meeting, however serves a guide to 2 follow for a structured approach.

Overview – How each revenue stream is recovered System Transmission Owner (TO) Operator (SO) TO Entry TO Exit Other SO Commodity Other Charges Charges Charges Charges Charges St. Fergus DN Compressi TO Entry TO Entry TO Exit TO Exit SO Entry SO Exit Pensions on / Capacity Comm Capacity Comm Comm Comm / Shorthaul Charges Charges* Charges Charges* Charges* Charges* Metering / Legacy Capacity 3 * Storage Exemption

Key inputs to Capacity Charging Input Detail • Forecast Supplies Supply • Supply Supply must equal demand • Links to GTYS Entry / • Forecast 1 in 20 Peak Day Demand Demand Demand Exit Split • Links to GTYS • Required target revenue Capacity • Revenue* When used, required to recover Charges Allowed Revenue for formula year • Estimated cost of network Network Revenue Costs expansion expressed as £/GWh/km • Annuitisation Costs • All nodes on network and Network associated distances Entry/Exit • % split between Entry and Exit Split *Revenue only used in Exit Capacity charges, 4 not used in Entry charges

Current methodology for Capacity Charges: The Transportation Model (1/2)  The NTS Transportation Model, available to the industry, is a Microsoft Excel spreadsheet run using Microsoft Excel Solver and Macros  Calculates:  NTS Entry Capacity auction reserve prices  Long Run Marginal Cost  NTS Exit Capacity charges  Administered to recover allowed revenue  Inputs are:  Allowed Revenue (in respect of Exit)  Forecast 1-in-20 peak day demand data and forecast supplies – linked to a flow scenario  Obligated capacity levels  Transmission pipelines between each node (km)  Expansion Constant (£/GWh/km) to calculate costs  Anuitisation Factor to calculate prices 5

Current methodology for Capacity Charges: The Transportation Model (1/2)  Transportation Model has two components  The NTS Transport Model that calculates the long run marginal costs (LRMCs) of transporting gas from each Entry Point (for the purposes of setting NTS Entry Capacity Prices) to a “reference node” and from the “reference node” to each relevant offtake point.  Long Run – Investment costs  Marginal Cost – adding an extra unit of supply or demand at a relevant node on the system  The Tariff Model (in respect of Exit) calculates a Revenue Adjustment Factor, which when added to the LRMC at each demand, gives a revised marginal distance for each demand, such that the total revenue to be recovered from exit charges equals the target revenue. 6

Core steps to determining prices Comparing Entry and Exit Capacity Entry Exit Capacity Capacity • “Solved” Network using supply and • “Solved” Network using supply and Marginal Marginal demand provides marginal demand provides marginal Distance Distance distances distances Include cost • Balance Entry and Exit Average • Distances converted to prices 50/50 Distances using annuitisation of costs components Include Cost • Revenue based adjustment • Distances converted to prices 50/50 • All prices equally uplifted components using annuitisation of costs • Minimum price if calculated • Minimum price if calculated Price Collar Price Collar adjusted price is less than 0.0001 reserve is less than 0.0001 p/kWh p/kWh Payable Payable • Calculated and changed each Gas • Set by auction. Year (1 Oct) Price Price 7 A “solved network” calculates the minimum total network flow distance on the NTS given a set of supply and demand flows

TO and SO Commodity Charges Transmission Owner System (TO) Operator (SO) SO TO Entry TO Exit Other Other Commodity Charges Charges Charges Charges Charges St. TO TO DN SO Fergus TO Exit TO Exit SO Exit Entry Entry Pension Entry Compres Capacit Comm Comm Capacit Comm s / Comm sion / y Charges Charges Shorthaul y Charges Meterin Charges Charges * * / Legacy Charges * g * Capacity 8 * Storage Exemption

Commodity Charges Type of Commodity Charge Summary • An NTS TO Commodity charge is levied TO Entry Commodity on Entry flows where entry auction Charge revenue is forecast to be under-recovered. • An NTS TO Commodity charge is levied on Exit flows where revenue from Exit TO Exit Commodity Charge capacity bookings is forecast to be under recovered. • The NTS SO allowed revenue is collected largely by means of a Commodity charge SO Entry and Exit levied on Entry and Exit flows (same rate Commodity charge is applicable for both SO Entry and SO Exit Commodity charge). 9

Key inputs to Commodity Charging Input Detail • Allowed Revenue for Formula Allowed year as calculated through the Allowed Revenue Revenue Licence • Forecast of Capacity revenue for the period • Revenue Revenue from NTS Optional Revenue from Commodity Charge, St. Fergus from Commodity Entry / Exit Capacity Compression, DN Pensions. capacity Split Charges and other • and other Revenue from Commodity charges charges charges (applicable for mid formula year changes – i.e. from 1 October) • Forecast of Entry and Exit Forecast Forecast Flows flows over which the Flows commodity charge is to applied Entry/Exit • % split between Entry and Exit Split 10

TO and SO Other Charges Transmission Owner System (TO) Operator (SO) Other SO Commodity Other TO Entry Charges TO Exit Charges Charges Charges Charges St. Fergus TO Entry TO Entry TO Exit TO Exit SO Entry SO Exit Compression DN Pensions Capacity Commodity Capacity Commodity Commodity Commodity / Shorthaul / / Metering Charges Charges* Charges Charges* Charges* Charges* Legacy Capacity 11 * Storage Exemption

Other TO Charges Charge Detail • Charge levied directly to DNs that were sold for which National Grid retains certain pension DN Pensions charge responsibilities. • Value incorporated into NTS TO Allowed Revenue. Amount is collected directly from respective DNs. NTS Meter • Unit charges for the NTS meter maintenance under Maintenance National Grid NTS’s ownership. charges The overall TO Allowed Revenue less these two items provides the target revenue to be collected through the remaining TO charges. 12

Other SO Charges Charge Detail NTS Optional Commodity Users can elect to pay the NTS Optional charge (“ Shorthaul ”) Commodity Rate as an alternative to both the NTS Entry and Exit (SO & TO) Commodity Charges. St. Fergus Compression Applicable where gas is delivered at lower than charge normally expected pressures. Charge is cost of additional fuel per unit throughput (applies at Total entry point only). Legacy Capacity Revenue associated to incremental capacity Revenue triggered before April 2013 treated as SO for a period then transfers to TO. Timescales given in the Licence for when this transfer occurs. 13

Gas Charging Review Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Objectives

Gas Charging Review Objectives  Relevant Objectives as per Licence  Stakeholder Objectives – as developed and shared at NTSCMF  EU Objectives – closely aligns with relevant objectives in Licence, as discussed at NTSCMF 15

Charging Obligations / Relevant Objectives Licence Obligations Detail • Licence Standard Keep charging methodology under review • Special Conditions Use reasonable endeavours regarding • A4 - Charging methodology and charge changes: • General Not to make changes more frequently than • A5 - Charging twice a year (on 1 April and 1 October) • Methodology In relation to exit capacity once a year on 1 October Relevant Objectives • • Cost reflectivity Take account of developments in • Promote efficiency the transportation business • • Avoid undue preference in the Compliance with Regulation and supply of transportation services decisions from the EC and ACER • • Best promotes competition Follow any alternative arrangement between gas suppliers and gas determined by the Secretary of shippers State 16

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