Review Group 291 – Balancing Arrangements Default Cashout

Review Group 291 – Balancing Arrangements Default Cashout

Workshop 3 – 21st June 2010

Introduction

Primary objective is to update the SMP default values

A number of ways to achieve the objective:

Use ‘operational costs’ to reflect imbalance costs to SO

Use ‘market prices’ to reflect possible shipper actions to balance

SMP default values should essentially provide:

a commercial incentive to balance and,

a proxy for the use and valuation of system flexibility

We should also consider the interactions between the use of SMP defaults and the development of a Linepack product

Contents

Action from previous meeting

Overview of potential options

Other considerations

Recommendations

Action 004: Obtain & report balancing and operational costs faced by National Grid due to shipper imbalance (EOD) Balancing;

Residual Balancing trades (neutrality)

Financial impacts to SO Incentives

Operational:

Components are Compressors, Pipeline & Maintenance

Compressor usage is most likely to reflect marginal costs

However, approx 95% of compressor fuel is used to transport gas around system

National Compressor Fuel Usage

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mcm

Daily linepack change

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1 19 37 55 73 91 109 127 145 163 181 199 217 235 253 271 289 307 325 343 361mcm

Compressor costs to derive default values?

Some initial figures;

In 2008/9 approx 3,894GWh of gas to fuel NTS compressors

5% of the above = 195GWh

In 2009 the gross shipper imbalance i.e. total amount of gas ‘cashed out’ was 28,378GWh, net 41.6GWh

Average SAP for 2008/9 was 1.89p/kWh

Possible methodology;

Multiply 5% of compressor fuel use by average SAP = £3.7M

Divide £3.7M by 28,378GWh = 0.0128p/kWh

Current SMP Buy = 0.0288p/kWh

Current SMP Sell = 0.0324p/kWh

Further development of RG 291 options

1. Retain the current SMP default values

2. Remove the SMP fixed differentials

3. Base differentials on transportation charges

4. Update SMP default values with current Hornsea prices

5. Use Market prices;

a) Apply a % SAP or alternative market price

b) Use forward prices to calculate default

6. Existing Methodology

Any other possible options?

Criteria

Transparent Market & objective based Cost reflective Provide incentive for shippers to balance Does not cross-subsidise Facilitates competition Does not risk security of supply Does not hamper market liquidity Dynamic

Option 1 – Retain current default values

Retain SMP Buy default as SAP +0.0288p/kWh, SMP Sell as SAP -0.0324p/kWh

Pros

Comparing pre 2001 to 2009, the volume of gas ‘cashed out’ has decreased from 7% to between 2-4%

Reduction in neutrality costs to industry

Cons

Consensus of Review Group was that current values are potentially arbitrary (may not satisfy EU balancing rules)

Gas sources & flows in 2010 are different to 2001 (not reflective of market)

National Grid believes that ‘do nothing’ is not an option



Option 2 – Remove SMP fixed defaults

Remove default cashout so that SMP Buy & Sell is set solely by Residual Balancing trades

What do we do use for days with no trades? SAP?

Pros

Removes arbitrary nature of defaults

Solely reflects Residual Balancing trades

Cons

Might reduce the shippers’ commercial incentive to balance

Increase in SO Residual Balancing actions?

Wider industry impacts e.g. Investment signals, NBP & Storage contracts



Replace default SMP values with a number derived from NTS transportation rates

As per April 2010 statement, NTS commodity charges are; SO Entry 0.0194p/kWh, but not levied on Storage Sites

TO Entry 0.0196p/kWh

SO Exit 0.0194p/kWh

Could above be a proxy for system flexibility?

i.e. = 0.039p/kWh?

Pros Easily derived from existing charge methodology

Regularly updated in line with transportation rates

Cons Not reflective of true operational costs, commodity charges are volatile and reflect SO

under / over recovery from other charges

Option 3 - Base upon transportation charges Current SMP Buy = 0.0288p/kWh


Option 4a) - Update default values with current Hornsea prices

Update SMP default values to reflect current Hornsea prices

Pros: utilises existing methodology, reflects opportunity the ‘value’ of not obtaining gas from storage to balance

Cons: limited to Hornsea, not reflective of true operational costs

Auction Price (p/SBU) SMP Buy Default (p/kWh) SMP Sell Default (p/kWh)

2001 5.6 0.0288 0.0324

2010 9.3 0.0409 0.0419



Option 4b) - Revise current methodology using range of Storage

Update existing methodology to reflect current storage prices and introduce methodology into UNC & update at least annually

Which gas sources should we benchmark?

Which prices do we use

Market based prices (if available)?

Ops Margins prices? E.g.



SMP Buy SMP SellRough 0.0313 0.0367Hornsea 0.1265 0.0885Avonmouth 0.1146 0.0820Glenmavis 0.1323 0.0917Partington 0.0871 0.0671Holehouse Farm 0.1058 0.0772Isle of Grain (average) 0.2452 0.1531

Option 5a) - Apply % of SAP

Add or subtract a % of SAP

For example Day Ahead?

2008/9 average DA price was 56.87p/Th (1.94 p/kWh)

Dutch TSO (GTS) model uses 10% for over delivery, 15% for under

Or, we could reflect original default cashout values / SAP % (based on 2001 average SAP)

Pros: ?, Cons: Arbitrary number, confusing calculation..

SMP Buy % SMP Buy Default (p/kWh)

SMP Sell % SMP Sell Default (p/kWh)

GTS 15% 0.2911 10% 0.1941

Original % 4% 0.0776 5% 0.0970



Option 5b) – Utilise forward prices

Replace current default prices with figure derived from a price-spread based on market prices?

Assumption is that market prices should reflect all associated costs (e.g. storage etc)

Options;

SAP Day 1 less SAP Day 2?

WD less DA, or DA less WD (depending on which is larger)?

A rolling average of WD-DA premium?

Winter vs Summer Premium?

Reference to Project Discovery work e.g. encourage Seasonal Storage?

Pros: market based, dynamic.

Cons: Potentially confusing, no consistent default



Example: Within Day vs Day Ahead 2008/2009

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Option 6 – Existing Methodology?

Update current defaults

Introduce existing default cashout methodology into UNC

Introduce regular (annual) reviews of input prices

Introduce a regular review of gas source inputs to ensure relevance



Possible scoring (for discussion)

Option 1 2 3 4a/b 5a 5b 6

Criteria

No

Ch

ang

e

Rem

ove

Tran

spo

rt Co

sts

Up

date

% S

ap

Market P

rice

min

imu

m

SMP Buy (p/kWh) 0.0288 SAP? 0.0309 0.0409 ? ? 0.0409

SMP Sell (p/kWh) 0.0324 SAP? 0.0309 0.0419 ? ? 0.0419 Transparent Market & Objective Based Cost Reflective Provide incentive for shippers to balance Does not cross subsidise Facilitates Competition Does not risk security of supply Does not hamper market liquidity Dynamic

Other considerations

IS

Development lead-times

Costs

SMP references within Industry contracts

NBP ’97 (trading) contracts

Storage

SO Incentive

Linepack

Price Performance Measure

Recommendations

Baseline ‘Option 6’

Update fixed defaults using current default values & relevant sources

Incorporate methodology into UNC

Update methodology on an annual basis, or when new relevant UK gas sources become available

Further develop Operational Costs & Market based default?

Documents

Review Group 291 – Balancing Arrangements Default Cashout