Energy Market Issues for Biomethane Projects

Workshop - 31 October 2011

RIIO-GD1 Environmental Incentives

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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”

Behaviours Output measure or policy instrument

Incentive arrangement

GDNs ensure they are playing their part in achieving a low carbon future

One of the criteria for judging a well justified business plan is the quality of the strategy the company will employ to play a full role in delivering a sustainable energy sector. Companies are also required to engage with stakeholders in determining business plans

GDN may not be fast tracked or subject to proportionate treatment

Broad environmental objective Reputational incentive: League table of biomethane connected (MW) and applications in progress

Discretionary reward scheme (DRS) for companies contributing to environmental and social objectives beyond those financed at review

£12m (3 tranches over the period)

GDNs look at new and innovative ways to deliver low carbon and environmental objectives at lower cost to customers

GDNs can include innovative solutions that can be justified within the price control or over a longer period in their business plans

Innovation allowance 0.5 – 1% of allowed revenue

Network Innovation Competition (NIS)

£20m p.a.

Revenue adjustment mechanism to provide financing for innovative solutions emerging from NIS

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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”

Behaviours Output measure or policy instrument

Incentive arrangement

GDNs provide good service to renewable gas producers and customers, help biomethane producers to understand the process and costs of connection and ensure they receive timely and efficient connections

GDNs to produce common, simple, accessible and reliable information to assist entry customers wanting to connect to the network

Licence requirement – potential fine for breach

Commitment from GDNs to introduce voluntary standards of connection service for gas entry customers

Reputational incentive

Stakeholder engagement +0.5% of allowed revenue Customer satisfaction survey +/ - 0.5% of allowed

revenue Complaints metric -0.5% of allowed revenue

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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)

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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

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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

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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

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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

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