Entry Capacity Substitution Workshop 7 – 10 th February 2009

Entry Capacity Substitution Workshop 7 – 10th February 2009

2

Agenda

Timeline

Further review of options

Mechanical approach

Two stage auction

Option model

Next Steps

3

TCMF – Develop Charging Methodology / Pricing Options

Further development of Charging Methodology

Develop Charging Methodology Changes at TCMF

07/11/09Submit Pricing Changes for

Approval

27/07/09Commence informal

Consultation on Pricing Changes

Approval of

Pricing Changes

Draft Timeline – Development of Methodology

Jan 09 Feb 09 Mar 09 Apr 09 May 09 June 09 July 09 Aug 09 Sept 09 Oct 09 Nov 09 Dec 09

Workshops

5 – Review status – explain risks/rewards process5 – High level options – work through of potential options6 – Industry options – review alternatives6 – Review all options – narrow down for development7/8 – Detailed options/examples9 – Finalised options/examples10 - Update industry following Informal Consultation

07/01/09Workshop 6

07/04/09Workshop 8

07/07/09Workshop 10

12/05/09Workshop 9

10/02/09Workshop 7

Develop stage 1 Licence Direction/Changes 01/04/09

Licence Changes Effective

S23 Notice

Develop stage 2 Licence Changes

07/09/09Submit ECS for Approval

07/12/09Approval of

ECS

27/07/09

Impact Assessment as necessary

28D 14DConsult Report

21D 28DConsult Finalise

Start consultationsInformal Formal

08/06/09 24/08/09Close formal consultation

Consult and Report (non-urgent)

Develop UNC Mod Proposals

07/12/09Approval of UNC

Mods

19/11/09Mod Panel Decision

17/09/09Mods to Panel

02/07/09Tx Workstream: present mods

IT Systemsdevelopment

31/03/09Progress

report

4

Summary of workshop 6

Option

1) Draft Methodology

2) Limits on Quantity

3) National Grid Discretion

4) Ofgem Discretion

5) Simple Economic Test

6) Exchange Rate Cap /

Economic Test Combination

7) Option Model

8) Sub-Reserve Prices

9) Early Warning System

10) Two Stage Auction

11) BGT Proposal

After consideration of the 11 options it was agreed that we focus on:

A Mechanical Approach (options 2 and 6);

Two Stage Auction;

Option Model.

All options build upon the draft methodology as the starting point.

5

Base Methodology

Publish QSEC auction invitation -

including entry zones and ASEP distance

order

Hold QSEC auction

Determine whether any requests pass

the NPV test?

No

Finish

Yes

Identify recipient ASEP with lowest

revenue driver auction

Do any ASEPs within zone have capacity above

sold levels?

Yes

Consider all within zone donor ASEP

with capacity above sold level

together

Undertake Network Analysis

Can all reinforcement be

avoided?

Accept substitutions and

update ASEP obligated levels

Are there any other recipient ASEPs?

Yes

Finish

No

Consider non-zonal substitutions

Yes



avoided?

Do any remaining ASEPs have

capacity above sold levels?

No

Consider next nearest out of

zone ASEP with capacity above

sold levels substitutions

Yes

No

Yes

Reject all partial substitutions

No, but retain partial valid substitutions

Entry Capacity Substitution Mechanical Approach

7

Mechanical Approach

Each substitution opportunity progresses subject to satisfying: Limits set on availability of capacity at potential donor ASEP

Use TBE as criteria to exclude capacity from substitution. Alternatives considered, historic, % baseline, % unsold.

An exchange rate cap:

Suggest 5:1 As TBE peak forecast should protect all foreseen developments a high

exchange rate cap should be appropriate and its inclusion ensures that capacity is efficiently re-allocated.

An economic assessment:

Suggest no economic assessment in the mechanical approach. The mechanical approach uses simple physical rules. “Economic” criteria lie

with the economic “options model”.

8

Mechanical ApproachUses the maximum TBE Forecasts and an XR cap to place limits on substitution


including entry zones, ASEP distance order and TBE Maximum Flow Forecast

Figure per ASEP from 42 months

Hold QSEC auction

Determine whether any requests pass

the NPV test?

No

Finish

Yes




TBE level?

Yes


with capacity above TBE level

together



avoided and is the aggregate XR below [5:1]?




Yes

Finish

No


Yes


capacity above TBE level?

No



TBE level substitutions

Yes

No

Yes


TBE level?

Yes

Consider nearest within zone donor

ASEP with capacity above

TBE level


Can all reinforcement be avoided and is the

specific XR below [5:1]?

Yes

No

Undertake Network AnalysisCan all

reinforcement be avoided and is the specific XR below

[5:1]?




Invitation to contain statement that TBE values are not subject to challenge.

Storage sites to be based on Max Deliverability.

References to capacity above TBE mean above sold level if higher.

Exchange rate cap to be proposed at 5:1

9

Mechanical ApproachMaximum TBE Forecasts (storage sites use Max deliverability)

1. Figures obtained from the Licence2. Figures obtained from http://www.nationalgrid.com/uk/Gas/Data/CMR/ as at 01.01.093. Figures obtained from Table A2.3A from 10 Year Statement4.Figures obtained form Platts and are EOD "possible" Maximum delivery figures No published data available

ASEP Baseline 90% Baseline Peak sold TBE Peak Supply Max deliverability

(see note 1) (see note 1) (see note 2) (see note 3) from Platts Gwh GWh Gwh Gwh (see note 4)

Avonmouth 179.3 161.37 22 0 1590

Bacton 1,783.40 1605.06 895 1,488 n/a0 0

Burton Point 73.5 66.15 13 11 n/a0 0

Barrow (TBE excludes Bains) 309.1 278.19 278 90 n/aBaines 0 00Barton Stacey (aka Humbly Grove) 82.6 74.34 90 0 800 0

Cheshire excludes HH (TBE includes British Salt,Holford, Stublach) 285.9 257.31 514 0Holehouse Farm 131.6 118.44 118 0 58Caythorpe 0 0 90 0 910 0

Dynevor Arms 49 44.1 22 0 500 0

Easington (inc Rough) 1,062.00 955.8 1,361 1,310 n/aRough 0 481Fleetwood 0 0 650 00 0

Glenmavis 99 89.1 0 0 1030 0 0Garton (aka Aldbrough) 0 0 420 00 0 0Hatfield Moor (storage) (TBE aggregates storage and onshore) 25 22.5 22 0 26Hatfield Moor onshore 0.3 0.27 00 0

Hornsea 175 157.5 206 0 1930 0

Isle of Grain 218 196.2 666 342 n/a0 0

Milford Haven 0 0 950 538 n/a0 0

Partington 215 193.5 22 0 2240 0 n/aSt Fergus 1,670.70 1503.63 472 1,272 n/a0 0

Teesside 476 428.4 162 337 n/a0 0

Theddlethorpe (TBE excludes Saltfleetby) 610.7 549.63 20 90 n/aSaltfleetby 0 0 860 0

Wytch Farm 3.3 2.97 0 negligble n/a

Entry Capacity Substitution Option Model

11

Option Model (Basic)

Capacity at an ASEP would be prevented from being substituted in response to an incremental signal elsewhere. This would be subject to an “option”. But what exactly is the option?

The option is a means to delay or prevent capacity being substituted from a particularly ASEP.

The option

does not give rights to the Shipper to use the capacity covered by the option;

does not give the Shipper first option to buy the capacity; but

it would reserve capacity at the relevant ASEP for any Shipper to obtain at a later auction.

12

Option Model – What is the Option?

Which “option” for the Option should be considered?

a) Proposal - Simple option with no further rules:

i.e. the option excludes the capacity from substitution processes. It is valid for 1 year covering all auctions (including ad-hocs) and protects capacity for the duration of the auction period;

simple to apply, understandable, provides certainty

b) Variant - Option with an economic test:

i.e. the option excludes the capacity from substitution processes only if the value of the “protected” capacity is greater than the incremental capacity;

more complex, may not provide the protection expected, hence may have no value, nature of the test needs consideration.

c) Rejected - Option and exercise:

i.e. if the “protected” capacity is identified for substitution the User may exercise the option and buy the capacity;

would extend post-auction timelines to exercise option, would require full commitment from User before being ready to commit.

13

Option Model – Possible Timeline for Options(assuming March QSEC)

FEB MARCH

Option window

Timing of Option Window

QSEC invitationletter

QSECauction starts

Shippers need to know how much capacity is available to have an option over:Hence the option window would follows the QSEC invitation.

Option invitation (part of QSEC invite)

Option window open two weeks after invitationOpen for three days

Options placed are not transparent to other Users

NG publishes option information:ASEPs, aggregate option quantity

14

Option Model – How Much?

How much should the Option cost?Needs to be high enough to discourage speculative options, but not too high that it encourages discontinuous single quarter bookings.

As the option protects for the full auction and is valid for a year; what could we link the option price to?

The NPV test is assessed over 32 quarters and can be used with the minimum capacity reserve price.

Propose that Option Price = Q * 0.0001p/unit x 32 quarters.

15

Option Model – How Much?

How much should the Option cost?

Propose that Option Price = 0.0001p/unit x 32 quarters.

32 quarters represents 8 year NPV test period.

Example

For an option over 10 mcmd at any specified ASEP:

Option Cost =

10 * 10.8 * 10^6 (convert to kWh/day) * 0.0001 * 365 * 8 / 100 (convert p to £) = £315,360

This value seems appropriate as it is of the same order as a PWA required to progress works for a year for delivery of incremental capacity.

16

Option Model – Further Rules

Option Rules

Option is placed ahead of QSEC and applies for 12 months, i.e. covers one QSEC and any ad-hoc QSECs before next option window.

Option does not prevent other Shippers (or that Shipper) buying capacity at that ASEP.

Option fees are non-refundable.

Options permitted only up to the quantity available in QSEC (usually 90% baseline – sold).

Fixed option price: options pro-rated if available capacity is exceeded.

Exchange Rate Cap

It is within the Shipper’s ability to define the required level for the option, but as it requires an element of financial commitment a slightly lower exchange rate cap may be appropriate. An exchange rate of 4:1 is proposed.

17

Option Model – Economic Test(assuming March QSEC)

MARCH APRIL

Assume a March QSEC

QSECauction

QSEC analysisNPV test

QSEC analysisFind donor ASEPs

Test applied: requires exchange rate

Capacity release notice to Ofgem

What is the test?The test is intended to measure and compare the value of capacity substituted from a donor ASEP and the value of the incremental capacity released at a recipient ASEP. Where the value at the donor ASEP is higher substitution should not be progressed.

The test needs to be predictable for Users. It should be simple, transparent and have minimal (or no) impact on post QSEC analysis.Needs to be non-discriminatory.

Shipper options placed

NG quantifiesoption value

NG quantifiesincrement value

18

Option Model – Economic Test

Propose to use Licence Revenue Drivers.

NG determines value of capacity at recipient ASEPsUsing incremental bid quantity and relevant revenue drivers.

NG determines value of capacity at donor ASEPsWhere no option in place value is zero, otherwise

Using quantity of capacity covered by option(s) and relevant revenue drivers and the maximum exchange rate. Q * RD * XRmax

If a simple economic test is used there should be no impact on post-auction timelines. A more complex test may require Licence / UNC changes.

19

Option model with economic test

Substitution criteriaCapacity available above sold levelOf which, some or all, does not have an option on itValue of capacity is lower than recipient (Q * Rev Driver)


including entry zones, ASEP distance order

Hold QSEC auction

Are there any requests from the QSEC auction that pass the NPV test?

No

Finish

Yes



Do any ASEPs within zone have

capacity that satisfies the

substitution criteria?

Yes

Consider all within zone donor ASEPs with capacity that

satisfies the substitution criteria

together



aggregate XR below [4:1]?




Yes

Finish

No


Yes

Do any remaining ASEPs have capacity that satisfies the substitution

criteria?

No

Consider next nearest out of zone ASEP with capacity that

satisfies the substitution criteria

Yes

No

Yes

Do any ASEPs within zone have

capacity that satisfies the

substitution criteria?


ASEP with capacity that satisfies the

substitution criteria




YesNo, but retain partial valid substitutions

No



[4:1]?



Open options window

Publish Options resultsASEPs & aggregate quantity

Identify incremental capacity value

(quantity * revenue driver

20

Option Model – Further Issues

Issues

Is the pricing methodology fair / discriminatory / effective?Treats all ASEPs alike, significant cost but not excessive.

When is the option cost paid?Pay post QSEC, in capacity invoice. Needs commitment, “security” issue, want to avoid need for refunds if capacity substituted.

Would this option encourage single quarter bookings?32 * cost of single quarter,

immediate financial commitment. Should rules be introduced to limit

single quarter bookings?

Can existing systems be used for placing options?Consideration of “options” functionality on Gemini needed.

Do options impact on use of Permits?NG may identify opportunity to release capacity early; would options affect NG’s analysis that leads to this decision?

Can options be made available to Developers?

Entry Capacity Substitution Two Stage Auction

22

Two Stage Auction

This option needs to be considered as a means to prevent capacity being substituted from a particularly ASEP by allowing Shippers an opportunity to respond to perceived vulnerability of certain ASEPs when incremental capacity has been requested elsewhere.

Baseline and incremental capacity can be obtained in the first phase.

Only baseline capacity can be obtained in the second stage.

23

Two Stage Auction – Timeline

STAGE 1 Five rounds

Invitation letter – unchanged

But will include substitution information, e.g. entry zones and distances.

Shippers bid for unsold obligated and incremental.

M T W T F S S

Auction closed

Issues

Auction open at start of month to create time for analysis.

May require Licence changes.

Are five rounds enough?

Stability measure retained.

Auction opened

24


STAGE 1 Five rounds

NG identifies valid incremental and publishes ASEPs and

quantities.

Shippers bid for unsold baseline and incremental.

M T W T F S S M T W T F S S M T W T F

Auction closed

Allocations madeon Gemini

Issues

Allocations are made without Ofgem approval. No history of Ofgem rejection.

Would require allocations to be backed out if Ofgem reject.

Assessment of “vulnerable” ASEPs lies with Shipper based on information provided.

Auction opened

Invitation letter – unchanged

But will include substitution information, e.g. entry zones and distances.

Incrementalcapacityidentified

NPVtest

Info published for each ASEP:Total sold

NPV pass quantity

Infopublished

25


NG identifies valid incremental and publishes ASEPs and

quantities.

M T W T F S S M T W T F S S M T W T F

Stage 2 will only be run where an incremental signal has been received in stage 1.

Stage 2 run using AMSEC functionality

Possible IT issue.

Stage 2 rules

Pay as bid.

Release to Y+15

Available capacity is same as stage 1 minus any sold in stage 1. No pro-rating across stages.

Three discrete rounds. No next-day withdrawal of bids.

NPVtest

STAGE 2 Three rounds

Shippers bid for unsold baseline only.

Shippers identify vulnerable ASEPs /

capacity.

Auction reopened

Allocationsmade onGemini

Infopublished

Auction closed

Shipperreview

26


M T W T F S S M T W T F Submit incremental release letter to Ofgem

Stage 2 allocations to be made within 2 months of close of QSEC.

Ofgem 28 day veto period

Post-auction processes

STAGE 2 Three rounds

Auction reopened

Auction closed

If Ofgem veto stage 1 incremental release then the incremental allocations need to be backed out.

[No history of Ofgem veto].

27

STAGE 2: 3 roundsObligated only

Two Stage Auction – March 2010 timeline

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

STAGE 1: Five roundsObligated & incremental

Stage 1 closed

Allocations madeon Gemini

Stage 1 QSECopened

Pre-auction activities include invitation letter / notice of prices / IECRInvitation letter – essentially unchanged, but will include substitution information, e.g. entry zones and distances.

IncrementalcapacityidentifiedNPV

test

Info published for each ASEP:Total sold & quantity passing NPV test

17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Stage 2 AMSEC opened

Stage 2 closed

Shipperreview

28

Two Stage Auction – Issues

Exchange rate cap set at 2:1

The two stage option does not protect donor ASEP capacity to the extent of the Mechanical Approach. Unlike the Option Model it requires full financial commitment from the Shipper if capacity is to be protected. Hence a lower cap would be appropriate.

How will the process be applied to ad-hoc auctions?

Run baseline auction (AMSEC functionality)

Major UNC modification.

Re-design of auction processes

Systems impact.

Use of existing functionality being considered

Possible licence change.

Developers cannot place capacity bids.

29

Two stage auction


including entry zones, ASEP distance order

Hold "shortened"

QSEC auction - 5

rounds

Are there any requests from the QSEC auction that pass the NPV test?

No

Finish

Yes




sold level?

Yes


with capacity above sold level

together



aggregate XR below [2:1]?




Yes

Finish

No


Yes


capacity above sold level?

No



sold level substitutions

Yes

No

Yes


sold level?


ASEP with capacity above

sold level




Yes


No



[2:1]?


Publish incremental signals received

that would pass the NPV test

Hold 3 round pay as bid quarterly auction for obligated capacity for the QSEC auction

transaction period


30

Recap of all options.

Do they offer the benefits of substitution?

Is it unduly restrictive?

Do they mitigate the risks presented by substitution?

New long term supply projects

Short term players – price sensitive

New supply projects – marginal fields

How difficult would they be to implement?

Systems impact?

Shipper processes?

National Grid processes?

Three options considered.

Mechanical Approach

TBE

Exchange rate capped at 5:1

Option Model

With / without economic test


Two stage auction:


Do the options satisfy the main substitution criteria?

31

Next Steps

1) Provide any initial comments on proposed options, and views on bullets 3 to 5, by 20th February 2009;

to [email protected]

cc [email protected]

2) For the next workshop National Grid will amend the options and add further detail as appropriate.

7th April

10am to 1pm

At Elexon (to be confirmed)

3) What information would you require to assess the options at the next workshop?

4) What examples should we consider?

5) Is the level of detail right?

Entry Capacity Substitution Workshop 7 – 10 th February 2009

Documents

Transcript of Entry Capacity Substitution Workshop 7 – 10 th February 2009