Entry Capacity Substitution Workshop 3 11 th June 2008 Substitution Example.
Entry Capacity Substitution Workshop 9 – 7 th July 2009 DRAFT PRESENTATION.
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Transcript of Entry Capacity Substitution Workshop 9 – 7 th July 2009 DRAFT PRESENTATION.
2
Overview
After the informal consultation Ofgem has made clear, in their letter of 3rd July,
that they would not approve an Entry Capacity Substitution methodology based
on future forecast flows, i.e. the Mechanical Approach.
National Grid has therefore reviewed the remaining two options.
Unfortunately National Grid does not believe that the Two-Stage Auction can be
implemented for March 2010.
Hence National Grid is proposing to put forward the Option Approach for formal
consultation.
5
National Grid views
Two-stage Auction
Full User commitment required (or possibly no User commitment if no incremental signal). Assumes unsold = unwanted Forces Users to commit earlier than they may feel able
Particularly relevant to short-term players, marginal fields.
Implementation is highly complex and uncertain (see timeline) Alters QSEC processes by reducing number of bid windows Uses mixture of auction functionality Depends on a major change to UNC (i.e. credit) to be implemented.
Since this proposal was first considered new “credit” arrangements have been proposed which would adjust the QSEC timeline to make implementation of 2-stage auction more challenging.
Systems implication of credit interactions need to be confirmed, e.g. to remove stage 2 allocations if credit check fails.
Further UNC change may be required to accommodate credit processes for stage 2.
Hence we do not intend to pursue this approach for March 2010.
6
STAGE 2: 3 roundsObligated only
Two Stage Auction – Proposed March 2010 timeline
1 2 3 4 5 6 7 8 9 10 11 12 13 14
STAGE 1: Five roundsObligated & incremental
Stage 1closed
Allocations madeon Gemini
Stage 1 QSECopened
NPV testIncremental capacity identified
Info published for each ASEP:
Total sold & quantity passing NPV test
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Stage 2 opened
Stage 2 closed
Earliest start date. AMSEC run in Feb.
Latest end date. 42 month lead time
starts.
Shippers review position
Reduced from current 10 rounds. Min 5 requested.
7
STAGE 2: 3 roundsObligated only
Two Stage Auction – Proposed March 2010 timelinePotential Impact of Entry Credit Mod Proposals
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Stage 1closed
Stage 1allocations made on Gemini
Stage 1 QSECopened
NPV testIncremental
capacity identified
Info published for each ASEP:
Total sold & quantity passing NPV test
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Stage 2 opened
Stage 2 closed
Shippers review
position
Potential discontinuity
Credit proposals are subject to Ofgem Impact Assessment which is not expected to conclude until late August. Hence the Two-Stage auction presents a challenge to accommodate within the available time.
One day after each bid window for credit checks.
STAGE 1: Five roundsObligated & incremental
9
National Grid views
Option Approach.
A good compromise between the two extremes.
Requires User Commitment May be considered too small at some ASEPs. Or too high at others (where reserve price is low). But, could be zero cost if capacity is booked.
Relies on Shippers’ assessment of needs not National Grid judgement.
Relatively simple to implement. No impact on QSEC processes for Shippers.
Except for participation in the earlier Options Window
No major impact on QSEC processes for National Grid. Allocations rules / process need to be managed; “Tracking” of Options will be required: Both may require future IT development.
Further clarity on how the Option process would work has been provided (see subsequent slides).
10
Option Approach
Capacity at an ASEP would be prevented from being substituted in response to an incremental signal elsewhere.
This would be subject to a signal and commitment from Shippers by way of an “Option”.
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.
11
Option Approach – What is the Option?
It is proposed that the Option:
identifies and excludes capacity from substitution processes thereby protecting capacity for the duration of the Option;
nominally applies in respect of Q3 Y+4, i.e. from the default 42 month lead-time, for the purposes of defining refunds;
will still prevent capacity being substituted away if the incremental capacity is allocated earlier or later than the default lead time;
is placed ahead of QSEC and applies for 12 months,
i.e. covers (normally) one QSEC and any ad-hoc QSECs before the next option window.
will be subject to a one-off Option Fee. This will be a fixed price per unit of capacity and will be the same for all ASEPs. The Option Fee shall be:
£32,120 per mcmd of capacity covered by the Option.
This is derived from minimum reserve price * 32 quarters.
i.e. 1 mcmd * 11 * 10^6 (convert to kWh/day) * 0.0001 p * 365 * 8 / 100 (convert p to £)
will be pro-rated if available capacity is exceeded.
12
Option Approach – What is the Option?
The Option will not:
prevent other Shippers (or the relevant Shipper) buying capacity at that ASEP in the period covered by the Option;
be sold in quantities above the quantity available in QSEC (usually 90% baseline – sold);
be available to non-Users. This is due to complications with potential refunds. However, extending the process to non-Users could be an option to be considered for 2011.
13
90 % of baseline capacity.
(May be higher if incremental capacity has previously been
released).
Time
Diagram 1: Capacity Available for Substitution at Donor ASEPsOption Approach
Capacity release date at recipient ASEP(usually 42 months)
Sold capacity
Capacity.
Option quantity
Available capacity for substitution
14
Diagram 2: Capacity Allocation at ASEPs with Options
Existing Sold Capacity
“Unprotected”
Options Quantity
Post-auction allocations
Sold Capacity
Options Quantity
“Unprotected”
90% baseline
Capacity
Pre-auction capacity
Withheld from QSEC
Baseline capacity
Unsold Capacity
New Sold Capacity
Withheld from QSEC
Unprotected capacity will be allocated first,
then capacity under Option.
New Sold Capacity
NB: In respect of subsequent QSEC and AMSEC auctions the Shipper taking out an Option will be allocated the protect capacity, thereby triggering the refund.
15
The Option Window
It is proposed that: The Option Window will be open for 2 “bid days” from [8am to 5pm].;
There will be one day between the bid days;
Option requests will not be visible within the bid window but Options granted shall be published before [7pm] on the bid day;
This will consist of relevant ASEP and quantity.
The same data on Options granted will be included in the QSEC invitation letter.
Options will be requested via fax. A pro-forma will be developed.
Any Options requested cannot be removed or amended except where the request submitted is identified by National Grid as blatantly erroneous and is rejected.
National Grid will accept no liability in respect of erroneous applications, but will endeavour to resolve errors within the bid day. Those not resolved or rejected by 5pm will be accepted as submitted.
Any pro-rating due to Options exceeding available capacity will be carried out at the end of each bid day.
The Option Window will be run in January 2010 (see timeline).
Avoid clash with AMSEC in February.
16
Diagram 3: Option Approach – Timeline for 2010 QSEC
Mid Dec
Invitation letter for Options issued
7 Dec
Approval of Methodology Statement
Mid Jan Option window.
2 days plus1 day between
Mid Mar QSEC
Apr / May Bids Allocated - 2 months – as defined in UNC section B 2.6.7
Feb AMSEC
4 tranches with 2 days between
Early June
Ad hoc Invoice for Option if required
DEC 09 JAN 10 FEB 10 MAR 10 APR 10 MAY 10 JUN 10 JUL 10
Mid Feb
QSEC invitation
letter
Mid Jan
Notice of
charges
N Grid AnalysisN Grid GovernanceOfgem Governance
Precise dates for QSEC auction to be confirmed
17
Option Fees
It is proposed that: The Option Fee will be £32,120 per mcmd irrespective of ASEP;
The Option Fee shall be invoiced via an “ad-hoc invoice” after capacity allocations are confirmed; i.e. June 2010.
In the event that capacity covered by an Option is allocated in the same year as the Option is taken out then the Option will be revoked, the Option Fee will not apply and no invoice will be raised.
The Option Fee shall not be subject to additional credit or security.
Amounts involved are relatively small
Impact in event of default is/may be unnecessary investment due to missed substitution opportunity. However, the risk of default is highest where there are no incremental capacity requests.
Option Fees will be refunded where capacity is subsequently allocated (see next slide for details).
Refunds will be credited in June 2010.
Treatment of Fees National Grid’s current view is that Option Fees will be offset against TO Entry Commodity
Charges (and refunds treated accordingly).
National Grid anticipate raising a Charging Consultation on the treatment of Option Fees following September TCMF.
18
It is proposed that the Option Fee will be refunded where the relevant Shipper is subsequently allocated, in a QSEC or AMSEC auction, the capacity covered by the Option. In these auctions the minimum reserve price will apply to the allocated capacity.
For the refund to apply the capacity must be obtained for one or more months for the designated year covered by the Option.
For an option taken out in Jan 2010 capacity must be allocated for October 2013 to Sept
2014.
The refund amount will equal the charge for the capacity allocated but will be capped at the Option Fee.
In the event that the capacity covered by the Option is allocated in the QSEC in the year in which the Option is taken out, to the relevant Shipper or to another Shipper, the Option will be revoked. The Option Fee will not be invoiced.
• Note that in this QSEC auction all Shippers (including the relevant Shipper) will be allocated unprotected capacity before that covered by the Option. The Option will be revoked (in part or whole) after all unprotected capacity has been allocated.
Option Fee Refunds
19
Option Fee Refunds
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
Option taken
QSEC auction
Period covered by Option
Period covered by QSEC 11
Period covered by QSEC 12QSEC 11
QSEC 12
AMSEC 13
Period covered by AMSEC 13
AMSEC 14
Period covered by AMSEC 14
Refund if capacity obtained for any month in this period
Auctions where capacity can be obtained that may trigger a refund.Relevant Shipper must be allocated capacity to get refund.
Option Fee not raised if any Shipper is allocated capacity in this QSEC
National Grid will track Options from January 2010 until February 2014. If a refund has not been triggered the Option will fall away and the Option Fee retained.
Substitution will be allowed in QSEC 11 from 42 months (Q4 14) unless a further Option is taken out in Jan 11.
20
Option Approach – Associated Issues
Informal consultation respondents mostly favoured a low exchange rate cap.
Several see exchange rate caps as being a soft landing tool that can be reviewed and
relaxed after experience of substitution is gained.
National Grid is proposing an exchange rate cap of 3:1
This is significantly lower that the cap applied to Transfer and Trades.
With Shippers having an opportunity through the Options to protect capacity, an additional constraint by way of 1:1 exchange rate cap would seem inappropriate.
Partial substitutions will be progressed
Entry Zones are proposed to be used for selecting potential donor ASEPs. Within zone,
donor ASEPs would be selected on the basis of best exchange rate. This should provide
the most economic outcome. Out of zone, donor ASEPs would be selected on the basis
of shortest pipeline distance from the recipient ASEP.
21
Option Approach.
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
substitutable capacity?
Yes
Accept substitutions and update ASEP obligated levels
Are there any other recipient ASEPs?
Yes
Finish
No
Consider non-zonal substitutions
Yes
Do any remaining ASEPs have substitutable
capacity?
No
Optimise reinforcements to
provide most efficient investment
strategy
Where applicable accept substitutions
and update ASEP obligated levels
Consider next nearest out of
zone ASEP with substitutable
capacity
Yes
No
Yes
No
No
Run options window
Publish Options results.Quantity / ASEPs
Publish QSEC auction invitation -
including Option result and substitution data: entry zones,
ASEP distance order.
Substitutable capacity is defined as:90% of the baseline obligated entry capacity; plus any previous released incremental capacity that has been reclassified as non-incremental obligated entry capacity; plus any capacity that has been substituted to the ASEP; minus any capacity that has been substituted from the ASEP; minus any capacity that has been allocated to any User; minus any capacity that is subject to an option.
Identify within zone donor
ASEPs with most favourable
(lowest) exchange rate.
Undertake Network Analysis
Can all reinforcement be avoided and is the
exchange rate below 3:1?
Retain partial valid substitutions
Identify within zone donor
ASEPs with next most favourable exchange rate.
Are there any more ASEPs within zone with substitutable
capacity?
Yes
No
Undertake Network Analysis
Can all reinforcement be
avoided and is the exchange rate
below 3:1?
Retain partial valid substitutions
22
Summary
The Option Approach protects capacity, but only to the extent that it is genuinely needed, as demonstrated by Shippers taking out Options.
A commitment is required from Shippers but this may be much lower than buying the capacity.
National Grid is proposing that Option Fees are refundable if the capacity is ultimately bought (see slide 18) thereby making the fee relevant only to speculative Options.
The Option Approach allows and encourages Shippers to identify and protect their needs.
Shippers may benefit from awareness of market developments but this is not essential.
The amount of protected capacity is determined by Shippers actions not National Grid assumptions.
Options (and existing sold capacity) will quantify reasonable and foreseeable future capacity demands which should be excluded from substitution.
23
Next Steps
Formal consultation
24th July 2009
Closes 21st August 2009
Proposed methodology statement submitted to Authority by 4th September 2009
Ofgem Impact Assessment
To follow submission of proposed methodology statement
Subject to Licence change to allow additional time between submission of methodology statement and deemed approval to facilitate IA time table.
24
Consultation and reportingDevelop Treatment of Option Fees
07/11/09Submit Charging
Proposals for Approval
Approval of
Charging Proposals
Timeline – Development of Options Approach
Jan 09 Feb 09 Mar 09 Apr 09 May 09 June 09 July 09 Aug 09 Sept 09 Oct 09 Nov 09 Dec 09
07/01/09Workshop 6
07/04/09Workshop 8
07/07/09Workshop 9
10/02/09Workshop 7
Develop Licence Change
01/09/09Licence Changes
Effective
07/09/09Submit ECS for Approval
07/12/09Approval of
ECS
24/07/09
Impact Assessment as necessary
formal consultation
08/06/09 21/08/09
informal consultation
03/09/09TCMF