RIIO-T1 impact on allowed revenues and network charges 6 September 2012.
-
Upload
roger-arnell -
Category
Documents
-
view
230 -
download
2
Transcript of RIIO-T1 impact on allowed revenues and network charges 6 September 2012.
2
Introduction
• RIIO-T1 will set revenue controls for transmission network companies 1 April 2013 – 31 March 2021
• July 2012: We published our Initial Proposals• Engagement with stakeholders continues to be important to the process • Today’s presentation and discussion aims to:
– Focus on the specific RIIO impact set against the wider context– Outline the ways that we and NGG can help manage the impact on
charges– Detail the way that revenue will be recovered by NGG including where
it relates to a signal for extra capacity• Consultation on Initial Proposals closes on 21 September 2012 • We intend to publish updated licence drafting in Autumn 2012 • Final Proposals December 2012
3
Context
• NGG’s obligations and allowed revenues are subject to economic regulation to ensure that energy consumers interests are protected
• To recover its allowed revenues NGG set charges consistent with its charging methodology statement. The methodology is subject to the governance procedures of the UNC and is subject to approval by Ofgem
• There are factors that affect the level and volatility of gas transmission commodity charges which are independent of our decisions in RIIO-T1
• This presentation focuses solely on the expected impact of RIIO-T1
4
RIIO• RIIO is different to our previous approach to setting transmission controls
• Differences include:
– Onus is on network companies to develop well-justified business plans – including reflecting stakeholder input
– Comprehensive set of outputs against which delivery will be monitored and in some cases financial incentives will be used to encourage higher quality performance
– Treatment of capex and opex aligned so that companies choose the most appropriate solution – allowable costs treated as totex
– Aims to match returns more directly to the company’s performance
– Preset proportion of totex allowed in the year (“fast money”) with the remaining payments spread over life of asset (“slow money”)
6
Option
Assessment against optimal risk allocation
Assessment againstother criteria
Consultation view
1 Improved information
Reduces risk to suppliers
No additional cash-flow risk for NWOs
Low cost
Relatively easy to implementLikely to be beneficial
2Restricting intra-year charge changes
Reduces risk to suppliers
Limited additional cash-flow risk for NWOs
Reduces complexity
Reduces administration costs
Likely to be beneficial
3
Lagging incentive rewards / penalties networks recover via allowed revenues
Reduces risk to suppliers
Limited additional cash-flow risk for NWOs
Potentially weakens the incentive regime and signals to investors
Likely to be beneficial
4Lagging adjustments to allowed revenues from uncertainty mechanisms
Reduces risk to suppliers
Potential additional cash-flow risk for NWOs
Potentially weakens signals to investors
Universal changes unlikely to be beneficial. May consider changes on mechanism-by-mechanism basis
5Cap and collar allowed revenue changes
Reduces risk to suppliers
Potential material additional cash-flow risk for NWOs
Introduces complexity to the regulatory regime
Could weaken incentive regime and signals to investors
Unlikely to be beneficial
We consulted on 5 options for mitigating volatility
7
Applying to gas transmission • Improved information
– Recognise NGGT’s work to identify where stakeholders require better information, including forum such as these
– 150 days indicative notice period and relationship with annual iteration
• Restricting charges to 1 April change– Responses were supportive of all charge changes being 1 April, currently
capacity charge setting linked to the gas year (from 1 October)– Welcome NGGT leading industry discussion on this
• Lagging incentives– Where financial incentives are applied, eg stakeholder satisfaction,
natural lag built in as performance in year 1 reflected in charges in year 3
• Lagging uncertainty mechanisms– Detailed design of mechanisms being finalised for RIIO-T1. Our initial
assessment favoured no lag on adjustments but a consideration of individual mechanism requirements
• Caps and collars– Do not favour this option, and see no reason why our assessment of costs
and benefits should be different from other network sectors
9
Setting revenue allowances for future years• Licence model calculates allowed revenue for future years - ‘open’
for annual update of some variables• Takes in actuals and compares with allowances• Formally part of Licence regime reflecting Conditions and Handbook
Annual Iteration• Run in November each year (so values need to be agreed before)• Uses data mostly from regulatory year just ended in March • Calculates adjustment to be applied in following year through
modification update licence term (MOD)MOD• Sum of differences (time adjusted) between• i) Recalculated base revenues for all 8 years using this year’s inputs
and ii) recalculated base revenues for last year• Reflects any changes/corrections to numbers previously used
10
• There are two components of MOD.• Changes from years prior to the current year which have WACC applied
and an updated year t itself. These are added together and compared with FP to calculate MOD.
2015-16 MOD term calculation
x x
+
MOD overview
11
Revenue associated with new projectsComparing TPCR4 with NGG business plan and our
Initial Proposals
• The next slide illustrates the different approaches to revenue recovery following NGG’s business plan proposal; our high level approach under our initial proposals; and TPCR4
• Annual iteration process should not limit agreement/ signals• For example under NGG’s proposal NGG will not be constrained from building
in year 2017; at the worst case the funding will be received 1 year in arrears (with financing costs)
• Our IP approach excludes any financing costs due to NGG for earlier preconstruction expenditure
• Total revenue will vary each year from that in Final Proposals as we update for actual totex and revised allowances
• TOTEX approach works whatever the outcome of the current discussion about new commercial arrangements. We are not prejudging the outcome of that process
12
2014 2015 2016 2017 2018 2019 2020 2021
Allowed revenue IP 736.7 724.5 745.3 769.4 818.5 792.2 814.3 842.0
NGG proposalAdditional allowances (£m) 1 2.5 2.5 2.5 17.5 23 1
Assumed spend 1 2.5 2.5 2.5 17.5 23 1
Change in revenue 0.0 0.5 0.5 0.6 2.5 3.9 2.2 2.2
% change on base 0.0% 0.1% 0.1% 0.1% 0.3% 0.5% 0.3% 0.3%
IP Interim approachAdditional allowances (£m) 10 40
Assumed spend 1 1 1 10 37
Change in revenue 0.0 0.0 0.3 1.6 5.6 2.1 1.1 2.2
% change on base 0.0% 0.0% 0.0% 0.2% 0.7% 0.3% 0.1% 0.3%
TPCR4 systemAssumed capex (£m) 10 40
Change in revenue 2.4 4.8 4.8
% change on base 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.6% 0.6%
Potential revenue impacts of £50m project
Delivery
Initiation