Modification Proposal 0246: Quarterly NTS Entry Capacity User Commitment
Chris Shanley
2
Modification Proposal 0246: Entry Capacity User Commitment – “The Concept”
Long Term Entry Capacity Car
Value - £1.3bn Value - £40,000
Security - £? Deposit - £1000
3
Timeline
RG221 was established in September 2008
Main questions:
Is the balance of investment risk right between existing and new shippers and National Grid NTS?
How do you mitigate the risk of “default”*.
Modification Proposal 0246 to the UNC Panel in March 2009.
Aim is to put new arrangements in place prior to the next Long Term
Entry Capacity Auction (QSEC)
Ofgem Impact Assessment is highly likely.
* “default” = payment for allocated capacity is not received at the time expected
4
Issues discussed by Review Group
Currently no security required at time of long term capacity auction.
Security called for 12 months prior to the start date of the entry
capacity – potentially long after system investment made.
User currently able to defer capacity commitments 12 months prior to use and keep deferring without penalty.
Incremental Capacity auction allocations lead to fixed additional
allowed revenue to National Grid.
If a User “defaults” = Allowed revenue shortfall is recovered through wider Transportation charges
5
Proposal – General terms agreed
Provision of security
To cover auction allocations – inc. past auctions
Amount of security – sufficient to deter speculative auction bidding
Aspiration for annual cost of security to be proportionate to the risk to the Shipper Community of a User Default
Security tools
Only Letter of Credit (LoC) or deposit allowed.
Default rules
Y2 to Y16 Entry Capacity at all ASEPs is withdrawn from User and User incurs cancellation fee equivalent to security provided by that User
6
Allocated Capacity Value (ACV) – Options considered
Profile of Capacity Booked Per Year - Option 1
£0
£20,000,000
£40,000,000
£60,000,000
£80,000,000
£100,000,000
£120,000,000
£140,000,000
£160,000,000
£180,000,000
2009 -10
2010 -11
2011 -12
2012 -13
2013 -14
2014 -15
2015 -16
2016 -17
2017 -18
2018 -19
2019 -20
2020 -21
2021 -22
2022 -23
2023 -24
2024 -25
Year
To
tal Q
SE
C H
old
ing
ACV = £319.8M(Y+1 & peak Y)
Profile of Capacity Booked Per Year - Option 3
£0
£20,000,000
£40,000,000
£60,000,000
£80,000,000
£100,000,000
£120,000,000
£140,000,000
£160,000,000
£180,000,000
2009 -10
2010 -11
2011 -12
2012 -13
2013 -14
2014 -15
2015 -16
2016 -17
2017 -18
2018 -19
2019 -20
2020 -21
2021 -22
2022 -23
2023 -24
2024 -25
Year
To
tal
QS
EC
Ho
ldin
g
ACV = £427.9M(Y+2 to Y+4)
Profile of Capacity Booked Per Year - Option 2d
£0
£20,000,000
£40,000,000
£60,000,000
£80,000,000
£100,000,000
£120,000,000
£140,000,000
£160,000,000
£180,000,000
2009 -10
2010 -11
2011 -12
2012 -13
2013 -14
2014 -15
2015 -16
2016 -17
2017 -18
2018 -19
2019 -20
2020 -21
2021 -22
2022 -23
2023 -24
2024 -25
Year
To
tal Q
SE
C H
old
ing
ACV * 10% = £119.5M(Y+2 to Y+16)
7
Entry Capacity Risk Assessment
ACV = Years Y2 to Y16 * [0.1]
Modification 0246 proposes that the ACV derived will be further reduced depending on the Users credit rating risk (between 30% and 100% of the ACV)
User Security Value (USV) = ACV * UCR + VAT
During legal drafting for Mod 0246 concerns have been raised by our Legal representatives
Charging a different cancellation fee when cancelling the same quantity of capacity, could be considered as unduly discriminatory
We propose to remove UCR
User Security Value (USV) = ACV + VAT
8
Barrier to Entry ‘vs’ Community Risk
Proposal seeks to strike a balance
LoC costs to cover aggregate USV estimated at around £4m per annum
Risk of a project or major User failure has been estimated at ~£20m per year – this figure is based on current levels of capacity holdings and not historic defaults
Views are sought on whether an appropriate balance has been met, i.e. should the 10% ACV figure be amended or not?
9
Security Tools and Operating Costs
For the purposes of long term entry capacity, only the following types of security shall apply:
“Deposit Deed”
“Letter of Credit”
ACV against Operating Cost
119.447
0
50
100
150
200
250
300
350
0 2 4 6 8 10 12
Operating Cost (£M)
AC
V (£M
)
Assumed LoC Range:1% - 7%
Note: Users with poor credit ratings may choose to use a deposit deed as a cheaper option
10
Security Required – Across Users
Security Required against Estimated Operating Cost
£0
£5
£10
£15
£20
£25
£0 £200,000 £400,000 £600,000 £800,000 £1,000,000 £1,200,000 £1,400,000
Operating Cost (£)
Sec
uri
ty R
equ
ired
(£M
)
Total Security Required£119M
Users with Assumed BB-Credit Rating
11
When should security be put in place? – Options Considered
Sept
Option 1 -Security Provided
pre auction
Aug
QSECAuction
held
Allocation processstarts - after last
bid window
Option 3 - Securityprovided after
allocation
Max 18 days
Allocation processfinalised
Max 60 days
Oct Nov Dec
30 days?
Jan
Min 30 days
Option 2. Securityprovided prior to
allocationAdditional 15days requiredfor allocation
proccess
Variations
Option 4 - (hybrid of option 1 + 2) - minimum level of security or bid bond provided pre auction and security topped up prior to allocation
Option 5 - (hybrid of 1 + 3) minimum level of security or bid bond provided pre auction and security topped up after allocation has been finalised
12
Options - Pros and Cons
No consensus reached
Option One – 14 days before auction proposed within Mod 0246
Option Three - Post auction favoured by some Review Group Members
Advantages Disadvantages
Option 1 No impact on current auction processes
or timetables
Removes unsecured bids prior to
allocation.
Involves estimating the value of your
successful auction bids
Potential barrier to entry for smaller
developers due to financing difficulties
Option 3 Provisional Allocations known before
security is called for
Aligns better with project financing
processes.
“default” = Potential effect on other
bidders at multi user ASEPs
13
QSEC – Bid Window Amendment
Issues identified with removing a Users bids prior to allocation
(option 1) - potential effect on other bidders at multi user ASEPs
Current QSEC Bid window:
Opens at 08:00 and closes at 17:00. Bid Windows must be held between 1st Sept - 30th Sept.
Open for 10 consecutive Business Days (stability can be met from day 2 and auction closes early).
The bid window closes 17:00 and auction information is sent to Users by 20:00 on each day
Now proposing that we check the security after each bid window
and remove any bids where the USV > security provided.
This will require us to amend the QSEC auction to have a day
between each bid window and reduce the number of windows to 8.
14
Example of a User’s Security Value - 2008 QSEC
User's Capacity Value from 2008 QSEC
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
5.000
2009 - 1
0
2010 - 1
1
2011 - 1
2
2012 - 1
3
2013 - 1
4
2014 - 1
5
2015 - 1
6
2016 - 1
7
2017 - 1
8
2018 - 1
9
2019 - 2
0
2020 - 2
1
2021 - 2
2
2022 - 2
3
2023 - 2
4
2024 - 2
5
An
nu
al
Cap
acit
y V
alu
e (
£M
)
ASEP 1 (2008) ASEP 2 (2008)
Total Holding £44.4M ACV = £4.44M
Est. Annual LoC Cost at 2.5% = £0.11M
M
ACV = Years Y2 to Y16 * [0.1]
15
Example of a User’s Security Value - 2009 QSEC
User's Capacity Value from 2009 QSEC
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
5.000
2010 - 1
1
2011 - 1
2
2012 - 1
3
2013 - 1
4
2014 - 1
5
2015 - 1
6
2016 - 1
7
2017 - 1
8
2018 - 1
9
2019 - 2
0
2020 - 2
1
2021 - 2
2
2022 - 2
3
2023 - 2
4
2024 - 2
5
2025 - 2
6
An
nu
al
Cap
acit
y V
alu
e (
£M
)
ASEP 1 (2008) ASEP 2 (2008) ASEP 1 (2009) ASEP 2 (2009)
Total Holding £46.8M
ACV = £4.68MEst. Annual LoC Cost at
2.5% = £0.17M
ACV = Years Y2 to Y16 * [0.1]
16
Default Rules
Long term entry capacity “events of default” will be:
Security < USV
The security tool (LOC/Bank Deed) is about to expire (less than 28 days).
The User is Terminated (UNC Section V4) for other reasons under UNC.
17
Default Rules - process
User will be notified and given 10 business days to rectify (except where Termination is for other reasons under UNC).
If not rectified: Invoice will be raised for the Secured amount (cancellation fee)
NG will call on the USV pending payment of the above invoice.
The User loses the right to acquire entry capacity
NG will re-call the User’s QSEC capacity at all entry points across all years (Y2 – Y16).
NG offer Capacity to trading party (UNC B5.4)
NG will resell the capacity in subsequent auctions
Top Related