Regulatory Updates - Smarter Business

Changes to the Gas Transmission Charging Regime

The new National Transmission System (NTS) charges facilitate the costs associated with operating the UK gas transmission system. These costs are to be recovered by the National Grid under their regulated price control mechanism as prescribed by Ofgem. The charges form part of the total gas transportation cost that is passed through to customers.

UNIFORM NETWORK CODE (UNC) MODIFICATION 621 AND 11 ALTERNATIVE VARIATIONS

This proposed change would alter the National Grid’s UK transmission charging regime by introducing a new pricing matrix. The overall permitted amount of revenue that the National Grid would recover through their price control would remain unchanged, but some customers will either pay more or less.

Scotland and Northern England are likely to receive the largest price increases. Currently, it is impossible to quantify the impact although it is expected to be considerable. The consequences of the price increase will be clearer once Ofgem publish their impact assessment, due in autumn 2018. Irrespective of the impact assessment, the consequences will only be fully known on a customer-by-customer basis, once Ofgem have established the way forward (likely to be Q1 2019) as well as the National Grid releasing its change in charges, expected from October 2019 or 2020.

According to Ofgem, the rise in charges are necessary to ensure compliance with the EU Tariffs Code, as per their transmission charging review, effective as of October 2019.  A minimum of one modification proposals needs to be implemented, despite there being many variations. The objective in this regard is to produce charges that are more constant, predictable and cost-reflective, as well as ensuring compliance with the EU network code.

The bulk of the options seek to reform the charging regime, in order for it to be based on a Capacity Weighted Distance (CWD) approach. The CWD uses a revenue allocation model, which sets charges based on assumed levels of capacity and distances between all entry and exit points. This approach is less locational versus the current policy in place. Alternatively, the UNC 621 J, proposed the use of postage stamps, which sets unit rate prices (excluding the distance element) and therefore no locational pricing.

Overall, all variations would replace the current system that is cost-based, investment focused and includes location signals.

Why is this change being proposed?

The Transportation Charging Methodology has remained unchanged for a number of years. The National Grid stated that capacity booking behaviour changed, causing a competition distortion. This is primarily due to the large uptake of short-term zero-priced capacity, which has led to a larger reliance on commodity charges, as a means to recover Transmission Operator (TO) revenue.

CONCLUSIONS

  • There will be a change of Reference Price Methodology in 2019 or 2020 which will impact network charge prices;
  • There will be a transition period of two years. Additionally, there could be a further step change in 2021 or 2022, towards a full capacity regime;
  • The most notable charge increases will be felt in Scotland and Northern England as they currently benefit from their location closer to gas entry terminals;
  • Customers need to be aware of these changes – the amount recovered in total will not change, but there will be winners and losers as charges are rebalanced under the new methodology

NEXT STEPS

  • In July, the UNC modification panel will vote on whether to recommend implementation of any of the modifications and the decision will be passed to Ofgem on which (if any) to implement;
  • The Ofgem impact assessment, planned for August 2018, should provide a better understanding of the impact on customers;
  • Decision from Ofgem on implementation is expected in the first quarter of 2019;
  • Revised charges would take effect from October 2019

Further information can be found at the following link – https://www.gasgovernance.co.uk/0621