Reflections on Transmission Access Strawmen following discussions with Ofgem

1
Reflections on Transmission Access Strawmen
following discussions with Ofgem

• TCMF
• 5 December 2002

2
Introduction

• Discussions with Ofgem following publication of
  SO Incentives consultation document in October
• Reflection on industry access debates following
  these discussions
• Understand Ofgem will set out their views on
  access in the forthcoming proposals document
• Provide information to Users on what transmission
  access might mean in this context as it is
  different from focus of TASG

3
Overview of requirements (1)

• Creation of long term financially firm tradable
  entry and exit rights
• Initial Allocation of rights (until the end of
  the next TO Price Control period) on the basis of
  prices related to costs (possible use of ICRP as
  a starting point)
• Capacity buyback incentive to cover these rights
  for the same period

4
Overview of Requirements (2)

• A mechanism to provide NGC with signals from
  Users as to need for incremental capacity release
  (from both initial allocations and from secondary
  market trading)
• New NGC Incremental Capacity Release statement
  would indicate methodology for determining
  whether to release additional capacity above
  baseline
• Determination of pricing of this capacity based
  on costs of delivery
• Incremental capacity release incentive for sale
  of long term rights
• New capacity buy-back for these long term rights

5
Product

• Product would be either the right or the
  obligation to inject into or offtake from the
  transmission system up to a specified capacity in
  a particular zone
• i.e. entry and exit access rights
• Right if access charge positive, Obligation if
  access charge negative
• Zones
• ideally use the 11 zones utilised for baseline
  transfer capability calculations (would require
  allocation factors on the demand side)
• may have to accept GSP Group zones for demand
• zones could change over time e.g. at a price
  control review (mechanism for dealing with access
  rights applying to different zones sold for the
  same period)

6
Entities buying rights/obligations

• Entry
• All licenced generators
• Traders?
• Interconnectors?
• Exit
• Suppliers
• Traders?
• Interconnectors?
• Players may differ for initial allocation and
  longer term allocations

7
Initial allocation

• Release of baseline capacity only
• Prices set to recover TO allowed revenues
• Participants would only have to specify the
  rights that they wished to acquire for each
  quarter until the end of the TO Price Control

8
Consequent long term allocation process (1)

• NGC would be obliged to make available baseline
  and any obligated incremental capacity (as
  determined by an ICR statement)
• A possible mechanism would be to publish a set of
  prices and volumes for capacity in each zone e.g.
  price/volume for baseline capacity, price/volume
  for baseline some incremental capacity etc.

9
Consequent long term allocation process (2)

• Allocation would be performed for each zone and
  for each quarter for the number of years offered
• Users would reveal volumes they are willing to
  buy at the different prices (tranches) in each
  quarter

10
Long term allocation - illustration
Baseline first second increment Price (P3)
set to include incremental investment costs
14
12
Capacity available
10
8
6
4
2
0
P3
Y1
Y2
Y3
Price
P2
Baseline Price (P1) set to recover allowed TO
revenue
Baseline first increment Price (P2) set to
include incremental investment costs
Y4
Y5
Y6
P1
Y7
Y8
Y9
Year
Y10
P1ltP2ltP3
11
Example of allocation

• In this example, 11 units would be allocated at a
  price of 6 if incremental capacity is released
• If not released - price rationing of baseline?
• Prices could be increasing or decreasing
  depending on economies of scale

12
Deciding the allocations

• Where incremental capacity is made available,
  this indicates that there is likely to be a
  constraint if only baseline capacity released
• the allocations and prices will be made on the
  basis of the first tranche for which the volume
  tendered is less than the total volume specified
• subject to the incremental capacity being
  released through the ICR statement

13
Deciding on incremental capacity

• NGC could apply for incremental capacity to be
  included in capacity release incentive at any
  time
• on account of prices revealed via secondary
  trading
• during course of the allocation, on the basis of
  the tenders that it had received
• If its inclusion was not vetoed, then it would be
  obliged to offer that incremental capacity for
  sale
• For NGC to decide price, consistent with its
  incremental release incentive
• too high prices will reduce capacity sold so may
  disadvantage NGC overall

14
Long Term Allocations

• Combination of long term (gt 1yr) and short (lt
  1yr) term allocations
• short term allocations to re-offer unsold
  capacity and release any additional capacity that
  has become available
• Precise length of subsequent long term allocation
  would need to be determined
• timing of long term allocations offered would
  extend into the period where it would be possible
  for NGC to release additional capacity following
  network reinforcement

15
Granularity of rights/obligations

• Initial allocations
• NGC would sell quarterly blocks of access rights
• Secondary trading
• Participants could divide quarterly blocks into
  whatever products they wanted to trade
• Monitoring settlement
• in an ideal world would be half-hourly
• system and transaction costs could be prohibitive
• need to assess trade-off between granularity and
  costs
• Would need a system that does not stifle supply
  competition
• Would daily settlement be sufficient? (already
  exists for gas)

16
Overall pricing structure (1)

• Access charges
• would be defined for the allocation process
• zonal differences (based on ICRP or other
  methodology)
• capacity (MW) charge
• Residual transportation charge
• covers those TO allowed revenues not emerging
  from allocations of baseline capacity
• energy (MWh) charge
• SO capacity charge
• covers any over/under recovery of SO capacity
  release incentive revenue and SO capacity
  buy-back incentive costs
• potential energy (MWh) charge

17
Overall pricing structure (2)

• BSUoS charges
• would remain but would exclude buyback and
  associated incentive costs
• Connection Charges
• Would still be required
• Envisage a shallower regime

18
Access charges

• Charges for each quarter in a year could be the
  same or different
• Different zones would have different charges
• Charges could be positive or negative

19
Rights and obligations

• Rights
• Users would pay for rights
• entitlement to used energised capacity but no
  obligation to do so
• subject to over-run charges if exceed rights
• Obligations
• Users would be paid for obligations
• obligation to make available energised capacity
  at specified times
• these could either be standard times e.g. weekday
  winter daytimes, or subject to separate
  negotiation
• at other times reduce to right
• subject to under-run charge if fail to meet
  obligations

20
Trading access rights

• Central registration of each holders access
  rights required
• Intra-zone trading
• no restrictions
• Inter-zone trading
• potential for exchange rates
• Rights can be traded down to whatever settlement
  level is decided upon
• key issue is how to deal with customers changing
  suppliers
• suggests that at least daily settlement may be
  necessary

21
Resolving constraints

• Recognised that zonal product provides a
  compromise between constraint cost and investment
  cost capture
• Envisage NGC will have tools outside of the
  access market to resolve any residual issues
• Nodal contracts
• BM Bids/Offers
• May require change to Security Standard to be
  consistent with offering zonal right (NGC may not
  know at which node the user holds the right)

22
Monitoring and settlement

• Anti-hoarding measures might require users to
  nominate the volume of rights they are going to
  use at the day-ahead stage
• NGC could then be obliged to sell any rights that
  users had bought but were not going to use, with
  revenues from sales going to initial holders
• This might require the introduction of a Grid
  Code obligation not to exceed access rights
• Overrun/underrun charges
• if nominations required, imbalance would be
  measured against these otherwise against access
  right holdings

23
Summary

• Discussions with Ofgem have informed us as to
  what their more detailed requirements for an
  access regime might be
• Our understanding is that it is closer to NGCs
  Strawman B Full Scale Access model though
  anticipating some simplifications
• Different to the focus TASG has had looking at
  current world evolution (based on NGCs Strawman
  A model)

24
Next Steps

• Ofgem initial proposals document likely to
  contain views on transmission access
• Presentation to TASG meeting tomorrow
• A need to re-assess the issues and workings of a
  more radical change to the access arrangements