Changes to the gas transmission charging regime

How are charges being impacted by this proposed change?

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

 

UNC Modification 621 and 11 alternative variations

This change proposal would reform National Grid’s UK transmission charging regime by introducing a new pricing methodology. The overall amount of revenue that National Grid would be allowed to recover through their price control would remain the same but some customers will pay more and some less as a result.  The regions that would receive the largest price rises would be in Scotland and the North of England.  It is not possible to quantify the impacts at this stage but they would be significant for some customers.  This should become clearer when Ofgem publish an impact assessment in autumn 2018.  However, the impacts will only be properly understood on a customer by customer basis when Ofgem have decided on the way forward (Q1 2019) and National Grid subsequently publish its charges that commence from October 2019/2020.

Ofgem deems that changes are necessary in order to ensure compliance with the EU Tariffs Code from October 2019 and to implement the changes recommended out of their transmission charging review. Only one of the modification proposals can be implemented and it is worth noting that there has never before been so many variations of a UNC modification.

The aim of all the variants is to produce charges that are more stable, predictable and cost-reflective, as well as ensuring compliance with the EU network code.

Eleven of the twelve options reform the charging regime so that it is based on a Capacity Weighted Distance (CWD) approach and they vary from this baseline to a greater or lesser extent.  CWD uses a revenue allocation model, which sets charges based on assumed levels of capacity and distances between all entry and exit points.  It is less locational than the current methodology. However UNC 621J proposes the use of a Postage Stamp methodology which sets unit rate prices and hence there is no distance element and therefore no locational pricing

All of the variations would replace the current methodology that is cost based and investment focused and includes strong location signals.  (for example it reduces the cost in Scotland due to the proximity of the St Fergus entry terminal.)

 

Why is the change being proposed?

The Transportation Charging Methodology has  been in place and not changed for many years. National Grid maintain that whilst the basic approach to revenue recovery has not changed, capacity booking behaviour has changed and this has caused a distortion of competition. One of the greater contributing factors is large uptake of short-term zero-priced capacity which has led to an greater reliance on commodity charges to recover Transmission Operator (TO) revenue.

 

Conclusions

  • There will be a change of Reference Price Methodology in 2019/20 which will impact network charge prices
  • We expect there to be a transition period of 2 years and there could be a further step change in 2021/22 as we move to a full capacity regime
  • The largest charge increases will be experienced in Scotland and the North of England as currently they 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

  • July UNC modification panel will vote on whether to recommend implementation of any of the modifications and the decision will pass to Ofgem on which (if any) to implement
  • Ofgem impact assessment in August 2018 should enable a better understanding of the impact on customers
  • Decision from Ofgem on implementation Q1 2019
  • Revised charges would take effect from October 2019

More information and some industry analysis can be found at the following link:

https://www.gasgovernance.co.uk/0621