Gas Networks Ireland Renewable Natural Gas Connections Policy Proposals

Transcription

1 An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities Gas Networks Ireland Renewable Natural Gas Connections Policy Proposals Commission for Regulation of Utilities Consultation Decision Paper Reference: CRU18089 Date Published: 16/05/2018 Closing Date: N/A 0

2 Executive Summary The Commission for Regulation of Utilities (CRU) is Ireland s independent energy and water regulator. The CRU was established in 1999 and now has a wide range of economic, customer protection and safety responsibilities in energy. The CRU is also the regulator of Ireland s public water and wastewater system. The CRU is today, 16 May 2018, publishing a decision on proposals submitted by Gas Networks Ireland (GNI) to the CRU to amend the current GNI Connections Policy. The amendments proposed to allow for the following: (i) the connection of renewable natural gas facilities to the natural gas network; and (ii) the appraisal of group sites as part of the GNI Connections Policy. The CRU published a consultation (CRU/17/297) 1 on the above proposals which had been submitted by GNI to the CRU in September The consultation closed on 21 November The CRU received 10 responses to CRU/17/297. The consultation on the above proposals from GNI follows the CRU paper Renewable Natural Gas Bridging Paper 2, published in The paper requested that GNI prepare proposals to allow for the inclusion of renewable natural gas 3 facilities into the existing GNI Connections Policy. In response, in 2017 GNI prepared proposals for the connection of renewable natural gas facilities to the natural gas network, which are now the subject of this decision. In addition, GNI also requested that the appraisal of group sites for connection to the gas network also be reviewed, currently sites for connection are appraised individually. Grouping sites belonging to the same entity is a potential method of assessing the 1 CRU/17/297-Connections-Policy Consultation Sustainably produced or purified Renewable Natural Gas (RNG) includes gas types such as; Biomethane, Synthetic Methane, Methanised Hydrogen, Natural Gas blended Hydrogen, egas/p2g, Green Gas, etc. 1

3 connection of a number of different sites as a whole instead of separately. The CRU previously rejected the proposal to connect group sites in 2015, stating that it was not convinced that the absence of such a policy would result in lost opportunities. However, the CRU committed to keeping the proposal under review. In CRU/17/297, the CRU sought the views of respondents relating to the proposals submitted by GNI. These were: 1. If a 15 year assessment period proposed by GNI is appropriate. 2. If seven years of financial security is appropriate. 3. If GNI s view that the appraisal is based on 100% of costs associated with transmission and distribution entry revenue and 50% of transmission exit revenue and 50% of distribution exit revenue associated with the connection is appropriate If the upfront customer contribution of 30% is appropriate. 5. Whether the proposal regarding group sites is appropriate and should be included in the GNI Connections Policy. Taking account of the responses received, the CRU has decided that the following rules will apply regarding the connection of renewable natural gas facilities. The economic viability of renewable natural gas connections will be assessed and recovered over a ten year period. Financial security will be required for seven years. The CRU has decided that the existing connection charges as outlined in the GNI Connections Policy will apply for renewable natural gas facilities. Renewable natural gas facilities will pay a 30% upfront connection cost with the remainder recouped over ten years 5. 4 In this context it is worth recalling that entry is at the point where renewable natural gas/natural gas is injected into the system and exit is where renewable natural gas/natural gas is taken off the system by customers. 5 GNI will perform an economic test to determine whether such connections are economically viable. Where the economic test shows the proposed connection will not meet the requirements set out above, the connecting party will pay a supplemental charge to connect to the natural gas network.. 2

4 The CRU has not approved the appraisal of group sites. 3

5 Public/ Customer Impact Statement Renewable gas has the potential to decrease the carbon intensity of the gas network and can also assist in the security of supply of gas. In recognition of this, the CRU requested that GNI prepare a connections policy for the connection of renewable gas facilities to the natural gas network. The availability of renewable gas will allow users of the natural gas network to decrease their carbon intensity and assist Ireland as it moves to a low carbon economy. Renewable gas is a sustainable source that could assist in the continued utilisation of the natural gas network which in turn could help maintain tariffs, so that gas remains a competitive fuel source for all gas customers. The CRU regulates the activities of GNI and gas undertakings with respect to safety under the Gas Safety Framework (GSF). The connection of renewable gas facilities to the natural gas network is not covered under the current version of the GSF Safety Case Guidelines. The CRU is currently updating the guidelines to reflect this change in order to ensure that the associated risks are properly managed. 4

6 Table of Contents Table of Contents... 5 Glossary of Terms and Abbreviations Rationale for consultation Background... 7 Renewable Gas... 7 Legislative Basis... 8 Structure of Paper GNI Proposals Proposal for consideration... 9 Group Sites Consultation responses Respondent comments Assessment and recovery period proposed Financial Security Proposal Connection costs Upfront payment Group sites CRU decisions and next steps

7 Glossary of Terms and Abbreviations Abbreviation or Term Definition or Meaning BGE CRU GNI GSF I&C NPV Bord Gáis Energy Commission for Regulation of Utilities Gas Networks Ireland Gas Safety Framework Industrial and Commercial Net Present Value PC5 Price Control 5 WDC Western Development Commission 6

8 1. Rationale for consultation 1.1 Background Renewable Gas In 2013, the CRU published a consultation paper on Biogas injection into the Natural Gas Grid (CER/13/209) 6, which sought the views of the public and industry as to the facilitation of the injection of renewable gas into the natural gas network in Ireland. In October 2016, the CRU published the Renewable Natural Gas Bridging Paper 7. In this bridging paper, the CRU requested that GNI prepare proposals to allow for the inclusion of renewable gas facilities into the existing GNI Connections Policy. In response, GNI submitted proposals for the connection of renewable gas facilities to the natural gas network in September In October 2017, the CRU published a consultation on the proposals submitted by GNI. Within the proposals submitted by GNI, GNI also proposed that the appraisal of group sites for connection to the natural gas network is reviewed, currently sites are appraised individually. Grouping sites is a potential method of assessing the connection of a number of different sites belonging to the same entity as a whole instead of separately. GNI contend that such a method of appraisal could result in a decrease in administration and potentially increase gas throughput and hence place downward pressure on gas tariffs. The CRU previously rejected the connection of group sites in 2015, stating that it was not convinced that the absence of such a policy would result in lost opportunities. However, the CRU committed to keeping the proposal under review. The consultation sought comments on the GNI proposals regarding the appraisal of group sites. In October 2017, the CRU published CRU/17/297 which sought responses from the public on the GNI proposals regarding the connection of renewable natural gas Paper.pdf 7

9 facilities to the natural gas network. CRU/17/297 closed on 22 November 2017, the CRU received 10 responses. Legislative Basis Under Section 9 of the Electricity Regulation Act 1999 (as amended), the CRU is to have regard to the need to ensure that grid connection policy takes account of renewable energy policy, including any such policy in relation to community energy projects. Information on the CRU s role and relevant legislation can be found on the CRU s website at Structure of Paper The structure of this paper is set out as follows: Section 1: Introduction. Section 2: Gas Networks Ireland connections policy proposals. Section 3: Consultation responses. Section 4: CRU decision and next steps. 8

10 2. GNI Proposals 2.1 Proposal for consideration GNI made a number of key proposals regarding the connection of renewable natural gas facilities to the natural gas network, these are: 1. That connection costs are recovered over a 15 year period i.e. the costs of connecting to the gas network are assessed and recovered over a 15 year period from the date of connection. 2. That the appraisal is based on 100% of the connection costs associated with transmission and distribution. GNI proposed that exit transmission and distribution revenues associated with the renewable natural gas connection are included as revenue in the appraisal. GNI also proposed that 50% of transmission exit revenue and 50% of distribution exit revenue will be associated with the connection. 8 GNI s rationale for using 50% of the transmission and distribution exit revenue is that it is a conservative estimate of the increased demand in the long term. This is because GNI consider that the introduction of renewable gas will be linked in increased gas consumption. 3. That 30% of the total connection cost is to be paid upfront by the producer with the remaining 70% recovered over a 15 year period. 4. That financial security 9 is provided for the initial seven years by the producer to cover the costs of the network connection. Financial security will limit the risk to the general gas customer in the event that a renewable gas facility ceases injecting renewable gas into the natural gas network before year seven. GNI did not propose seeking financial security for the period thereafter. 8 Entry is at the point where renewable natural gas/natural gas is injected into the system and exit is where renewable natural gas/natural gas is taken off the system by customers. 9 operations/related-documents/financial-security-policy-(amendments-for-legal-go-live)_version-3-1.pdf 9

11 Group Sites GNI is of the view that it would be advantageous for new customers with multiple sites to have those sites appraised as a group so that the portfolio benefit of connecting a group of sites could be recognised. GNI proposed that group sites which are owned by the same entity but are situated in different locations should be appraised together and that the economic test 10 would be appraised over seven years. If the treatment of group sites (same entity, different locations/sites) was formalised via a connections policy change, this would result in the sites being appraised together so that the overall Net Present Value (NPV) is taken into account rather than the individual NPVs for each site, which is the approach taken in the current connections policy. In addition, under the one appraisal one total contribution from the customer(s) would be sought to cover the connection of all of the sites within the group. 10 The economic test would evaluate the present value of the total cost of the group connection (as defined above plus operating costs, but less the standard 30% contribution) against the present value of the tariff revenue attributable to the facility. The present value in both cases will be evaluated over a 7-year time horizon and using GNI s regulated rate of return as the discount rate. 10

12 3. Consultation responses Following closure of the consultation, the CRU received 10 responses. The CRU received responses from the following: Alchemy Utilities. Bord Gáis Energy. Composting and Anaerobic Digestion Association of Ireland. Diageo. Dr Pau Farràs Costa, NUI Galway. Energia. Fingleton White. GenComm. Renewable Gas Forum. Western Development Commission. 11

13 The CRU sought specific comment from interested parties regarding the following: 1. The assessment period of 15 years proposed by GNI. 2. The level of financial security proposed by GNI. 3. The GNI view regarding the appraisal being based on 100% of costs associated with transmission and distribution entry revenues and 50% of transmission and distribution exit revenues. 4. The upfront customer contribution proposed by GNI. 5. Whether the proposal regarding group sites is appropriate and should be included in the GNI Connections Policy. 3.1 Respondent comments The CRU received 10 responses to the consultation. In general, respondents were supportive of a renewable natural gas connections policy proposal and the group sites proposal from GNI. The Western Development Commission (WDC) outlined concerns that reviews of the GNI Connections Policy only take place on an ad hoc basis based on submissions from the network operator. WDC is of the view that the CRU, in consultation with the Department of Communication, Climate Action and Environment (DCCAE) and the public should hold regular reviews of the connections policy. The CRU notes that the both the DCCAE and the public can provide written responses to any CRU consultation. The CRU further notes that this decision paper focuses on the connection of renewable natural as facilities and not a review of the GNI Connections Policy as a whole. 12

14 Assessment and recovery period proposed GNI proposed to assess the economic viability of renewable natural gas connections over 15 years. GNI is of the view that a 15 year time horizon is appropriate given the assumed lifespan for a renewable gas facility. GNI carried out analysis on the components of the injection facility to ascertain the technical lives of the equipment. The technical lives of the components of the renewable gas injection facility range from 8 years to 25 years with an average of 18.5 years. Given this, GNI is of the view that 15 years is an appropriate lifespan for a renewable gas facility. As an alternative, GNI proposed that the assessment and recovery period could be linked to the length of time of any support scheme in place. GNI in their proposal outlined that DCCAE was developing a Renewable Heat Incentive (RHI) 11 support scheme. GNI stated in their submission it was not known how long the scheme would run for but suggested that the evaluation period could be linked to the duration of support provided by the RHI when it is in place. Consultation Responses The majority of respondents are of the view that a 15 year assessment period is appropriate for the connections of renewable natural gas facilities. Two respondents, in recognition of the CRU s concerns outlined that they could support an assessment period of years or a ranging assessment period from 7-15 years with a larger upfront payment in instances where the project is assessed over a 15 year period. One respondent suggested that the CRU consider the potential of increasing the % contribution to enable a 15 year assessment and recovery period. CRU Response While noting the environmental benefits e.g. decreasing emissions in energy, transport and waste sectors that renewable gas may bring, the CRU is of the view that the assessment period proposed by GNI is too long. The CRU views a 15 year assessment period as too great a risk (when financial security ceases at year seven) 11 Now referred to as the Support Scheme for Renewable Heat: ew.pdf 13

15 for the general gas customer who will underwrite any shortfall if a renewable gas facility ceases production prior to year 15. In addition, the CRU notes that the existing GNI Connections Policy 12 assesses small Industrial and Commercial (I&C) connections over a seven year period. However, the CRU notes the text in the Recast Renewable Energy Directive 13 which states that the costs of connecting new producers of gas from renewable energy sources to the gas grids should be based on objective, transparent and nondiscriminatory criteria and due account should be taken of the benefit that local producers of gas from renewable sources bring to the gas grids. In addition, the CRU notes the reference to natural gas vehicles in the DCCAE paper Ireland s Transition to a Low Carbon Energy Future 14 and the use of renewable natural gases in the transport sector. The CRU also notes the commitment of the Department of Tourism, Transport, and Sport (DTTAS) with regard to Compressed Natural Gas (CNG) 15 and the potential of renewable natural gas to be used in CNG vehicles. Given the wider benefits outlined above and noting both the DCCAE White Paper and the DTTAS Alternative Fuel National Framework Policy, the CRU is of the view that a ten year assessment period is appropriate to ensure that Ireland is in a position to transition to a low carbon economy by Financial Security Proposal 12 Policy-v4.1-effective-01-October-2015-reflecting-CER-approved-changes.pdf

16 GNI proposed that financial security should be in place for seven years with the economic viability of the connection assessed over 15 years. Consultation Responses The majority of respondents are of the view that GNI s proposal regarding financial security being in place for seven years is appropriate. Respondents outlined that extending the financial security period will likely create a barrier to such projects. Bord Gáis Energy stated that financial security should be linked to the assessment period. CRU Response The CRU recognises the benefit that renewable gas will have to large users of natural gas who aim to reduce their carbon emissions by switching from natural gas to renewable natural gas. The CRU does not view an eight year gap in financial security as an appropriate risk for the general gas customer to bear. This is due to the CRU s view that in the short term renewable gas is likely to be consumed by large users of heat only and not the general gas customer. Given this, the CRU views the financial exposure of all gas customers as inequitable, particularly when they are unlikely to be in a position to gain a direct benefit (in this case, the consumption of renewable natural gas). The CRU is cognisant that this could change, as the percentage of renewable natural gas increases in the natural gas network. With this in mind, the CRU will monitor the demand and consumption of renewable natural gas by various customer groups. Given the concerns outlined above, the CRU has decided that financial security will be required for seven years. The CRU recognises that this places a potential risk to the general gas customer of an increase in gas tariffs if a renewable natural gas facility ceases production before year ten. However, the CRU views this risk as acceptable to ensure that renewable gas facilities are facilitated in their attempts to connect to the natural gas network which will assist in the continued utilisation of the gas network. In addition, the CRU recognises the potential security of supply benefit that such connections may bring. In their 2017 Network Development Plan, GNI outline that renewable natural gas has the potential to satisfy over 20% of Ireland s gas demand 15

17 by Given the low level of renewable natural gas facilities connecting to the gas network in the next number of years, the CRU understands that a total of three will connect to the natural gas network by 2020, any potential risk to the general gas customer will be relatively small (approx. 200,000 per plant). The CRU will keep this under review as the number of renewable natural gas facilities increase and may decide to link the assessment period to the level of financial security required. The CRU commits to reviewing this during the next Price Control (PC5) which will take place in Any decision to link the assessment period to the level of financial security will be based on the performance of renewable natural gas facilities. Connection costs GNI proposed that it would be appropriate for the appraisal to be based on 100% of the connection costs associated with transmission and distribution, 100% of the entry revenue from the connection, 50% of transmission exit revenue and 50% of distribution exit revenue associated with the connection. GNI s rationale for using 50% of the transmission and distribution exit revenue is that GNI deem that this is a conservative estimate of the increased demand in the long term. 17 GNI considers it likely that renewable gas will be supplied to new sources of gas demand initially. However, as the percentage of renewable gas in the gas network grows it is likely that renewable gas will start to be consumed by customers that had been consuming natural gas i.e. renewable gas will result in a reduction in natural gas consumption. It is GNI s view that the NPV calculation takes account of 50% of transmission and distribution exit revenues to strike a balance between the new demand being created now and the existing demand that will transition to renewable gas in the future Entry is at the point where renewable natural gas/natural gas is injected into the system and exit is where renewable natural gas/natural gas is taken off the system by customers. 16

18 Consultation responses In general, respondents agreed with GNI s proposal. Bord Gáis Energy (BGE) outlined that it was not clear what the expected demand growth for renewable natural gas is and what it is based on. Analysis conducted by the ESRI suggests that gas demand will grow by circa. 20% out to 2050, albeit at a lesser rate than would be expected if Ireland did not decarbonize. Given this, BGE is if the view that it is appropriate to assume some growth in demand as part of the economic test. CRU response The CRU is not convinced that any incremental demand growth should be considered to result from renewable natural gas injection to the extent that it should be included as an assumption in an economic test. The CRU is of the view that if total gas demand remains static then renewable gas will not result in increased gas throughput, renewable gas may simply displace imported/indigenous natural gas. The CRU agrees with GNI that this policy will need to be developed as the renewable natural gas industry continues to grow. Given that the renewable gas industry is in its infancy in Ireland, the CRU has decided that existing connection charging arrangements as outlined in the GNI Connections Policy 18 will remain in place. Upfront payment GNI proposed that a 30% upfront payment should be made by the connecting party with the remainder of the costs recovered over a 15 year period. Consultation responses In general, respondents were in favour of GNI s proposal that a 30% upfront payment is provided by the party wanting to connect to the natural gas grid. Some respondents cited general European practice where a 25/75 split is in place and emphasised a 18 Policy-v4.1-effective-01-October-2015-reflecting-CER-approved-changes.pdf 17

19 preference for such a model with economic assessments conducted over a 15 year period. CRU response The CRU notes the varying upfront payments that are currently in place in different jurisdictions. The CRU notes that the proposed upfront payment is in line with existing upfront payment arrangements for connections in the GNI Connections Policy. The CRU is cognisant that a higher upfront payment may result in some renewable gas facilities not connecting to the natural gas network. The CRU is also cognisant that a higher upfront payment will result in a reduced risk of tariff variation for all gas customers. The CRU examined the potential of varying the assessment and recovery periods (7, 10, and 15 years) with upfront payment rates of 30%, 50%, and 70% respectively. As outlined earlier, the CRU is of the view that a 15 year assessment and recovery period is too long. Hence, the CRU has rejected the GNI proposal for a 15 year assessment and recovery period. In addition, the CRU is of the view that a 70% upfront payment could be a significant barrier for renewable natural gas facilities and as such is not appropriate. The CRU has decided that a 30% of the connection cost will be paid upfront by parties wishing to inject renewable natural gas into the natural gas network. The remaining 70% will be recovered through network tariffs over the following ten years 19. The CRU views this as an appropriate balance between protecting existing gas customers and facilitating renewable natural gas producers in connecting to the gas network. Group sites GNI submitted a proposal regarding the grouping of sites when seeking connection to the natural gas grid. GNI is of the view that it would be advantageous for new customers with multiple sites to have those sites appraised as a group so that the portfolio benefit of connecting a group of sites could be recognised. GNI proposed that group sites which are owned by the same entity but are situated in different locations 19 GNI will perform an economic test to determine whether such connections are economically viable. Where the economic test shows the proposed connection is not economically viable, the connecting party will have the option to pay an upfront supplemental charge. 18

20 should be appraised together and that the economic test would be appraised over seven years. If the treatment of group sites was formalised via a connections policy change, this would result in the sites being appraised together so that the overall Net Present Value (NPV) is taken into account rather than the individual NPVs for each site, which is the approach taken in the current connections policy. In addition, under the one appraisal one total contribution from the customer(s) would be sought to cover the connection of all of the sites within the group. Consultation responses Respondents who specifically referenced the group site proposal were in favour of the GNI proposal stating that measures to improve efficiency should be encouraged. BGE recognised the CRU s concerns which were outlined in CRU/17/297 and stated that to alleviate such concerns that ensuring that both and upfront payment and financial security are required. CRU response In CRU/17/297, the CRU outlined that it was not convinced that the absence of this proposal will result in significant missed opportunities. From information provided by GNI, the CRU notes that GNI assumes that it will connect approximately 60% of proposed group sites located near the natural gas network 20. The CRU is not convinced that the uptake levels assumed by GNI will be achieved. The total potential increase in gas demand estimated by GNI was 95.03GWh per annum 21. GNI did not provide any additional information to convince the CRU that such a policy will result in an increase in gas throughput. The CRU notes that the category of business used by GNI in this proposal (in this case supermarkets) did not submit a response outlining their support for such a policy. The CRU is of the view that this is not insignificant. 20 GNI did not provide specific details on the distance sites would be located from the natural gas network. 21 Approximately 0.13% of total annual gas demand based on 16/17 gas demand. 19

21 The CRU is not convinced of the benefit to all gas customers. The CRU previously rejected the proposal to connect of group sites in 2015, stating that it was not convinced that the absence of such a policy would result in lost opportunities. Given the information provided above, the CRU is of the view that the rejection of the group site proposal will not result in a significant opportunities being missed. For example, an entity with five sites (four of which are NPV positive, one of which is not), under the GNI proposal, the addition of the fifth site would make the combined effect less positive for the general gas customer. The CRU s decision in 2015 was that it was uncertain that an entity would forego the benefit of connecting the four positive sites if the fifth uneconomic site could not be connected. In any event, there is nothing to stop the entity from considering the five sites as a single group in its own evaluation of conversion to natural gas. GNI s 2017 submission did not materially address these issues, therefore the CRU sees no reason to change the policy. Given the above, the CRU has again decided to not approve the group sites proposal from GNI. The CRU commits to keeping this decision under review should robust rational data become available. 20

22 4. CRU decisions and next steps As outlined earlier, the CRU has taken account of the responses received to CRU/17/297and has decided that the following: Renewable natural gas facilities that seek connection to the natural gas network will be assessed over a ten year period. Financial security will be required for seven years. The CRU has decided that existing connection charging arrangements as outlined in the GNI Connections Policy will remain in place for renewable natural gas facilities. Renewable natural gas facilities will pay a 30% upfront cost with the remainder recouped over ten years 22. The CRU has not approved the appraisal of group sites. The CRU now requests that GNI prepare an updated connections policy to allow for the connection of renewable gas facilities to the natural gas grid. GNI will submit this updated connections policy for the CRU s acceptance. Following the CRU s acceptance of the updated GNI connections policy, GNI will publish the updated Connections Policy on the GNI website. The CRU will make a decision on a further review of the GNI Connections Policy at a later date. It is envisaged that this review will take place post GNI will perform an economic test to determine whether such connections are economically viable. Where the economic test shows the proposed connection is not economically viable, the connecting party will have the option to pay an upfront supplemental charge. 21