Representation - Draft Modification Report UNC 0621; 0621A; 0621B; 0621C; 0621D; 0621E; 0621F; 0621H; 0621J; 0621K*; 0621L

Transcription

1 Representatin - Draft Mdificatin Reprt UNC 0621; 0621A; 0621B; 0621C; 0621D; 0621E; 0621F; 0621H; 0621J; 0621K*; 0621L Amendments t Gas Transmissin Charging Regime * Amendments t Gas Transmissin Charging Regime and the treatment f Gas Strage Respnses invited by: 5pm n 22 June 2018 T: enquiries@gasgvernance.c.uk Representative: Julie Cx Organisatin: Energy UK 1 Date f Representatin: 15 June 2018 Supprt r ppse implementatin? Cmments 0621A - Cmments 0621B - Cmments 0621C - Cmments 0621D - Oppse 0621E - Cmments 0621F - Oppse 0621H - Cmments 0621J - Cmments 0621K Cmments 0621L - Cmments Expressin f Preference: General Cmments n Relevant Objectives Standard Relevant Objective: a) The ptinal charge is an imprtant feature that seeks t maintain the efficient and ecnmic peratin f the system, withut it there are incentives t bypass the NTS 1 The views develped in this respnse are nt supprted by Equinr Page 1 f May 2018

2 which if built wuld mean that allwed revenue wuld then be recvered ver a reduced demand base. Mst prpsals apart frm 0621B and 0621C d nt prvide fr an ptinal charge beynd the interim perid r a significantly reduced benefit as Transmissin services revenue recvery charges are expected t be zer r very lw. A further factr here is the specific capacity discunt fr strage facilities, analysis by Strengy and WWU has shwn that a 50% discunt simply avids duble-charging in relatin t strage flws. It was calculated that 86% better reflects the value strage prvides in relatin t efficient and ecnmic peratin f the system and fr system balancing. Overall 0621B and 0621C psitive b) n/a c) The remval f existing cntract vlume and revenue befre calculating the reference prices leads t a greater distrtin between the prices paid by existing cntract hlders and thse making new capacity purchases. Whilst this has been a feature f the regime fr sme time due t entry capacity purchases made n a fixed price basis nt being indexed in any way, the situatin becmes extreme in the enduring perid which is incnsistent with the licencee s bligatins t avid undue preference in the supply f transprtatin services. Energy UK acknwledges that existing cntracts have been purchased in mnthly r quarterly blcks which cannt be changed whilst new purchases can be prfiled mre clsely t meet expected flws. Energy UK is nt cnvinced this is sufficient t ffset the price disparity in the enduring perid and expects Ofgem t cnsider this in its impact assessment, alng with whether this creates a barrier t entry. Overall 0621L psitive, it mitigates the distrtin in sme respects but thse with enduring perid with FCC that excludes existing cntracts negative. 0621B nne assuming price differences similar t nw d) Effective Cmpetitin is very much linked t cst reflective charges, but the CWD mdel is nt cst reflective rather it is a cst allcatin apprach, there is als the ptential t distrt cmpetitin in the enduring perid where all charges are capacity based. Sme f this is cunteracted by the ptinal charge. A psitive impact n cmpetitin wuld be if charges were mre predictable and stable which is a feature in the interim perid where charges are based n stable and predictable input values f bligated capacity. It is nt knwn whether Natinal Grid s frecast fr FCC in the enduring perid will lead t stable charges Overall mds with enduring perid based n Natinal Grid frecast capacity negative, 0621B nne t shw it is relatively better than thers due t nging use f bligated capacity as the FCC. e) n/a f) n/a Fr additinal cmmentary see belw ( para 17-21): Page 2 f May 2018

3 g) There are aspects f the prpsals that are cmpliant, but thers that are nt s all are listed as blank as nne is nt apprpriate. See further cmmentary belw under respnse t Ofgem s questins, (para ) Charging Methdlgy Relevant Objective: a) The CWD methdlgy is a cst allcatin methdlgy rather than a cst reflective methdlgy it des nt reflect frward lking marginal csts and leads t high prices at entry pints clse t entry pints. Where there is spare capacity in the system the frward lking marginal cst will be lw, clse t zer. In this case the revenue recvery charges shuld nt distrt behaviurs but in the enduring perid mre revenue is mved int capacity charges which are nt cst reflective and can lead t distrtins. Retentin f the ptinal charge is a mitigating factr Applying a multiplier f 1 t shrt term capacity prducts is nt cst reflective since the cst f prviding such capacity is very lw. see additinal cmments belw All CWD mds negative, althugh the 0621B is less distrtinary as it mves less cst t capacity charges, except at IPs where TAR NC des nt allw a cmmdity revenue recvery charge. The IP at Bactn exit is expected t be cnstrained with the reverse flw f BBL frm Octber LINK This may create different market cnditins fr intercnnectrs at Bactn vs nn-ip pints and therefre justify different treatment. The pstage stamp mdel may be a fair way t allcate csts in a fully uncnstrained system, but it is nt clear t what extent the system is uncnstrained, particularly at exit where there is a lt f PARCA activity and netwrk investment may be needed in the future if there is investment in transmissin cnnected gas fired generatin. S retaining sme lcatinal diversity in charges may be apprpriate. aa) nne f the prpsals suggest a reserve price f zer, s cnsideratin needs t be given t aviding undue preference and prmting cmpetitin which relates back t standard relevant bjectives c and d b) All prpsals seek t address develpments in the transprtatin business, such as the need t cmply with new EU Regulatins, and the fact that the netwrk is n lnger experiencing whlesale grwth. The prpsals d this by varius means but all are psitive fr this relevant bjective. Assessment against the ther relevant bjective shuld determine the best utcme fr custmers. The bjectives in relatin t cst reflectivity and cmpetitin will be mst imprtant in this regard. c) As standard relevant bjective d d) n/a e) As standard relevant bjective g Page 3 f May 2018

4 Standard Relevant Objective: 0621 c) Negative d) Negative g) 0621A c) Negative d) Negative g) 0621B a) Psitive c) Nne d) Nne g) 0621C a) Psitive c) Negative d) Negative g) 0621D c) Negative d) Negative g) 0621E c) Negative d) Negative g) 0621F c) Negative d) Negative g) 0621H c) Negative d) Negative g) 0621J c) Negative d) Negative g) 0621K c) Negative d) Negative g) 0621L c) Psitive d) Negative g) Page 4 f May 2018

5 Charging Methdlgy Relevant Objective: 0621 a b) Psitive c) Negative e) 0621A a b) Psitive c) Negative e) 0621B aa) Nne b) Psitive c) Nne e) 0621C a b) Psitive c) Negative e) 0621D a b) Psitive c) Negative e) 0621E a b) Psitive c) Negative e) 0621F a b) Psitive c) Negative e) 0621H a b) Psitive c) Negative e) (cntinued verleaf) Page 5 f May 2018

6 Charging Methdlgy Relevant Objective (cntinued): 0621J a b) Psitive c) Negative e) 0621K a b) Psitive c) Negative e) 0621L aa) Nne b) Psitive c) Negative e) Page 6 f May 2018

7 Reasn fr supprt/ppsitin and preference: Please summarise (in ne paragraph) the key reasn(s) 1. Energy UK recgnises that UNC mdificatin prpsal 0621 has led t a recrd number f alternatives being raised, this is in part due t being advised that this was the best way fr issues t be cnsidered, where they did nt feature in Natinal Grid s prpsal. This makes the assessment by respndents challenging as infrmatin n which t base analysis t fully understand the differences between the prpsals has nly been made available late in the prcess, such that there was insufficient time fr the wrkgrup t cnsider this infrmatin and prvide evidence based cmment in the wrkgrup reprt. Furthermre there were errrs fund in the analysis presented at a Natinal Grid (NG) led wrkshp n 30th May which were nly crrected and re-issued n 13 th June, effectively shrtening the time available t prvide evidence based cmment in respnses. Energy UK cnsiders that if this analysis had frmed part f the wrkgrup reprt then it is likely that the cnsultatin wuld have been referred back t the wrkgrup r at the very least the cnsultatin re-issued and extra time prvided fr respnses. 2. Energy UK ntes that many f the alternatives reflect nly minr changes t NG s 0621 prpsal, that reflect particular issues that had been discussed at length but NG had decided nt t include in its prpsal. It is the case that these prpsals then largely mirrred changes in NG s 0621 prpsal during the wrkgrup develpment phase. This then appears t give weight in numbers t certain features f the prpsals, but we wuld cautin this being given weight t assessment by the UNC Panel and Ofgem, when in fact it is a cnsequence f lack f time t develp mre sphisticated alternatives as NG s final psitin nly became clear in early May. 3. Charging is ften a divisive issue even when the revenue pt remains static as changes can lead t cmmercial cnsequences, impacts n prfitability and in sme cases business viability. Given these ptential impacts Energy UK is cncerned that a least-wrst ptin may be chsen rather than an ptin which is best fr the GB gas market and cnsumers. This may arise due t insufficient time t undertake analysis by industry and / r Ofgem in its impact assessment OR because there is n single prpsal that includes all the features f the best ptins fr GB. 4. We urge Ofgem t cnsider hw such a situatin shuld be managed, whilst seeking t cmply with EU Regulatin 2017/460 (TAR NC), t avid detrimental impacts n GB custmers. Page 7 f May 2018

8 5. Cnsultant Study 6. Energy UK retained Frntier Ecnmics (FE), an ecnmic cnsultancy, t help us understand hw the prpsed changes t the transmissin charging regime create a cst r a benefit fr the ecnmy, and in particular whether new charges culd result in any adverse cnsequences beynd thse arising frm a redistributin f allwed revenue recvery frm charges; better satisfy the relevant bjectives fr the UNC in relatin t charging; and better satisfy Ofgem s statutry duties. 7. FE assessed the CWD methdlgy against the status qu, LRMC based apprach. Tw variants f the CWD methdlgy were cnsidered, ne using the bligated capacity fr the Frecasted Cntracted Capacity (FCC) and using frecast bking values fr the FCC. Nte FE were nt asked t assess the impact f the treatment f existing cntracts. 8. The Executive summary f the reprt is included as Appendix 1, the full reprt is available LINK 9. The mdels were assessed against six main themes: Cst reflectivity; Effective cmpetitin; Security f supply; and Cst recvery Effect n end cnsumers Cmpliance 10. Key Pints 11. Cst reflectivity 12. Netwrk charges shuld reflect the frward lking marginal csts that users impse n the netwrk thrugh a change in their use t achieve an ecnmic utcme. Ecnmic thery suggests it is always relevant t set marginal cst related prices. Hwever where there is spare capacity the marginal cst may be lw r zer. This suggests that a methdlgy that results in lwer reference prices is mre efficient than a methdlgy that results in higher reference prices. 13. The CWD mdel als shifts sme cst recvery frm cmmdity t a capacity basis, which may nt be passed nt whlesale gas prices. This may distrt flws if sme shippers (with supplies at higher cst entry pints) n lnger purchases entry capacity. 14. The CWD mdel appears wrse than the status qu since it allcates histrical csts lcatinally and is nt a frward lking cst based methdlgy. 15. The bligated capacity variant reduces sme f these distrtins since it mves less cst frm cmmdity t capacity. 16. Energy UK therefre des nt supprt ptins which use Natinal Grid s frecast capacity as an input t the CWD methdlgy. This suggests 0621B which uses bligated capacity is the least wrst f the ptins 17. Effective Cmpetitin Page 8 f May 2018

9 18. Effective cmpetitin generally fllws where charges are cst reflective s the issues abve are pertinent. 19. There culd als be impacts n cmpetitin, if certain appraches t charging effectively exclude sme surces f gas frm the market and if vlatility in charges and NBP prices affect barriers t entry. 20. As abve, the bligated capacity variant reduces sme f these distrtins relative t the frecast capacity variant since it mves less cst frm cmmdity t capacity. 21. Due t the ptential impact n cmpetitin Energy UK des nt supprt ptins which use Natinal Grid s frecast capacity in the CWD mdel. 22. Security f Supply 23. Security f supply is linked t the number f cmpeting physical surces f gas, s if the charging arrangements were t impact this then there culd be an impact n security f supply 24. The mve away frm cst-reflective tariffs by the intrductin f the CWD mdel and the shift f revenue recvery frm cmmdity t capacity increases the ptential fr distrtins means. 25. Under the CWD mdel strage lses its current exemptin frm revenue recvery which culd impact its prfitability r bring frward clsure f existing assets. The increase in multipliers fr shrt term capacity and reductin in interruptible capacity discunts will als impact strage. These factrs may als impact investment t bring additinal supply t GB in this respect there are particular cncerns regarding the high entry prices at St Fergus in the enduring perid. 26. The table belw shws this by cmparing 0621 with 0621B, with the range bxes highlighting the ttal cst f flwing gas using interruptible capacity as this reflects that mst capacity purchased at St Fergus is n an interruptible basis s it wuld be inapprpriate t cmpare the firm prices. 27. Table 1 St Fergus prices St Fergus prices p/kwh/d B 17/18 firm entry /18 int entry /18 revenue recvery /18 ttal firm /18 ttal int /20 firm entry /20 int entry /20 revenue recvery /20 ttal firm Page 9 f May 2018

10 19/20 ttal int /22 firm entry /22 int entry /22 revenue recvery /22 ttal firm /22 ttal int Prices frm wrkbks dated 13/6/ Energy UK cnsiders that the viability f strage facilities is imprtant t ensure security f supply and supprt verall market efficiency as they prvide market participants with useful resurces fr trading and ptimisatin f gas purchases and balancing psitins all year rund. See graphic belw which shws strage being utilised dynamically thrugh the year. We nte that even in early June gas is flwing frm strage t meet demand, even at a demand level f 150mcm Graph 1. Mid-range strage stck levels 29. Energy UK has cncerns with prpsals that increase the cst f using strage as such csts are likely t be refelcted in NBP prices and passed nt custmers. In cnsdieratin f this and the pints abve we have reservatins with prpsals which include a 50% specific capacity discunt as we cnsider this insufficeint t ensure strage cntinues t prvide this imprtant rle in the market. The prpsals als include diverse treatment with respect t revenue recvery charges; whilst all cntnue with flws in and ut f strage (apart frm wn use gas) being exempt frm all cmmdity charges in the interim perid there are different appraches in the enduring perid. Sme prpsals limit exclusins frm revenue recvery charges t histrical cntracts, as abve we have reservatins awith this apprach Page 10 f May 2018

11 30. Cst Recvery 31. Efficient cst reflective charges may nt recver all csts which have been incurred, additinal charges t ensure cst recvery shuld therefre seek t create minimal changes in behaviurs relative t an efficient set f charges. 32. The current LRMC mdel makes revenue recvery charges vlatile frm year t year, the CWD mdel may imprve this if the mdel inputs are stable. Where the bligated capacity is used as the FCC the CWD variant is mre likely t result in mre stable prices than the frecast capacity variant. 33. Setting shrt term multipliers t 1 and reducing the discunt frm interruptible capacity will als tend t lead t mre stable changes, albeit with negative impacts n cst reflectivity, cmpetitin and security f supply. 34. Energy UK supprts stable and predictable charges as these are mst likely t fster cmpetitin, therefre we d nt supprt appraches which use frecast capacity, as the prpsals are silent n hw a frecast wuld be established fr the enduring perid s it is nt pssible t cmment n its stability. 35. Effect n end cnsumers 36. FE ntes that a mve t CWD alng with ther features f the prpsals is likely t increase csts fr electricity cnsumers, as gas transmissin charges will verall increase fr gas fired generatin. This is thrugh a cmbinatin f effects, including the lss f shrt term and interruptible capacity discunts frm NTS exit capacity, an increase in the cst f shrt-haul transprtatin and higher capacity csts 37. Fr prpsals which include an enduring perid the shrt-haul benefits are very much reduced nce cmmdity based revenue recvery charges disappear at the start f the enduring perid. This applies t all prpsals apart frm 0621B and 0621C. 38. Energy UK therefre cannt supprt these prpsals, even thugh we acknwledge the intentin is t develp a new slutin fr the netwrk ptinal charge as it is nw called, there are n assurances that this will actually happened and be implemented in time. N details are included in the prpsals s we cannt supprt smething that des nt exist. 39. Cmpliance 40. FE felt verall that the CWD Mdel has relatively lw risk f nn-cmpliance with TAR NC, but it did nte that there is a small risk that a capacity based revenue recvery charge at IPs may be cnsidered discriminatry. 41. Belw we prvide a summary f the key features f each prpsal and hw it varies frm 0621, with a cmmentary n hw this affects the relative merits f each in respect f the relevant bjectives This prpsal is nt cnsidered t prduce particularly cst reflective charges since it utilises the CWD mdel, and in the enduring perid mves t the use f frecast values (with n methdlgy fr hw they wuld be determined) which further shifts revenue recvery frm nn-distrtive cmmdity t capacity charges. Page 11 f May 2018

12 44. The applicatin f a specific capacity discunt fr strage f 50% is nt cnsidered sufficient t reflect the value strage prvides t the system and security it prvides t the market. This level f discunt des nt recgnise the shrter distances gas will travel t final demand nce it is withdrawn frm strage. 45. The ptinal cmmdity charge becmes the netwrk ptinal charge with a capacity based apprach fr IPs. The frmula is als indexed by RPI, which is a reasnable apprach and a distance limit intrduced. The distance limit is arbitrary but recgnised by sme as a practical measure. Hwever there is n mechanism / frmula that will apply fr the netwrk ptinal charge in the enduring perid nce transmissin services revenue recvery cmmdity charge are eliminated. This lack f clarity is a cncern, assurances f a future mdificatin / develpment prcess t deliver a slutin cannt be guaranteed, this is a negative factr fr this prpsal. 46. The md fails the cst allcatin assessment which means it is mre likely t be prne t crss subsidy and discriminatin. Ofgem will need t explain hw this is justifiable as per the EU TAR NC A 48. As 0621 apart frm: 49. The 86% specific capacity discunt takes better accunt f the value f strage and the distances travelled by gas nce withdrawn frm strage fr supply t end cnsumers. This is therefre cnsidered mre cst reflective than B 51. This prpsal is nt cnsidered t prduce particularly cst reflective charges since it utilises the CWD mdel which is a cst allcatin apprach. Hwever as bligated capacity is used as the FCC n an enduring basis which avids all revenue shifting t nn-cst reflective capacity charges (except at IPs) it is mre cst reflective than 0621 and the ther prpsals which include an enduring perid with frecast values used fr the FCC. 52. Cmmdity charges fr revenue recvery are less distrtive than capacity charges 53. The 86% specific capacity discunt takes better accunt f the value f strage and the distances travelled by gas nce withdrawn frm strage fr supply t end cnsumers. This is therefre cnsidered mre cst reflective than With respect t the netwrk ptinal charge this includes an enduring slutin which prvides a degree f certainty t parties which utilise the ptinal charge, this is psitive fr this prpsal relative t thers which d nt have clarity n the netwrk charge in the enduring perid C 56. As 0621 apart frm: Page 12 f May 2018

13 57. The 86% specific capacity discunt takes better accunt f the value f strage and the distances travelled by gas nce withdrawn frm strage fr supply t end cnsumers. This is therefre cnsidered mre cst reflective than The absence f supprting analysis makes it difficult t assess the merits f this prpsal with respect t the ptinal charge. It is really psitive that this seeks t prvide an enduring slutin that des nt change significantly at the start f the enduring perid, when sme ther prpsals d nt address this, but there has been insufficient time t cnsider, hwever this is a better ptin than prpsals that d nt address the issue fr the enduring perid at all. (all apart frm 0621B) 59. The prpsal als prmtes flw-based cmmdity Transmissin Services Revenue Recvery charges fr existing cntracts at bth IPs and nn-ips in the transitin and enduring perids. This is aimed at retaining the status qu charging cntracts fr them, ensuring there is n different treatment fr IPs versus nn-ips and that they make a fair cntributin t meeting verall revenue recvery targets. This als prvides sme prtectin frm the risk that Natinal Grid s capacity frecast in the enduring perid diverges frm bkings, where mst ther prpsals culd see a change t the capacity based revenue recvery charge within year D 61. As 0621 apart frm 62. The absence f an ptinal charge frm implementatin leads Energy UK nt t supprt this as it cnsider an ptinal charge is needed t help t ffset the unreasnably high, nn-cst reflective charges that the CWD mdel establishes at exit pints that are clse t entry pints. This wuld encurage by-pass pipeline t be built which wuld have a negative impact n the efficient and ecnmic peratin f the pipeline 63. The 86% specific capacity discunt takes better accunt f the value f strage and the distances travelled by gas nce withdrawn frm strage fr supply t end cnsumers. This is therefre cnsidered mre cst reflective than The use f the square rt f distance in the CWD distance matrix has a mderating effect n sme f the mre extreme prices but there seems n justificatin fr it ther than it being a half-way huse. 65. The Prpser, a DNO, ffers a frm f ptinal charge n its wn netwrk s it is surprising that it finds fault with the transmissin charging methdlgy in this respect E 67. As 0621 apart frm: 68. A lnger interim perid fr exit and histrical cntracts attracting cmmdity based revenue recvery charge in enduring perid and strage nt paying revenue recvery charges in the enduring perid. 69. The extended interim perid fr exit will allw mre time fr Natinal Grid t assess changes in bking behaviur frm implementatin in 2019 and befre needing t establish its wn frecast. In additin this will ensure that prices bid in the recent T-4 electricity capacity market Page 13 f May 2018

14 auctin remain bradly cnsistent with thse understd at the time f bidding, this will facilitate cmpetitin n a level playing field between thse parties. 70. The retentin f cmmdity based revenue recvery charges at nn-ip pints (apart frm strage) seeks t address an issue that has been very cntentius thugh the develpment prcess, where capacity cntracts were bked sme-time ag a change t capacity based revenue recvery charges culd nt have been freseen. S this retains sanctity f cntracts, and imprtant principle fr regulatry certainty, bth nw and in the future. This als prvides sme prtectin frm the risk that Natinal Grid s capacity frecast in the enduring perid diverges frm bkings, where mst ther prpsals culd see a change t the capacity based revenue recvery charge within year F 72. As 0621 apart frm: 73. The applicatin f a capacity discunt at bi-directinal intercnnectrs n the basis that these end islatin f Member States and flws can act like a strage facility. 74. Energy UK is nt aware f analysis that demnstrates the magnitude f revenue that wuld then be shifted t ther pints, but has cncerns this may nt be cmplaint with Article 7d. 75. There is n verwhelming evidence fr the applicatin f a 50% discunt at bi-directinal intercnnectrs, the value is selected as the default that applies fr the specific capacity discunt fr strage but this is nt shwn t be cst reflective. 76. The apprach fr the perid frm 2021 is cmplex and can lead t uncertainty in charges H 78. As 0621 apart frm: 79. Histrical cntracts nt paying revenue recvery charges at IPs in the interim r enduring perid nr at nn-ip pints in the enduring perid. 80. Whilst we appreciate the issues arund histrical cntracts having been cmmitted t sme time ag when the prpsed changes culd nt have been freseen, exempting these cntracts n revenue recvery charges culd be cnsidered unfair, and leads t undue preference twards existing cntract hlders in the enduring perid. See graphic in respnse t Ofgem questin 4 belw fr an indicatin f the disparity in charges J 82. The 86% specific capacity discunt takes better accunt f the value f strage and the distances travelled by gas nce withdrawn frm strage fr supply t end cnsumers. This is therefre cnsidered mre cst reflective than The pstage stamp reference price methdlgy leads t a unifrm price at entry pints and separately at exit pints, apart frm where specific capacity discunts apply. These prices are nt cst reflective. This is a significant departure frm prices that vary gegraphically regin Page 14 f May 2018

15 and may g sme way t address the issue f utlier prices, eg high prices at exit clse t entry pints. 84. This apprach wuld be mre suitable where the system is fully uncnstrained, and cst recvery is the nly bjective. Hwever whilst there are few cnstraints, the current level f PARCA activity suggests investment may still be required at sme lcatins where substitutin may nt be pssible such that sme gegraphic signal wuld remain apprpriate, n the grunds f cst reflectivity, cmpetitin and signals fr cnnectins t supprt ecnmic and efficient peratin f the system. We nte that whilst PARCA activity has mstly been in respect f exit capacity that n 14 th June 2018 a PARCA windw has pened fr Entry capacity in the suth west which may be a cnstrained lcatin K 86. As 0621 apart frm: 87. The 86% specific capacity discunt takes better accunt f the value f strage and the distances travelled by gas nce withdrawn frm strage fr supply t end cnsumers. This is therefre cnsidered mre cst reflective than A 100% ff peak / interruptible discunt n entry and exit capacity at strage nly is prpsed but we feel this is nt fully justified and the case that therwise the charge exceeds the marginal cst f prvisin f such a service wuld als apply at ther pints, nt nly strage pint because f their bi-directinal nature L 90. As 0621 apart frm: 91. Existing cntracts are retained within the values fr FCC used as inputs t the CWD reference price methdlgy in the interim and enduring perid, this is mre like the cunterfactual detailed in TAR NC and cmpliant with article 6.3. It als avids the majrity f cases where a 0 value fr FCC lead t a 0 reference price which then needs a mechanism t create a value which may nt be cmpliant with TAR NC Article 6.4, mst f these are in the enduring perid 92. As this apprach creates charges that allcate revenue acrss netwrk pints free f distrtins intrduced by netting ff existing cntracts, which thse cntracted prices are preserved and under recvery is then attributed fairly acrss all pints, s that new capacity purchases are nt at inflated prices. This may be cnsidered mre cst reflective and better with respect t prmting cmpetitin than It is als the case that all ther things being equal reference prices will nt be affected by existing cntract expiry as wuld be the case fr 0621 and alternative that net ff existing cntracts prir t calculating reference prices. Implementatin: What lead-time d yu wish t see prir t implementatin and why? Please specify which Mdificatin if yu are highlighting any issues. 94. Interactins with md 0636 will need t be cnsidered, since if certain ptins are implemented the 621 prpsals wuld need t be amended, analysis rerun and justificatins re-written, and there is n prvisin in the Mdificatin Rules fr this nce an FMR is Page 15 f May 2018

16 submitted t Ofgem. The Jint Office utlined in its request t Ofgem fr a View that there is a gvernance vacuum in sme scenaris. Once a respnse is received there will be an pprtunity t better understand the ptential impact n the implementatin f any f the 0621 mdificatin prpsals. 95. Aside frm this Energy UK Members will need as much time as pssible t ensure their wn systems are mdified t wrk effectively with the new central systems under the new rules. Time will als be required t cnsider new cntracting strategies and reflect the new charging structure in custmer cntracts. Timing is als imprtant with respect t interactins with the electricity market and the next capacity auctin, which 0621E sught t address. Essentially the interim perid wuld need t be extended further t help address this issue and ensure gas transmissin charges are apprpriately reflected in bids. The next capacity market auctin is due t be held in February Therefre an early decisin by Ofgem is desirable. 96. Energy UK understands that Ofgem will undertake a regulatry impact assessment f all the prpsals against the existing rules as the baseline. We acknwledge that Ofgem is nt required t prvide a minded-t psitn as part f a mdificatin impact assessment, but that it ften des particularly where the prpsals are cmplex r there are multiple alternatives. We als nte that a minded-t preference des nt bind Ofgem t cnfirming that decisin at a later stage. Given the large number f alternatives in this case we think it wuld be very helpful t prvide a minded t decisin at the time the impact assessment is issued fr cnsultatin as this wuld begin t narrw dwn the range f pssibilities as the time fr implementatin appraches. If Ofgem is unable t express a minded-t preference fr a single ptin it wuld still be helpful if the range f pssibilities were reduced as this wuld mst likely reduce the range f pssible prices. 97. Frm a practical viewpint the final cnsultatin fr ACER culd fcus n the minded-t ptin(s) rather than there being ten variants included in this dcument. Impacts and Csts: What analysis, develpment and nging csts wuld yu face? 98. As a trade assciatin - nne Legal Text: Are yu satisfied that the legal text will deliver the intent f the Slutin? Please specify which Mdificatin if yu are highlighting any issues. 99. Energy UK has nt reviewed the legal text fr all the prpsals Mdificatin Panel Members have requested that the fllwing questins are addressed: Please specify which Mdificatin yur views relate t D yu believe there is specific issues that shuld be cnsidered by Ofgem s Regulatry Impact Assessment? Sectin 10 f the Draft Wrkgrup reprt cntains a cmprehensive list f tpics, belw are sme further issues: 101. Whle system impacts acrss energy markets, including: Impact n electricity prices as increased capacity csts are passed thrugh via the capacity mechanism r cmmdity prices. These csts arise nt nly frm a shift t mre capacity based charges but als reduced discunts fr ff-peak capacity, the ptinal cmmdity charge (nw called the netwrk ptinal charge in 621 mds) and that n netwrk ptinal charge exists frm 2021 fr many prpsals. Page 16 f May 2018

17 Impact n gas-fired generatrs that have cmmitted t capacity mechanism cntracts fur years ahead based n NTS charges that may bear little resemblance t thse that apply at the time. Bth fr price setters and price takers Impact n the gas and electricity market in Nrthern Ireland as part f the UK market, and the wider Irish market as linked t prperly functining reginal markets with the Eurpean Unin Impact n crss brder trade mre generally TAR NC Article 7e requires reference prices nt t distrt crss brder trade The impact f increased recvery f allwed revenue frm capacity charges n NBP prices, and custmer gas prices. Particularly with respect t higher St Fergus entry capacity prices The impact n cmpetitin, security f supply and whlesale prices if strage assets were n lnger viable and clsed 104. Whether the price difference and distrtin created in the enduring perid at entry by excluding the existing cntracts (vlume and revenue) is ffset by existing capacity hlders having lnger term bkings whilst new capacity purchasers can prfile bkings. Als whether this creates a barrier t entry 105. Impact f increased PARCA security csts, and User Cmmitment Amunts n investment 106. Ofgem will als need t prvide evidence as t why the csts f prvisin f shrt term capacity vary by lcatin 107. Cst allcatin assessment Overall Ofgem will als need t explicitly cnsider a number f trade-ffs; including; whether prpsals sufficiently cmpliant even if nt cmpliant in all regards with TAR NC Cst reflectivity and n impact n cmpetitin 109. Impact n revenue flws as TO and SO, and hence n custmers, fllwing the implementatin f any ptin where the discunt fr interruptible / ff peak capacity reduces t 10% and is assigned t TO frm SO fllwing a licence change (if cmpleted in time) 110. The Impact n dmestic and ther DN cnnected custmers and suppliers frm :, the changing gegraphic recvery f revenue. increased capacity charges, including vulnerable custmers where standing charges may reflect this change in suppliers fixed csts 2 Sectin Page 17 f May 2018

18 The impact n dmestic and ther DN cnnected custmers f the timing and manner f pass-thru f NTS exit capacity charges as ECN charges by DNs given the tw year lag in DN revenue adjustments. Risks f charges being unpredictable frm the abve. Uncertainty arising frm ptential fr changes in DN capacity bking behaviur 111. Energy UK als seeks assurances frm Ofgem regarding the prpsed default tariff cap fr dmestic custmers such that it will take adequate accunt f these reginal variatins in gas transmissin charges as they are implemented, recgnising the mechanisms by which they are reflected in dmestic custmers bills. Als ensuring that the mechanism t update the cst allwance is flexible enugh t address the impact f these refrms ver time Ofgem requested that the fllwing questins be included as part f the cnsultatin. Panel agreed t include these: 113. The ratinale in the reprt fr having an interim perid and using the bligated capacity as the Frecasted Cntracted Capacity (FCC) is t avid significant changes t charges and have a perid t understand hw bking behaviur changes. Hw des this cmpare t having tw structural changes t charges (ne at the start f the interim perid and anther at the enduring perid)? The ratinale fr the interim perid (which is enduring fr 0621B) ges beynd what is stated abve, indeed it may be better t ask what is the ratinal fr the enduring perid The starting pint fr using bligated capacity as the FCC is s that the values are published well in advance, are nt pen t manipulatin and are stable s that stable charges will be established. Stable, predictable charges are best suited t furthering cmpetitin bjectives as suppliers are then able t efficiently incrprate these int their tariffs with little risk premium t manage uncertainties, such that cmpetitin is then based n issues that are within the influence f the supplier At the time f the prpsals n methdlgy is available t understand hw NG will establish FCC values based n a frecast and there is cnsiderable uncertainty abut hw RIIO2 may affect allwed revenues and baseline. It is therefre difficult t see hw any prpsal with a step change frm the interim t enduring perid can be implemented when this creates significant uncertainty in charges and may distrt cmpetitin. It is als the case that n analysis has been carried ut t cnsider the variatin in charges that culd arise frm errrs in frecasting FCC values, year n year variability and the impact this culd have n revenue recvery charges and K Furthermre bking behaviur will change due t the increase in price f shrt term and interruptible / ff-peak prducts at bth entry and exit. It may be that bkings mre clsely match flws but there will be ther factrs t cnsider particularly at exit where the range f prducts is limited, and there is a risk f substitutin leading t lss f baseline capacity What (if any) cnsequences d yu see frm interim cntracts being allcated at QSEC and AMSEC auctins in 2019 given the timings f these auctins in the UNC and pssible date f Ofgem decisin n UNC621? What ptins are there t deal with these cnsequences and what impact wuld these ptins have? Page 18 f May 2018

19 There is an interactin between the date f allcatin f capacity in these auctins and the date f Ofgem s decisin n 0621 and whether the capacity secured thrugh such auctins will be cnsidered as histrical cntracts r nt. This means whether the price paid fr capacity is fixed fr the duratin f the cntract r flats subject t the prices calculated each year This uncertainty will impact bidding strategies fr these auctins, parties will be unwilling t cmmit t lng term capacity if the price f that capacity culd increase significantly as is seen at mst entry pints at the transitin frm the interim t enduring perid Fr example in the recent QSEC allcatins substantial vlumes f capacity have been secured at Cheshire and Fleetwd at p/kwh whilst the price frm Octber 2021 accrding t the 0621 wrkbk 3 wuld be and respectively A way t address this wuld be a further UNC mdificatin that may require urgent status s that it is clear whether capacity secured in the 2019 QSEC and AMSEC auctins will be treated as histrical capacity r nt. Clearly this decisin will impact the vlume and price f existing cntracts excluded frm the reference price calculatin fr all mds apart frm 0621L and hence the revenue t be recvered frm capacity purchased in subsequent allcatins / shrt term prcesses An assciated issue is that histrical cntracts will lse their exclusin frm revenue recvery charges upn transfer t anther party in the enduring perid. This is an issue because it nly became apparent very late in the develpment prcess that this was the intent f NG s 0621 prpsal, such that there was limited time t discuss and address this via alternative prpsals This will als impact n the revenue and vlume excluded frm the reference price calculatin increasing uncertainty f charges in the enduring perid D yu cnsider the prpsals t be cmpliant with relevant legally binding decisins f the Eurpean Cmmissin and/r the Agency fr the C-Operatin f Energy Regulatrs? Cmpliance is a cncept that shuld be black and white with a yes / n answer. Hwever there is scpe fr interpretatin f the EU rules and cnsequently ptential fr a variety f slutins t be bradly cmpliant with mst, if nt all, rules. It may als be that in trying t achieve cmpliance with sme rules weakens cmpliance with ther rules. There is likely t be a trade-ff between the degree f cmpliance and achievement f wider EU and UNC bjectives. Ultimately cmpliance is fr a lawyer t determine, whilst ur cmments flw frm the nrmal meaning f the wrds that frm the legal text Main features that are cmpliant: Article 4.1 the attributin f csts as transmissin r nn-transmissin services seems cmplaint 3 Page 19 f May 2018

20 Article 6.3 requires the same reference price methdlgy t be applied at all entry and exit pints 0621L meets this by nt excluding existing cntracts in the calculatin f entry reference prices J uses equalizatin as an adjustment t reference prices this mechanism is allwed under Article All the 0621 variants include a cmmdity revenue recvery charge at nn-ips pints and at least in the interim perid, if such a charge is cmpliant in the interim perid we can see n reasn fr it nt being cmpliant as an enduring slutin. A cmmdity base revenue recvery charges is allwed by exceptin, subject t NRA apprval by Article 4.3 which identifies a number f criteria, as fllws: Levied fr the purpse f managing revenue under / ver recvery Calculated n the basis f frecasted r histrical capacity allcatins and flw r bth Applied at pints ther than intercnnectin pints Applied after the NRA has made an assessment f its cst reflectivity and its impact n crss-subsidisatin between intercnnectin pints and ther pints These criteria seem t be met by all the prpsals; with respect t the assessment that revenue recvery charges need t be cst reflective see belw under cmments in paragraph 114 as a cunter t this. It is als the case that GB has unlike ther Members States used a cmmdity charge fr revenue recvery fr sme time, with prpsals t change this by GCM 19 4 being rejected by Ofgem in At the time Ofgem did nt cnsider there were crss subsidies in the regime. Ofgem and BEIS als lbbied t ensure that a cmmdity based revenue recvery charge was permitted by TAR NC, s it wuld seem smewhat dd t reverse this thinking withut full justificatin as this undermines regulatry certainty Article 9 requires the applicatin f a 50% r greater capacity discunt fr strage capacity Article 13 multipliers are within the allwed range, seasnal factrs are nt used Article 14 calculatin f reserve prices fr n-yearly standard capacity prducts this is cnsistent with the apprach prpsed Article 16 requires that the price f interruptible capacity at IPs reflects; the prbability f interruptin a simplified apprach has been adpted that bradly meets this criterin Article 17 1 a & b the prpsals are cmpliant with minimizing under / ver recvery Articles 23,24,25 relate t flating payable price which is being intrduced at IPs (and ther pints) fr new capacity purchases 4 Page 20 f May 2018

21 Article 26 & 27 Cnsultatin this is in hand but will need t cnsider the prpsals against the CWD cunterfactual defined in TAR NC Article Article 28 cnsultatin n discunts, multipliers and seasnal factrs is prvided fr by the UNC mdificatin prcess if necessary Article 32 Publicatin ntice perid existing rules prvide fr this Article 35 Existing cntracts all prpsals ensure that existing cntracts pay the fixed capacity price agreed at the time f bking Main features where cmpliance is uncertain: Article 5.6 requires a justificatin by the NRA fr cst allcatin assessments > 10% Article 6.3 requires the same reference price methdlgy t be applied at all entry and exit pints, all variants apart frm 0621L d nt meet this since existing cntracts are excluded befre the calculatin f entry reference prices Excluding existing cntracts leads t an FCC value f 0 being input int the CWD calculatin, this leads t a 0 price at sme pints. This situatin is nt anticipated by TAR NC. Hwever, the mechanism fr establishing a nn-zer price is nt ne f thse permitted in Article 6.4. This is mainly an issue fr mds that include an enduring perid and exclude existing cntracts, all apart frm 0621B and 0621L Article 8.1 suggests that where entry and exit pints cannt be cmbined in a flw scenari that cmbinatin f exit pints shall nt be taken int accunt. The prpsed CWD mdels are nt cmpliant with this as they assume flws are pssible t/ frm every entry / exit pint. Whilst the difficulties in remving certain rutes is appreciated it is pssible this may vercme sme f the nn-cst reflective charges generated by the CWD mdel Article 17.1 c the prpsals with a step change frm the interim t enduring regime may nt be cmpliant with this which suggests significant differences between the levels f tariffs in tw cnsecutive tariff perids shuld be avided t the extent pssible Article 19.4 requires TSOs t use ne regulatry accunt, it is prpsed t use ne accunt with sub-divisins 116. In what way d yu cnsider the reference price methdlgies prpsed (Capacity Weighted Distance (CWD), CWD using square rt f distance and Pstage Stamp) t be cst reflective and meet the criteria in Article 7 f TAR? Article 7a aims at enabling netwrk users t reprduce the calculatin f reference prices and their accurate frecast This is achieved t sme extent by the mdels published by NG fr each 621 variant. Albeit there are a number f uncertainties, including; The uptake f the newly defined netwrk ptinal charge (NOC) and revenue frm this, as this will impact the revenue t be recvered frm ther pints. Page 21 f May 2018

22 The ability t accurately frecast charges is directly linked t knwledge f the input parameters t the mdels. 0621B which uses bligated capacity fr the FCC meets this bjective better than the ther alternatives since the FCC values in the enduring perid fr thse prpsals are nt knwn, and there is uncertainty ver hw they will vary year n year The treatment f capacity allcated in 2019 QSEC and AMSEC which is linked t the date Ofgem makes a determinatin n this suite f prpsals als limits the ability f parties t accurately frecast charges Article 7b intends the methdlgy t take int accunt the actual csts incurred fr the prvisin f transmissin services cnsidering the cmplexity f the transmissin netwrk These methdlgies are cst allcatin rather that cst reflective appraches. Ecnmic thery suggests that cst reflectivity requires tariffs t reflect the frward lking csts that users impse n a netwrk thrugh a change in their use. In a system with declining demand and spare capacity the incremental marginal csts are likely t be lw r clse t zer. Therefre it culd be said that all ptins are less cst reflective than a lng run marginal cst apprach albeit we recgnise the weaknesses in the current pricing framewrk Distrtins in the use f capacity will arise where charges are nt cst reflective. Appraches which shift mre revenue nt capacity charges will risk mre distrtins than appraches which d nt. Therefre a CWD apprach based n bligated capacity has lwer capacity charges which will be less distrtive than a CWD apprach based n frecast capacity. A pstage stamp apprach with applies the same charge at all pints (subject t specific capacity discunts) is nt cst reflective, if sme lcatinal diversity in charges is cnsidered apprpriate It is als the case that the CWD mdel leads t high exit charges fr pints clse t entry pints which cannt be cst reflective fr use f a very small part f the netwrk The prices in the table 2 belw demnstrate this. The prices are currently lwest fr Pembrke and Peterhead which are bth clse t large entry pints, with Langage having the highest charge being distant frm entry pints, with Didct smewhere between the tw price levels Pembrke and Peterhead see significant price rises in bth the interim and enduring perid highlighting a key weakness f the CWD mdel with respect t cst reflectivity. Didct has the cheapest price in the interim perid, whilst Langage has the mst expensive price albeit similar t Pembrke and Peterhead even thugh it is a lng way frm any entry pint since the weighted average distance fr these three pints is similar. Table 2. Firm exit capacity prices at certain pwer statins Firm exit price n p/kwh Didct Langage Pembrke Peterhead Middle f cuntry remte frm entry Suth West remte frm entry Suth west Wales adjacent t large entry pint Nrth east Sctland adjacent t large entry pint Page 22 f May 2018

23 17/ / / It can als be said that since the CWD uses distance as a cst driver with higher charges the greater the weighted average distance and distance that gas travels then there is sme small element f cst reflectivity. 0621J uses the pstage stamp methdlgy which des nt include distance but shares csts acrss all pints equally (subject t specific capacity discunts) All the 621 variants apart frm 0621L exclude existing cntract vlume and revenue befre the charges fr ther pints are calculated. The revenue related t these cntracts was fixed at the time f allcatin and as per Article 35 is prtected under TAR NC. Hwever if that price was nt cst reflective at the time r is nt cst reflective nw then remving the revenue assciated with these cntracts will lad additinal revenue nt new cntract purchases at entry, which will further distrt the cst reflectivity f thse charges with cnsequential impacts n cmpetitin There is nly limited infrmatin available n prices paid fr existing cntracts hwever the vlume and revenue is available fr each year, the average price paid which remains fixed fr the duratin f the cntract is shwn in blue in the graph belw. The range and grey bars represent the average price at a nn-strage entry pint with the existing cntracts excluded and included in the reference price calculatin using the pstage stamp mdel. (A summary f existing cntract vlumes, average price and the data used fr the graph belw are in appendix 2) The step change in the range and grey bars in 2021 is due t the change in the FCC values frm bligated t Natinal Grid s frecast. Graph 2. Average Price Cmparisn Cmparisn f nn-strage entry prices with adjustment via revenue using PS mdel V 2.3 with exisiting cntracts average prices (allwed revenue frm 2021 nt indexed ) / / / / / / / / / / / / / / / / /33 Existing cntracts Average Price (p/kwh/d) PS entry pint price nt-excluding existing cntracts PS entry pint price excluding existing cntracts Page 23 f May 2018

24 The blue bars fr existing cntracts culd be the mst cst reflective as the reserve prices in the auctins were derived using the LRMC methdlgy r ptentially the unit cst allwance calculatin. Hwever these values were fixed at the time f allcatin and have nt been indexed t current prices s if they were cst reflective at the pint f purchase they are n lnger reflective f current csts. Infrmatin is nt available t determine what these values wuld be if they had been indexed but in any case all prpsals lad this missing indexatin value nt new capacity purchases Ofgem cnfirmed its GTCR plicy view in Nvember as belw that: Our view is that flating capacity charges shuld apply t all cntracts frm the date f implementatin, including thse taken ut under the current regime. We cnsider this wuld avid market distrtins between users buying the same entry pint capacity fr the same perid but paying different charges depending upn the date they entered int the their bligatin t pay At the time, Ofgem acknwledged that the treatment f existing cntracts at IPs was uncertain. Nw that the TAR NC psitin is clear and all prpsals extend the treatment f existing cntracts t all pints and t the date f implementatin f a 0621 prpsal, it is clear that Ofgem will agree this creates a distrtin in the market, althugh Ofgem s pen letter f February makes n cmment n this issue, which is surprising given that the TAR NC psitin with respect t existing cntracts was clear by then. The missin f the existing cntracts issue and recgnitin f its interactins with key features f the regime namely capacity charges fr new capacity purchase and cmmdity revenue recvery charges is rather serius since Ofgem had previusly recgnised the distrtin that culd be created whilst simultaneusly rejecting the use f a cmmdity revenue recvery charge that wuld g sme way t reduce this distrtin The graph abve shws that existing cntracts are a medium term issue int the early 2030 s and s that distrtin will persist fr sme time. We wuld assume that Ofgem wuld therefre lk favurably n prpsals which reduce this distrtin. 0621B des this mst effectively by using the bligated capacity n an enduring basis, this reduces the price differential between existing capacity and new capacity bkings, with residual revenues being cllected by a unifrm cmmdity charge (except at IPs) which will nt distrt cmpetitin. 0621L als addresses this issue by retaining the existing cntract vlume and revenue as part f the inputs t the CWD calculatin, this reduces the reference prices relative t prpsals which exclude these cntracts, but this prpsal mves t FCC values based n a NG frecast frm 2021 which increases the differential between existing cntracts and new purchases. Hwever this remains less distrtinary than prpsals which exclude the existing cntracts in the enduring perid Als in Nvember 2015 Ofgem stated: 5 Page Page 24 f May 2018

25 The intrductin f flating capacity charges wuld ensure that all users wh benefit frm the availability f a reliable netwrk cntribute twards the histrical csts. It transfers the burden f revenue under-recvery frm the current cmmdity charge t the new flating capacity charge. We cnsider this wuld be mre cst reflective and wuld ensure that NGGT has better infrmatin fr netwrk management There are tw pints here Cst reflectivity is nt explained in terms f reflecting frward lking marginal csts and seems t be at dds with ecnmic principles. Ofgem s view seems t stem frm the desire fr all parties tp make a cntributin t the histrical csts f the netwrk as all parties benefit frm the netwrk, hwever that is already achieved thrugh a cmmdity charge fr revenue recvery. Ofgem seems t cnsider that where bkings diverge frm flws that there are misleading signals t NG in the management and peratin f the netwrk. We cnsider that nminatins rather than capacity bkings are key t the way in which NG manages the netwrks and that the PARCA framewrk is used t signal future capacity needs beynd baselines als that there is n cst t NG f bkings being shrt term rather than lng term. Ofgem needs t mre fully justify this premise if it maintains that bkings mre clsely matching flws is desirable Ofgem als seems t cnsider that revenue recvery charges shuld be cst reflective in its February 2017 letter We d nt believe that the current use f nn-lcatinal cmmdity charges, levied fr the purpses f managing under- and ver-recvery f transmissin services revenue shuld be cntinued as we d nt cnsider them t be cst reflective in the cntext f TAR NC as their derivatin des nt incrprate the required cst drivers TAR NC refers t cst drivers f capacity and distance in the cntext f reference prices nt revenue recvery charges Als in the electricity Targeted Charging Review (TCR) 8 Ofgem has stated that Cst reflectivity is less directly relevant fr residual charges; hwever it is imprtant that residual charges d nt unduly distrt the signals prvided by frwardlking charges which are intended t be cst reflective residual charges d nt relate t specific csts that any user impses Instead Ofgem is prpsing t assess residual charges against the principles f reducing distrtins, fairness and prprtinality and practicality. Fr electricity this leads t a capacity based revenue recvery charge in rder t Page 25 f May 2018

26 minimise distrtins that culd arise frm behind the meter generatin. In gas there is n parallel issue f behind the meter generatin s a unifrm cmmdity charge wuld seem t be cnsistent with these principles The TCR apprach seems mre cnsistent with ecnmic principles and hence likely t lead t efficient utcmes in custmers interests As cst reflective charges are clsely linked with effective cmpetitin, the treatment f existing cntracts and the shift in revenue t capacity charges will likely have a detrimental impact n cmpetitin thrugh the distrtins created Multipliers Energy UK recgnises that all the prpsals adpt a cmmn apprach t multipliers fr shrt term capacity f 1, even thugh Ofgem invited the industry t cnsider and justify the apprpriate level given that it had expressed its view that shrt term discunts shuld be reduced. We cnsider that relatively little attentin was given t this issue with all prpsers fllwing Natinal Grid s lead and setting multipliers t ne. Whilst we agree this des nt differentiate between shrt and lnger term bkings it is nt a cst reflective ptin, and shuld nt be justified as such The ratinal fr discunts fr shrt term capacity cmes frm ecnmic thery f shrt-run marginal cst pricing. This suggests that the csts f prviding netwrk capacity t any ne shipper n any ne day wuld be insignificant. Ofgem nted this in its December cnsultatin and felt the need t recnsider the degree t which this applies in practice, given the uncnstrained nature f the netwrk, switching t shrt term capacity and cnsequential uncertainty in the lcatin f flws entering the netwrk. Ofgem felt the current situatin is nt sustainable We dn t think the cst t NGGT f accmmdating a significant number f shrt-term users is zer. Shrt-term users already pay the full rate f the cmmdity charge, cntributing t the recvery f NTS fixed csts. Hwever, we als think that a lack f any lcatinal signals may create inefficiencies in the shrt-term use f the NTS. Under the current arrangements, shippers buying within-day r interruptible daily capacity face the same unifrm charge (cmmdity nly) at all entry pints even thugh the csts NGGT incurs in prviding access may be different Ofgem ntes that shrt term users make a cntributin t histrical cst via the cmmdity charge, n evidence is prvided here r elsewhere by Ofgem that the csts f prviding shrt term access vary by lcatin. Therefre evidence needs t be prvided t supprt Ofgem s psitin, r accept that unifrm cmmdity charges prvide a cntributin t fixed csts We als nte frm this statement that Ofgem wuld appear t ppse a pstage stamp mdel since capacity charges d nt vary by lcatin. 9 Page 26 f May 2018

27 Energy UK wuld als like t refer back t Ofgem s decisin letter regarding GCM This cntains a number f statements linked t the reasns fr reducing shrt term discunts at that time Reflecting the fact that the SRMC f daily entry capacity is relatively lw, Ofgem cnsiders it apprpriate that the reserve price fr such capacity is lwer than the reserve price fr lnger term capacity i.e. the Lng Run Marginal Cst (LRMC). GCM19 wuld mve further away frm this psitin by basing the daily entry capacity auctin reserve prices n the LRMC. We cnsider that the setting f artificial barriers such as a flr price which was higher than the SRMC wuld have an adverse impact n cmpetitin. Ofgem therefre des nt agree that the current arrangements give undue preference t thse bking capacity in the shrt-term This change in plicy psitin away frm ecnmic principles, is a cncern in the cntext f regulatry certainty. Hwever as the prpsals d nt include a range f ptins n multipliers we d nt cmment n this further, nr did we cnsider this in ur assessment against the relevant bjectives Article 7c requires the methdlgy t aim at ensuring nn-discriminatin and prevent undue crss-subsidisatin including by taking accunt f the cst allcatin assessments in Article The results f the cst allcatin assessments are summarised abve, this infrmatin is taken frm the preliminary ACER cnsultatin issued at the same time as the cnsultatin fr These have nt attracted much discussin during the 10 Page 27 f May 2018