Investor Webinar. UK Transmission Incentives. October 2010

Transcription

1 Investor Webinar UK Transmission Incentives October

2 Introduction and objectives Why this webinar topic? What are we aiming to do for you today? How we intend to do this? 2

3 Why incentives? Incentives have been utilised in National Grid s Transmission regulation since the 1990 s Introduced for a number of reasons Drive positive and innovating behaviour in focus areas of operations Balance market behaviour through shared pain/gain Allows automatic corrections for some uncertainties 3

4 Aim of existing incentives in Transmission Optimise costs Minimise the cost of energy we use and procure to run the networks Maximise the capacity in the networks at minimum cost Reduce costs of energy imbalance Drive environmental performance Minimise vented emissions of greenhouse gases from our plant and equipment Improve market information Timeliness and accuracy of historical and forecast data to market participants Optimise the use and delivery of capacity on the networks Balance the need to invest in physical capacity against commercial options Maintain reliability levels Minimise electricity supply disruptions to customers Innovation Encourages efficient research, development and application of new technologies 4

5 Typical Incentive structure Outcome for National Grid Cap X% Upside Sharing Factor Deadband Target Y% Downside Sharing Factor Collar Measure of performance (e.g. cost) Profit Loss The cap and collar limit the profit or loss, to avoid windfall profits or losses Sharing factors define National Grid s share of profits or losses for a given level of performance. Balances the risk and reward Target is the performance benchmark Deadband encourages focus on sustainable delivery 5

6 How incentives fit within our current price controls Maximum Base year RPI 2009/10 allowed = Incentives* revenue x indexation revenue K (timing adjustment) Other Adjustments ETO 1,512m = x 987m m (15)m 276m** GTO 604m = x 460m m 25m 30m ESO 791m = n/a n/a 791m n/a 0m GSO 427m = n/a n/a 401m 25m 0m 6 *Includes associated incentive pass-through costs and GSO revenue drivers. **Includes transmission investment for renewable generation and pass-through items such as collections on behalf of Scottish Power and Scottish Hydroelectric limited Numbers taken from regulatory accounts Adjustments made to get from regulatory to IFRS accounts include depreciation, capex and pensions.

7 Electricity Incentives Electricity TO Transmission Network Reliability Incentive ( TNRI ) Sulphur Hexaflouride ( SF6 ) emissions Innovation Funding Incentive ( IFI ) Electricity SO Balancing Services Incentive Scheme ( BSIS ) Internal costs incentive 7

8 Gas incentives including revenue drivers Gas TO Innovation Funding Incentive (IFI) Gas SO Entry Operational capacity buybacks Incremental capacity buybacks Incremental capacity delivery* Investment incentive revenue driver Exit Buy-back and Interruptions Investment incentive revenue driver Gas SO continued Constrained LNG procurement Shrinkage Operating margins procurement Residual gas balancing Demand forecasting performance Website performance NTS environmental incentive Internal costs incentive NTS unaccounted for gas 8 * Incremental Capacity Delivery will not remunerate until 2012/13

9 Electricity Incentives Performance 2009/10 Strong incentive outperformance 20 Performance ( m) m 2m 9m TO incentives 15m SO incentives TO SO IFI SF-6 TNRI BSIS -10 9

10 Gas Incentives Performance 2009/ Strong incentive outperformance Performance ( m) m 3m 24m 81m 29m 52m TO incentives SO incentives SO revenue driver TO SO Incentives SO Revenue driver IFI Other: (Operating margins, website performance, NTS Environmental, Internal gas) 1m Capacity buybacks 12m Demand forecasting 2m Residual gas balancing 2m Shrinkage 5m Constrained LNG 2m Exit revenue driver Entry revenue driver 10

11 Deep dive UK Transmission Incentives Nick Winser 11

12 Incentive performance Electricity Transmission 40m 30m IFI TNRI Performance 20m 10m 0m - 10m SO 2007/ / /10 Internal costs TO SF6 BSIS Internal costs Net 3 year rolling average - 20m 12

13 Incentive performance Gas Transmission 30m 25m 20m TO IFI Constrained LNG Internal costs Performance 15m 10m 5m SO Buybacks Shrinkage Environmental Operating margins Demand forecasting 0m - 5m - 10m 2007/ / /10 Residual balancing Website performance Net 3 year rolling average 13 Excludes revenue drivers

14 Gas Transmission System Entry Capacity Hole House Farm Storage TPCR 4 revenue driver TPCR 4 TPCR 5 TPCR 6 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 42 month build window RIIO 8 year price control SO incremental capacity rights TO baseline capacity SO income stream m TO income stream m Total income stream m Capacity auctions in Sept 2009 Bid of 165 GW/d determined allowed capex spend for project Capacity contracted for delivery from March 2013 Capacity expected to be delivered and utilised 18 months early - generating additional income 14 Forecast project completion delivering system capacity from October year revenue driver income triggered based on 165 GW/d capacity Efficient costs remunerated by TO in RAV

15 SF 6 emissions reduction incentive Flat performance target of 0.2% of ETO base revenue if pre-agreed target levels met or beaten No sharing factors, no downside Achieved for the past three years generating incentive revenues of: 07/08 2.2m 08/09 2.3m 09/10 2.4m 100,000 tons equivalent of CO 2 reductions delivered in 2009/10 High leakage sites targeted in parallel with R&D into alternative technologies Leakage (as % of inventory) /8 2008/9 2009/ / /12 Target Actual Forecast 15

16 Incentives drive outperformance 2009/10 Allowed real vanilla return Achieved real vanilla return Achieved nominal RoE normalised for RPI* 5.05% Electricity Transmission 6.6% 14.2% 5.05% Gas Transmission 7.6% 16.8% 4.94% Gas Distribution 6.3% 14.2% 16 * Normalised for 3.0% p.a. long run UK RPI UK rate base as at 31 March 2010

17 What does RIIO mean for Transmission? UK Transmission Incentives Paul Whittaker 17 Alignment between customers and shareholders Deep stakeholder engagement Incentives to deliver Drive for investment

18 RIIO: Incentives playing a larger role Revenue = Incentives Innovation Outputs Price control set in advance to ensure: Timely and efficient delivery Network companies remain financeable Transparency and predictability Allowed returns reflect cash flow risk Balance between costs paid by current and future consumers Deliver outputs efficiently over time with: Focus on longer term, with 8 year control periods Rewards and penalties associated with output delivery Incentives for timely delivery of large scale projects Technical and commercial innovation encouraged through: Core incentives in price control package Option of giving responsibility for delivery to 3 rd parties Innovation stimulus gives support and prizes for innovation, building on low carbon network fund Set outputs in clear contract outlining deliverables Consumers know what they are paying for Network companies are required to deliver 18

19 The RIIO revenue model REVENUE COMMITMENT UNDER PRICE CONTROL = BASE INCENTIVES ADJUSTMENTS BASELINE REVENUE ALLOWANCE ( M) RULES to adjust revenue in view of Company performance RULES to adjust revenues for uncertainty RAV Capitalisation depreciation Rewards / penalties for delivery of outputs Specific re-openers WACC Upfront Efficiency incentives Pass through items Tax allowance Volume driver Expenditure requirements Indexation 19 SPECIFICATION OF OUTPUTS TO BE DELIVERED

20 TPCR4 rollover high level timeline Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Ofgem issues rollover FBPQ and supplementary questions Rollover data and narrative submitted to Ofgem 30 th July th October 2010 Q&A and cost visits Ofgem publishes initial proposals Ofgem publishes final proposals One year control period begins 1 st April

21 TPCR5 high level timeline Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun TPCR5 main review Ofgem issues strategy document for consultation Ofgem issues future business plan questionnaire Data and narrative submitted to Ofgem - 29 th July 2011 Fast Track Ofgem Fast Track decision and consultation published Fast Track sign-off and final proposals Non-Fast Track Additional data and narrative submitted 30 th April 2012 Ofgem publishes initial proposals Ofgem publishes final proposals Control period begins 1 st April

22 Summary Incentives are a familiar concept within Transmission and help us to drive more efficient outputs from the system We have a track record in delivery against incentives and achieving outperformance through innovation RIIO contains many recognisable features RIIO supports new investment and our continued opportunity to outperform 22

23 Q&A UK Transmission Incentives 23