1 project nexus approach to modelling costs and benefits cesar coelho ofgem project nexus unc...
TRANSCRIPT
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Project NexusApproach to modelling costs and benefits
Cesar Coelho
Ofgem
Project Nexus UNC Workgroup15 May 2012
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Agenda
• Overall approach to analysis and modelling
• Steps for conducting analysis
• Take-up scenarios
• Costs and benefits
• Competition and distributional impacts
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Where we are
• Project Nexus (PN) has the potential to deliver significant benefits for consumers
• At PNAG in March, Ofgem offered to help support the workgroup’s analysis
• We have developed an approach for modelling the costs and benefits of PN for discussion today
• We also intend to facilitate discussion on consumer issues
Ofgem’s role
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Overall approach• Standard approach to cost benefit
• NPV modelling costs and benefits
– Decision on time horizon
– Discounting
• Uncertainty
– Scenario-specific uncertainty (e.g. specific to PN implementation)
– Universal uncertainty (e.g. Magnitude of energy prices)
• Approach to questions: simplify so these do not need to reflect the detail of the modelling
High-level principles
TIME
NP
V
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Steps for conducting the analysis
Establish potential take-up scenarios
Estimate benefits, quantify where possible
Compare Nexus implementation with counterfactual scenarios
Assess any impacts on competition, distribution of costs & benefits
High-level principles
Establish how industry costs would change according to the level of take up
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Step 1 – Take-up scenarios
• Take-up scenarios drive:
– Costs
– Benefits
– Impacts on competition
• Define:
– Implementation scenario
– Range of counterfactual scenarios
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Step 1 – Take-up scenarios – Settlements
TIME
Counterfactual: Maximum plausible take-up of DM settlement without Nexus implementation (LSP) 3
Counterfactual: Minimum plausible take-up of DM settlement without Nexus implementation (LSP)
SETT
LEM
ENT
PRO
DU
CTS
– TA
KE U
P
100%
0%
3 1
2
4
3
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Settlements implemented: Maximum plausible take-up of daily settlement products
Settlements implemented: Minimum plausible take-up of daily settlement products
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Step 1 – Take-up scenarios – Settlements time reference
TIMEMilestone for framing stakeholder questions – Post-implementation
SETT
LEM
ENT
PRO
DU
CTS
– TA
KE U
P
100%
0%
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Time to be used as reference to frame questions:
•Need to understand current take-up (DM/NDM)•Post implementation assumption: Daily meter data is available•Post-2020
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Milestone for framing stakeholder questions – Pre-implementation (central agent)
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TIME
3
Milestone for framing stakeholder questions – Post-implementation
SETT
LEM
ENT
PRO
DU
CTS
– TA
KE U
P
100%
0%
3 1
2
4
3
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Milestone for framing stakeholder questions – Pre-implementation
Step 1 – Take-up scenarios – Settlements questions
Question:
•Assuming that it is possible to access daily meter reads, what are minimum and maximum likely take-up scenarios for each settlements product (at milestone XX)?
Bottom up + top down approach:
•Ask the group for a common view•Ask individual stakeholders for view across their portfolio, weight by portfolio size
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Step 1 – Take-up scenarios – AQ, MPR frequency
TIME
2
Milestone for framing stakeholder questions – Post-implementation
Rolli
ng A
Q –
TAK
E U
P
100%
0%
3 1
3
Rolling AQ/MPR implemented: Maximum plausible take-up
Rolling AQ/MPR implemented: Minimum plausible take-up
Time to be used as reference to frame questions:
•Post implementation assumption: Daily meter data is available•Post-2020
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Step 1 – Take-up scenarios – AQ, MPR frequency questions
TIME
2
Rolli
ng A
Q –
TAK
E U
P
100%
0%
3 1
3
Question:
•Assuming that it is possible to access daily meter reads, what percentage of your portfolio would update the AQ/be reconciled on a monthly, quarterly, six monthly, annual basis (at milestone XX)?Bottom up + top down approach:
•Ask the group for a common view•Ask individual stakeholders for view across their portfolio, weight by portfolio size
For discussion:
•Frequency intervals•Counterfactual
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Step 2 – A framework for costs – Applying a cost curve
Take-up100%
AG
GR
EG
AT
E C
OS
T
t Today’s level of DM-settlement take-up
Increased take-up of DM settlement over time
TIME
NP
V
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Step 2 – A framework for costs – Question on costs (1)
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1
Take-up100%
AG
GR
EG
AT
E C
OS
T
2
Cost at maximum plausible take-up, post-implementation
3
Cost at maximum plausible take-up, counterfactual
x x
Question:
•What would your costs be to meet the take-up of DM settlement at (1), (2), (3) and at (4)?
Cost at minimum plausible take-up, post-implementation
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Cost at minimum plausible take-up, counterfactual
xx
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Step 2 – A framework for costs – Question on costs (2)
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Take-up100%
AG
GR
EG
AT
E C
OS
T
2
3
x x
Question:
•Are there levels of take-up that would require you to make capital investment? If so, at what level of take up do these bite?•How much additional capital investment is required?
4
xx
5
Additional detail on upgrade points and costs
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Step 2 – A framework for costs – Sensitivity analysis
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1
Take-up100%
AG
GR
EG
AT
E C
OS
T
2
3
x x
4
xx
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Sensitivities
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Potential benefits• Accurate allocation of energy costs:
– Lower balancing/settlements costs
– Suppliers’ costs more accurately reflect customer usage
• Other benefits
– Long term gas purchasing gains
– Identify and reduce unallocated units
– Efficiencies/cost savings
• Network benefits from Nexus
– More accurate allocation of network costs
– Better network planning
– More accurate reporting of losses
Step 3 – Assessing benefits
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Step 4 – Comparing costs and benefits (1)
TIME
TIME
TIME
TIME
• Compare implementation costs and benefits...
... with counterfactual scenarios and sensitivity testing.
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TIME
PN Implemented
NPV
Net cost
Net benefit
Hurdle test
Sensitivity testing
High-level approach
•Quantitative modelling gets you so far•Test is what then has to be delivered by non-quantified benefits to go ahead•Apply this methodology to each counterfactual scenario / sensitivity
Could derive from qualitative benefits
Step 4 – Comparing costs and benefits (2)
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Competitive and distributional impacts
• Need to assess impacts on competitive position of market participants
• Quantify distributional effects / improvements in allocation
– Allocation of charges
– Charges effectively paid – reconciliation
– Effects of meter reads submission on allocation and reconciliation
Step 5 – Distributional effects
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Different rules for different segments
• NDM SSP– Allocation based on annual AQ– No reconciliation– Meter reads do not affect reconciliation; only affect AQ on an
annual basis
• NDM LSP– Allocation based on annual AQ– Reconciliation once a meter read is submitted– Meter reads used for reconciliation; only affect AQ on an annual
basis
Step 5 – Distributional effects – Market segments
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Approach
• 2 sources for inaccuracy if daily meter reads are not used– allocation– reconciliation
• Bottom-up approach (zero-sum game between providers, but possibly not between segments of customers)– Assume error for allocation– Assume error for reconciliation– Possibility for using different profiles for errors
Step 5 – Distributional effects – Approach
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