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Overview of Marchwood determination

Mark FeatherAssociate Director, Ofgem

7 December 2006, Transmission Workstream

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Background (1)

Marchwood gas fired power station – 860 MW– Marchwood development owned by ESBI and SSE

Requested firm gas supply from the NTS from Oct 08 NTS proposed network reinforcements for Marchwood

– 28km/900mm pipe from Barton Stacey to Lockerley– £43m cost

MPL constructing own connecting pipe:– Marchwood to Lockerley on NTS– 22km/610mm pipe– £24m cost– MPL to own pipeline

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Avonmouth

Wormington

Lockerley

ICI Severnside

Ottery St. Mary Kenn

Fishacre Coffinswell

Lyneham Plymouth PS

Ilchester

NTS Compressor

NTS Offtake NTS Junction LNG Facility

Proposed NTS Pipeline

Existing NTS Pipeline

Proposed NTS Offtake

Barrington

Pucklechurch

Sapperton

Aylesbeare

Aylesbury Didcot PS Chalgrove

Winkfield

Nuffield

Ipsden

Braishfield

Mappowder

Seabank

Abson

Cirencester Littleton Drew Eastern Grey East

Illsley

Avonmouth

Wormington

Lockerley

ICI Severnside

Ottery St. Mary Kenn

Ilchester

NTS Compressor

NTS Offtake NTS Junction LNG Facility

Proposed NTS Pipeline

Existing NTS Pipeline

Proposed NTS Offtake

Barrington

Pucklechurch

Sapperton

Aylesbeare

Aylesbury Didcot PS Chalgrove

Winkfield

Nuffield

Ipsden

Braishfield

Mappowder

Seabank

Abson

Cirencester Littleton Drew Eastern Grey East Ilsley

Barton Stacey Michelmersh

Marchwood

Proposed Connecting Pipeline Proposed Compressor Mods

Buttsash

AGI on LTS

Existing LTS pipeline

Map of Marchwood area

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Background (2)

Proposals for development – since 2000 Various consents already secured:

– Generation licence– Consents to construct power station– Pipeline construction authorisation for connecting pipe to

NTS– Landowner consents along connecting pipe route– Connection and construction agreement with NGET

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The dispute (1)

Occurs in transitional offtake period Release of incremental exit capacity governed by NTS

Incremental Exit capacity release methodology (IEXCR)

Marchwood power station requires reinforcement IEXCR specifies that ARCA required where

investment needed NTS requested 14 year ARCA for payment of full

£43m MPL sought same terms as Langage – 2 year ARCA for

1 years charges

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The dispute (2)

MPL raised dispute under:– sections 21 and 27A of the Gas Act– Article 25(5) of Gas directive

Focus of dispute on terms of Advanced Reservation of Capacity Agreement (ARCA)

MPL sought same treatment as Langage MPL also raised connection issues.

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The process

Dispute raised – late March 2006

Ofgem initiates process – April 2006

Submissions received from parties – May 2006

Oral hearing requested – June 2006

Oral hearing – August 2006

Release decision – September 2006

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The key issue

The level of the ARCA commitment– Principles for determining commitment level– Risk assessment test– Comparisons with Langage– What are the efficient costs of reinforcement?

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Location of connection point

Initially some issues raised regarding location of connection point for charging purposes

The shallow connection test – set out in Ofgas 1997 document and applied in Langage.

‘Point of connection for charging purposes is the point where the new connection pipes join the existing main (that is, where the existing system has sufficient capacity to meet the connecting load, disregarding existing loads at that point)’.

Parties agreed at oral hearing that connection point was NTS connection at Lockerley

Connection issues therefore NOT in dispute.

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The level of commitment required under the ARCA

Discussions and Conclusions– Issue A: Approach to determining the level of

financial commitment– Issue B: Assessing the risk associated with the

Marchwood load– Issue C: Assessing the efficient costs or

reinforcement– DECISION

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Issue A: Approach to determining the level of financial commitment (1)

Key document – 1997 Ofgas report on ARCAs Case by Case assessment in transitional offtake period Langage a relevant comparator – not necessarily a

precedent ARCAs intended to protect NGG from stranded asset risk. In return the customer obtains firm exit capacity rights. Commitment beyond 1 year not normally appropriate as

code only requires capacity to be booked on annual basis. Additional commitment may be appropriate if load is

riskier than overall portfolio of firm loads.

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The one year commitment Why is there a one year commitment? Inappropriate to impose greater level of

commitment on new users whilst existing users roll over existing rights on a monthly basis.

As such, protects parties from risk of undue discrimination.

BUT, greater than one year commitment may be necessary where load poses significant risks (ie risker than overall portfolio of firm loads)

Onus of proof on NGG NTS Key issue is allocation of risk between users,

generality of customers and NGG NTS

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Enduring offtake

Marchwood decision applicable to transitional offtake arrangements

Enduring offtake framework under consultation Not appropriate to depart from Ofgas 1997

principles for transitional offtake If enduring offtake is implemented then Ofgas

1997 principles would no longer apply. Enduring offtake proposals subject to Authority

consideration

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Case by case: Assessing the risks

Jan 2006 IEXCR letter provided guidance on risk assessment:– Commitments must not discriminate between new and existing

users– Commitments should facilitate efficient investment and reduce

stranded asset risk– What is the risk profile of the load making the capacity request

relative to other present and future loads in the area?– Do the reinforcements benefit other present and future users in

the area?– How risky are the other loads that benefit?– Are there other ‘risky’ loads expected to reduce usage in the

future and create spare capacity in the area?

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Issue B: Assessing the risk associated with the Marchwood load

The following factors relevant to determining risk of Marchwood load: – More efficient than existing CCGT plant – less likely to exit

the wholesale electricity market.– Proposed power station is favourably located in the SW

area for electricity system– May benefit from the EU Emissions Trading Scheme.– 15 year tolling agreement with SSE– Langage a relevant comparator – similarities exist

But, there are factors which may pose a greater risk to consumers: – Government’s Energy Review process; uncertainty over

allowances for EU ETS (although this is a concern for all generators); greater gas price volatility.

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Issue B: Assessing the risks (2) Ofgem placed in position of assessing risk for customers Absence of enduring offtake framework makes risk assessment

difficult. – Difficult to assess riskiness of load– Difficult to assess whether other users benefit from the reinforcements– Difficult to assess whether other loads in the area may reduce their

usage going forward NGG NTS did not provide bona fide risk assessment and required

100% commitment from Marchwood Effective NGG NTS risk assessment may have reduced user

commitment and likelihood of dispute – failure must be corrected. BUT, on balance:

– Marchwood load is NOT significantly more risky than overall portfolio of firm loads including other firm generating loads

– insufficient evidence to suggest that reinforcement of the Marchwood load benefits others

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Conclusions NGG NTS should enter into an ARCA for one

year’s worth of exit capacity charges. Going forward we would expect NGG NTS to

undertake risk assessments in the transitional offtake period on a case by case basis having regard to the relevant principles.

Need for reform of existing arrangements for securing exit capacity. – Appropriate for the risks associated with transmission

reinforcement to be managed by those parties best able to manage them

Efficient costs of reinforcement – not considered in determination…issue for TPCR.

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Transmission Price Control – Final proposals

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Offtake – key conclusions

Baselines – minor adjustments to baselines for exit and flat capacity. Flex baseline – 22 mcm Revenue drivers – apply for 5 years from contractual delivery -

updated upwards to reflect further information received from NGG NTS

Indexation applied to revenue drivers CLNG incentive targets for 09/10, 10/11 and 11/12 updated –

– NGG NTS volume requirements accepted (SE and SW)– Price – minor variation to medium case scenario chosen– No ex-ante funding of gas purchase costs in CLNG incentive– CLNG manager account – Targets: 09/10 - £4.3m, 10/11 - £3.6m, 11/12 - £2.9m.

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TPCR – Offtake - Key conclusions (2)

Transitional offtake – 15 day incentive retained but with “zero” targets and collar of £-2m.

Enduring offtake – Investment buy back incentive– £36m annual cap +monthly cap of £4m.– Aggregate downside cap across all buy back schemes is £48m.– 365 days of permits at 30 Gwh/day for exit – permits can only be used

in advance of long term allocations.– Permits can be cashed out if unused– value set at £3m – pro-rated to

number of unused days. Enduring offtake – non-obligated capacity incentive

– £20m cap and 50% sharing factor– Monitoring of conduct under NTS efficient operation licence condition

Enduring offtake – south west interruptibles– Allowance for long term contracting - £3.4m per annum – 50% sharing

factor.

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Other key highlights

Significant capital investment allowances Adjustment mechanisms flex revenues according

to demand Safety net and output measures Emphasis on user commitment models Post tax return – 4.4% Disallowance of proportion of St Fergus spend

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