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GDN Charging Structure Bill Bullen Managing Director, Utilita.

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Presentation on theme: "GDN Charging Structure Bill Bullen Managing Director, Utilita."— Presentation transcript:

1 GDN Charging Structure Bill Bullen Managing Director, Utilita

2 Seasonality of Gas Demand Gas demand is seasonal and volumes vary significantly over the year (4:1) – especially in residential sector Cost base is fixed –but driven by high winter demand If income is related to consumption: –there will be a shortfall during summer months –there will be volatility due to colder/warmer winters It’s always been like that! –why change the charging structure now? –what reduction in price did it give?

3 New 95:5 Charging Structure Intended to give more stability against year-on- year weather variation DN charges represent only 20% of customers’ bills But with summer consumption only one quarter of winter consumption the DN charge amounts to over 40% Negative gross margin for suppliers during the summer months (June to August) Funding issue transferred from network operators to suppliers

4 Cost of Capital Who is best placed to fund the shortfall in revenue during the summer: –Lowest cost of capital is network operators –Shift away from this means that customers’ bills will rise –There is a competition issue because smaller suppliers are likely to have a higher cost of capital than larger suppliers

5 Efficient Pricing Signals Cost reflective Even better if they reflect MARGINAL costs No meaningful relationship between capacity charge based on AQ and customers’ usage –AQ “deadband” of +/- 20% –Weather correction –Estimated profile factors Costs driven by winter demand – therefore have higher charge during winter

6 Solutions Return to 50:50 split –or at least to a split that gives some positive gross margin during summer (NB this is dependent on summer/winter gas wholesale price differentials) Modify cash collection from smaller suppliers –this should not hit overall DN cashflow significantly

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