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