Mod 621A Supporting analysis Nick Wye Mod 621 Meeting 28 March 2018

Mod 621A - refresher Proposes an increase in the “storage discount” from 50% to 86% for both implementation phases Proposes non-application of capacity-based revenue top-up charge, in the enduring phase, on storage capacity bookings

Justification Numerous reasons why discount should be greater than 50% CWD model is simplistic based on the premise that revenue should be allocated on the basis of capacity and distance. It does not reflect costs (or benefits) incurred by the NTS It is based on average flows rather than peak/off-peak flows, so again difficult to marry with cost reflectivity, where system is built to meet peak flow/demand expectations It is based on average distances rather than actual distances between entry and exit points (see relative prices of exit points close to entry points with those with lower average distances between all entry points and individual exit points) The above can be remedied by shorthaul and/or diluting the overall distance impact, but storage cannot access shorthaul and is both an entry and exit point. Storage is embedded in the UK network and its operational relationship is symbiotic with the SO Gas which is delivered, stored and redelivered to the system has already paid transmission access charges at entry and exit points

WWA/GSOG paper – July 2017 Main points Storage is a parking service (confirmed by Ofgem in its GTCR conclusions). Ofgem argued that commodity charges (and we presume revenue top-up charges) should not be applied to storage as it has already contributed to historical costs. This could equally apply to all transmission charges as CWD is a methodology for recovering historical, current and future costs all of which are paid by gas entering and exiting (but not parked) in the system…….charges on storage result in double counting and overcharging. Storage can be compared to linepack. It is embedded and injects during “low” demand and delivers during “high” demand. As such, it provides balancing assistance to National Grid. If charges are to be more cost-reflective then given the system is built to meet peak demand levels then it could be argues that storage should be exempt from exit charges (as storage delivers on peak days).

Main points (cont) Storage provides transmission benefits of between £40m to £70m p.a. through investment savings Storage produces significant externalities (societal benefits) not realised by storage owners. These translate into security of supply benefits which can be allowed for in accordance with the EU TAR and Authority’s principal objective

Why 86%? An assessment based on a shorthaul type tariff with storage satisfying local demand to ensure improved cost-reflectivity in charging. See WWA paper 14 Dec 2017 https://www.gasgovernance.co.uk/0621/141217 Modelling looked at costs of injection and delivery to and from storage to an exit point, compared to costs of transporting gas directly to the same exit point The average increase in unit cost of transportation for all storage points was 36% In total, applying the min. 50% discount and the additional 36% discount to ensure fairer treatment for storage the total discount is 86%

Transitional Phase impacts Entry Storage discount Expected Revenue Recovery Entry Total Under-recovery CRRC IP Top Up 50% -£49m -£252m 0.0302 0.0231 86% -£78m -£253m Change 59% 0.4% 0% Exit Storage discount Expected Revenue Recovery Exit Total Under-recovery CRRC IP Top Up 50% -£26m -£175m 0.0204 0.0182 86% -£38m -£177m 0.0206 0.0183 46% 1.1% 0.98% 0.54% 0.0

Enduring 50% discount – entry prices

Enduring 86% discount - entry

Enduring 50% discount - exit

Enduring 86% discount - exit

Enduring firm entry price comparison

Enduring firm exit price comparison

Increasing the discount to 100% Repeated the modelling using same underlying assumptions with an increased storage discount Results show little impact, due to relatively low levels of storage bookings combined with significant levels of existing entry capacity acquired at these points

Transitional Phase impacts Storage discount Expected Revenue Recovery Entry Total Under-recovery CRRC IP Top Up 50% -£49m -£252m 0.0302 0.0231 100% -£89m -£253m Change 81% 0.4% 0% Storage discount Expected Revenue Recovery Exit Total Under-recovery CRRC IP Top Up 50% -£26m -£175m 0.0204 0.0182 100% -£43m -£181m 0.0211 0.0188 65% 3.4% 3.3% 0.0

Enduring firm entry price comparison

Enduring firm exit price comparison