Energy Market Issues for Biomethane Projects Workshop - 31 October 2011 RIIO-GD1 Environmental Incentives

2 Environmental Incentives in RIIO-GD1 supporting distributed gas / biomethane Extract from “Decision on strategy for the next gas distribution price control - RIIO-GD1 Outputs and Incentives. Table 3.1 Summary of output measures and policies that contribute to environmental objectives”

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4 Connection policy Connection and use of system charging for distributed gas  Deep vs shallowish connection charging policy  Gas – currently has deep connection charging i.e. network reinforcement funded by connecting producer  Electricity – have a shallowish connection boundary – therefore distributed generation incentive is used to incentivise network operators to undertake efficient reinforcement investment  Reflects benefits of losses reduction and potential voltage support  Not a volume driver  Any changes to the connection charging policy would need to reflect benefits to the network (and other users)  RIIO-GD1 sets out GDNs to review charging methodologies and propose modifications where there is an objective rationale (to be considered on their merits)

5 Connection policy Industry currently considering UNC Modification 0391 – Distributed Gas Charging Arrangements  Ofgem will consider in due course  Will also consider any evidence that distributed gas entering at distribution level provides benefits to the network to justify other network customers funding these connection costs  Argument for connection boundary to remain deep to encourage competition in provision of connection assets In event of a boundary change  GDNs would need to recover certain expenditure on entry connection through their allowed revenue  RIIO-GD1 provides a mechanism similar to that of DG to incentivise efficient investment  Initially log up efficient costs to be assessed at a later stage (re-opener triggered or end of price control)  Incentivised cost pass through mechanism could be implemented if there is sufficient information to assess efficient connection costs

6 Capacity issues Differences between electricity and gas networks affect ability to offer priority access and dispatch Gas  Technical aspects of connection still need to be resolved (e.g. gas quality, injection equipment)  Localised gas networks  Planning is done on peak capacity  Insufficient firm demand to offer firm contracts  Constraints on moving gas to where there may be demand - still to be resolved Any incentive to offer firm capacity contracts would have to be funded by all network customers  Insufficient information is currently available to demonstrate benefits to the network to justify other customers funding these costs RHI  Provides support for producers through payment for energy generated for use  Does not fund connection costs

7 Current position  A range of mechanisms are in place / being put in place to encourage bio- methane connections  There is currently insufficient information available on efficient costs associated with the connection of distributed gas to the grid to justify additional incentives at this time  There are differences between technical aspects of gas and electricity networks which mean that priority access and dispatch for distributed gas cannot be similarly incentivised as for electricity  We have a duty to balance the interests of all stakeholders

8 RIIO-GD1 – Environmental Impacts Process followed Policy consultation process for next price control (RIIO-GD1)  Environmental Working Group meetings  Discussions on proposed incentives / reporting requirements  Consultation (17 December 2010 – 4 February 2011)  Consideration of submissions Decision on RIIO-GD1 policy  Published 31 March

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