1. EDCM submission workshop Andrew Neves CMG Chair 12 May 2011 1 | Energy Networks Association - CMG

2. Purpose of the day 12 May 2011 2 | Energy Networks Association – CMG To give you a chance to interact – questions/feedback To provide an overview of the proposal submitted to Ofgem To provide details on the impact of the submission and volatility analysis To provide details on how the charges can be influenced by customers To assist and encourage responses to Ofgem’s forthcoming consultation To detail the next steps

3. Workshop agenda 12 May 2011 3 | Energy Networks Association – CMG Background and objectives (Ofgem) EDCM background and development process The EDCM submission Objectives of the EDCM and how they are met Practical demonstration of the EDCM model EDCM potential volatility................Lunch.................. Managing your charges Stakeholder Q&A Next steps

4. EDCM submission workshop EDCM background and objectives Ofgem 12 May 2011 4 | Energy Networks Association

5. Background to the EDCM 12 May 2011 5 | Energy Networks Association – CMG Forecast DNO investment of £2.3 billion in the network between 2010 and 2015 On July 2009 Ofgem published guidelines for the EDCM based on LRIC and FCP Ofgem July 2009: “Given the extent of this investment and the significant increase in energy prices in recent years, it is important we do all we can to have charging arrangements to encourage customers to locate where there is spare capacity” On 1 October 2009 licence conditions comes into force requiring DNOs develop and implement the EDCM based on the guidelines published in July 2009

6. Background to the EDCM 12 May 2011 6 | Energy Networks Association – CMG Ofgem published their decision on the boundary between the EDCM and CDCM in August 2010 The EDCM will apply to all “designated EHV properties”, including generators connected before April 2005 Ofgem decision that EDCM charges would be “unbundled” from any compensation for deep connection charges Ofgem guidance on the treatment of pre-2005 DG published on 9 May 2011

7. EDCM development process 12 May 2011 7 | Energy Networks Association – CMG DNOs set up three workstreams working under the direction of the Common Methodology Group (CMG) Workstream A led the development of the FCP and LRIC methodologies Workstream B focused on tariff methodologies and models, and tariff application rules Workstream C led the work on the price stability and the development of long term products All workstreams were open to stakeholders, including Ofgem, customers, suppliers and IDNOs

8. EDCM development process 12 May 2011 8 | Energy Networks Association – CMG First consultation on the EDCM was issued in June 2010, followed by a supporting workshop DNOs published an information report in September 2010 A development workshop was held in November 2010 Second consultation on the EDCM was issued in December 2010, followed by a supporting workshop in January 2011 A mini-consultation on issues relating to licensed distribution network operators (LDNOs) was issued in February 2011 Final EDCM proposals submitted to Ofgem on 1 April 2011 Awaiting Ofgem decision before implementation

9. Current position 12 May 2011 9 | Energy Networks Association – CMG EDCM submitted to Ofgem and published on 1 April, see: http://2010.energynetworks.org/edcm-file-storage/7-edcm- deliverables 2011/12 Illustrative tariffs based on the methodology submitted to Ofgem Customer total charges not provided due to legal constraints Please contact relevant DNO with any questions about particular customers’ tariffs

10. EDCM submission workshop Overview of the EDCM submission Shankar Rajagopalan Reckon LLP (ENA/CMG consultant) 12 May 2011 10 | Energy Networks Association

11. The EDCM submission (1) 12 May 2011 11 | Energy Networks Association – CMG The EDCM report –Describes the methodology and provides commentary on decisions and choices made. Appendix 1: Illustrative tariffs for end users and LDNOs –Purely illustrative. –Tariffs relate to the charging year 2011/2012 –Tariffs are anonymised: Contact your DNO or supplier to identify the tariff that relates to your site Appendix 2: Draft FCP and LRIC methodology statements Appendix 3: Areas of implementation risk Appendix 4: Super-red time bands by DNO area

12. The EDCM submission (2) 12 May 2011 12 | Energy Networks Association – CMG Appendix 5: EDCM volatility analysis Appendix 6: Blank models –Blank FCP and LRIC models for EDCM end user tariffs (DNO and LDNO connected customers) –Blank “extended Method M” models for LDNO discounts on CDCM tariffs. Appendix 7: Draft LC14 charging statement Appendix 8: Commentary from individual DNOs on the justification of tariffs Appendix 9: Deviations from Ofgem specifications

13. Objectives of the EDCM 12 May 2011 13 | Energy Networks Association – CMG The overall objective of the EDCM is to produce cost- reflective Use of System Charges to encourage new and existing users to: –Use existing network capacity more efficiently –Avoid prompting inefficient network reinforcement The EDCM aims to achieve the overall objective by incorporating –site-specific charging elements calculated using the long run incremental charging (LRIC) and forward cost pricing (FCP) methodologies –Allocating cost-based and demand scaling elements using appropriate charge drivers

14. EDCM objectives in the licence 12 May 2011 14 | Energy Networks Association – CMG Four “relevant objectives” …“compliance with the EDCM facilitates the discharge by the licensee of the obligations imposed on it under the Act and by this licence.” (Licence condition 50A.7) … “EDCM facilitates competition in the generation and supply of electricity and will not restrict, distort, or prevent competition in the transmission or distribution of electricity or in participation in the operation of an Interconnector.” (Licence condition 50A.8) …“compliance with the EDCM results in charges which, so far as is reasonably practicable after taking account of implementation costs, reflect the costs incurred, or reasonably expected to be incurred, by the licensee in its Distribution Business.” (Licence condition 50A.9) …“so far as is consistent with the first three Relevant Objectives, the EDCM, so far as is reasonably practicable, properly takes account of developments in the licensee’s Distribution Business.” (Licence condition 50A.10)

15. Objectives of the EDCM 12 May 2011 15 | Energy Networks Association – CMG The EDCM “must conform to the principles and assumptions” of LRIC and FCP methodologies published by Ofgem in July 2009. (SLC 50A.12) Ofgem letter to DNOs in September 2010 introduced additional requirements: Consult with customers before Christmas 2010 Amend the methodology to address comments - final proposals should not require “substantial further work” before implementation “Sense-check” charges and ensure that they can be justified, particularly where there is a significant change up or down from current charges. Ensure that customers understand the methodology and illustrative charges – explore ways in which they can manage their charges

16. Challenges and issues 12 May 2011 16 | Energy Networks Association – CMG Different objectives Charges must “reflect the costs incurred, or reasonably expected to be incurred” by the DNO EDCM must encourage efficient use of the network and avoid some reinforcement (through FCP or LRIC charges) These objectives might conflict with each other Common method is difficult to reconcile with differences in network structure and customer profiles across GB Charges based on avoiding future reinforcement costs might conflict with the desire to encourage embedded generation

17. How the requirements were addressed 12 May 2011 17 | Energy Networks Association – CMG Final charges include elements from FCP or LRIC methodologies Improvements to the original specifications from Ofgem Capping of LRIC charges introduced following sense checks Different types of test-size generators in FCP following sense checks Identifiable DNO costs are pre-allocated before demand scaling – Improved cost-reflectivity of final charges Generation scaling introduced to target a notional recovery from DG, based on the DG incentive scheme

18. How the requirements were addressed 12 May 2011 18 | Energy Networks Association – CMG Asset-based method produces a fair allocation of allowed revenue between CDCM and EDCM demand customers Appropriate charge drivers for the pre-allocation of costs and demand scaling aimed at producing justifiable final charges that recover the EDCM target revenue Using notional site-specific assets through network use factors produce charges that reflect usage of network assets Capacity and consumption during the DNO peak time band also reflect network usage and drive the need for network reinforcement

19. How the requirements were addressed 12 May 2011 19 | Energy Networks Association – CMG On competition in electricity distribution More granular definition of DNO-LDNO boundaries Better allocation of indirect costs for EDCM customers connected to LDNOs We consulted with customers and other stakeholders in June 2010 and January 2011. Information report published in September 2010 Mini-consultation on LDNO charging in February 2011 National workshops in June 2010, November 2010 and January 2011 Regional workshops held by DNOs

20. How the requirements were addressed 12 May 2011 20 | Energy Networks Association – CMG Caps and collars for network use factors introduced following sense checking of final charges Some variation from current charges inevitable following the introduction of the new common charging methodology DNOs believe these changes are justifiable given the objectives of encouraging efficient network investment Open governance mechanism allows stakeholders to propose changes to the methodology

21. In summary 12 May 2011 21 | Energy Networks Association – CMG DNOs submitted their proposals for the EDCM on 1 April 2011 The DNOs believe that the proposals have met the requirements placed upon them by Ofgem Ofgem intend to consult on these proposals shortly DNOs will continue to engage with stakeholders and Ofgem in the mean time

22. Summary charts 12 May 2011 22 | Energy Networks Association – CMG Some graphs showing comparative summary statistics on the EDCM across all DNO areas Overall recovery from demand and generation customers High-level breakdown of charges Comparative statistics on the application of FCP and LRIC charges

23. Overall EDCM revenue 12 May 2011 23 | Energy Networks Association – CMG

24. EDCM customer numbers 12 May 2011 24 | Energy Networks Association – CMG

25. Breakdown of demand charges 12 May 2011 25 | Energy Networks Association – CMG

26. Breakdown of generation charges 12 May 2011 26 | Energy Networks Association – CMG

27. Distribution of LRIC/FCP charges 12 May 2011 27 | Energy Networks Association – CMG

28. Distribution of LRIC/FCP charges 12 May 2011 28 | Energy Networks Association – CMG

29. Distribution of LRIC/FCP charges 12 May 2011 29 | Energy Networks Association – CMG

30. Overview of the model (1)

31. Overview of the model (2)

32. Practical demonstration of the EDCM model 12 May 2011 32 | Energy Networks Association – CMG Structure of the Excel model Input data tables Sheet 11 contains DNO-wide parameters Sheet 913 (in LRIC) and 911 in (FCP) contains locational LRIC or FCP prices for each location Sheet 953 contains data on each customer (or each “tariff”) Tariff tables

33. EDCM submission workshop EDCM Potential Volatility Andrew Pace 12 May 2011 33 | Energy Networks Association

34. Sources of Volatility 12 May 2011 34 | Energy Networks Association Internal - Inputs which a customer can influence and have a direct impact on their charge: –Consumption in the super-red timeband (for demand customers) –Maximum Import/Export Capacity (demand & generation customers) –Units generated within the super-red timeband (generation only) External – Inputs over which a customer has no influence, but which has an impact on their charge. –Demand on individual nodes –Network Usage Factors –DNO Allowed revenue –MEAV of Sole Use Assets

35. Assessment of Volatility 12 May 2011 35 | Energy Networks Association Scenario Description Scenario 1A 3% increase in the demand loadings in the load flow analysis (FCP/LRIC). Scenario 2A 3% decrease in the demand loadings in the load flow analysis (FCP/LRIC). Scenario 3The Allowed Revenue increased by 7% Scenario 4The Allowed Revenue decreased by 7% Scenario 5 The historical peak-time kW divided by historical agreed kVA in Super-red timeband for each customer increased by an increment of 0.15, on an individual customer basis. Scenario 6 The historical peak-time kW divided by historical agreed kVA in Super-red timeband for each customer decreased by 0.15, on an individual customer basis. Scenario 7 The network use factor for each customer increased by an increment of 0.18, on an individual customer basis. Scenario 8The network use factor for each customer decreased by 0.18, on an individual customer basis.

36. Measure of Volatility (1) 12 May 2011 36 | Energy Networks Association Every customer has a baseline charge (Illustrative 2011/12 EDCM charge used in EDCM submission) and a charge under each scenario. The 2 measures of volatility used are: –The maximum charge across all 8 scenarios as a % of the baseline –The minimum charge across all 8 scenarios as a % of the baseline

37. Measure of Volatility (2) 12 May 2011 37 | Energy Networks Association Baseline £154,981 Scenario 1 LRIC/FCP Demands Scaled by: 3%£153,689 Scenario 2 -3%£156,166 Scenario 3 Allowed Revenue scaled by: +7%£166,525 Scenario 4 -7%£143,436 Scenario 5 Historical peak-time kW divided by historical agreed kVA in Super-red timeband +0.15 increment £215,852 Scenario 6 -0.15 increment £93,348 Scenario 7 Network Use Factors +0.18 increment £154,981 Scenario 8 -0.18 increment £154,981 Lowest Charge £93,348 Average Charge £154,884 Maximum Charge £215,852 Range compared to central case Lowest Charge -39.77% Highest Charge 39.28%

38. Impact Analysis - Demand 12 May 2011 38 | Energy Networks Association – CMG EDCM VariableChange Applied Average Percentage Impact Maximum Percentage Impact Minimum Percentage Impact LRIC/FCP Demands Scaled by: 3% 373%-84% -3%0%112%-42% Allowed Revenue scaled by: +7%6%41%0% -7%-6%0%-41% Historical peak-time kW divided by historical agreed kVA in Super-red timeband +0.15 increment28%214%0% -0.15 increment-20%0%-100% Network Use Factors +0.18 increment5%27%0% -0.18 increment-4%0%-22%

39. Impact Analysis - Demand 12 May 2011 39 | Energy Networks Association

40. Impact Analysis - Generation 12 May 2011 40 | Energy Networks Association EDCM VariableChange Applied Average Percentage Impact Maximum Percentage Impact Minimum Percentage Impact LRIC/FCP Demands Scaled by: 3%-11%1985%-3131% -3%14%3808%-1836% Allowed Revenue scaled by: +7%0% -7%0% Historical peak-time kW divided by historical agreed kVA in Super-red timeband +0.15 increment0% -0.15 increment0% Network Use Factors +0.18 increment0% -0.18 increment0%

41. Impact Analysis - Generation 12 May 2011 41 | Energy Networks Association

42. Typical EDCM Variance These percentages represent the average lowest and highest charge compared to the baseline charge Provides an indicative range, but charging volatility will vary between customers. 12 May 2011 42 | Energy Networks Association Average Lowest Charge across the 8 scenarios as % of Base Case charge Average Highest Charge across the 8 scenarios as % of Base Case charge Demand Customers-23%32% Generation Customers-21%38%

43. Additional information 12 May 2011 43 | Energy Networks Association Confidentiality Issues -Summary document (appendix 5) available on ENA website -Individual Customer information provided to Ofgem -DCUSA mod in progress (DCP91) – submitted in April 2011. 5 year estimate of charges provided to Ofgem -Derived by changing allowed revenue Long Term Products -Discussed within Workstream C

44. EDCM submission workshop Lunch 12 May 2011 44 | Energy Networks Association

45. EDCM submission workshop Managing your charges Shankar Rajagopalan Reckon LLP (ENA/CMG consultant) 12 May 2011 45 | Energy Networks Association

46. Tariff structure - Demand 12 May 2011 46 | Energy Networks Association – CMG Tariff componentUnitCorrespondence to tariff elements Fixed chargep/daySole use asset charges for direct operating costs and network rates Import capacity charge p/kVA/dayLocal element of FCP/LRIC charge 1, direct operating costs, indirect costs, network rates, demand scaling charge and the transmission exit charge Exceeded import capacity charge p/kVA/dayCharged at the same rate as the import capacity charge (except for sites with a DSM agreement) Super-red unit ratep/kWhRemote element of FCP/LRIC charge

47. Tariff structure - Generation 12 May 2011 47 | Energy Networks Association – CMG Tariff componentUnitCorrespondence to tariff elements Fixed chargep/daySole use asset charges for direct operating costs and network rates Export capacity charge p/kVA/dayBoth elements of FCP/LRIC charge 2, the generation scaling fixed adder and GSP credits for qualifying generators Exceeded export capacity charge p/kVA/dayCharged at the same rate as the export capacity charge (except for sites with a GSM agreement) Generation creditp/kWhBoth elements of FCP/LRIC charge 1 for non-intermittent generation only

48. Demand tariff drivers 12 May 2011 48 | Energy Networks Association – CMG Maximum import capacity (kVA) Energy used during the DNO super-red time band (kWh) Location on the DNO’s network (voltage of connection, network configuration) LRIC or FCP charges at the location of connection Value of sole use assets (MEAV) Reactive power flows (indirectly) And finally, all of the above for other customers

49. Generation tariff drivers 12 May 2011 49 | Energy Networks Association – CMG Maximum export capacity (kVA) Energy produced during the DNO super-red time band (kWh) LRIC or FCP charges at the location of connection Value of sole use assets (MEAV) Reactive power flows (indirectly) Again, all of the above relating to other customers

50. Managing your charges 12 May 2011 50 | Energy Networks Association – CMG Use of system charges are not usually charged to the end- user (except CVA sites) The charges in relation to most end-users are charged to their registered supplier The Supplier/end-user decides how these charges are met by the end-user Subject to this caveat, there are some things that an end- user can do to manage use of system charges

51. Managing your charges 12 May 2011 51 | Energy Networks Association – CMG The overall objective of the EDCM is to produce cost- reflective Use of System Charges to encourage new and existing users to: Use existing network capacity more efficiently Avoid prompting inefficient network reinforcement If these objectives are to be met, EDCM charges should respond to changes in customer behaviour Siting decisions of new customers Usage of the network by existing customers

52. Managing your charges 12 May 2011 52 | Energy Networks Association – CMG Forecast potential network reinforcement determines LRIC and FCP charges at a location New customers can avoid locations with high LRIC or FCP charges But – the situation is not static, and can change from year to year Connection of that customer could change the situation Investment by the network operator may change the need for reinforcement New connections or disconnections by other customers

53. Managing your charges 12 May 2011 53 | Energy Networks Association – CMG Rationalise the maximum import or export capacity in the EDCM The capacity-based tariff component would apply to the new import or export capacity Demand customers could reduce charges by cutting consumption during the DNO’s super-red time band The super-red unit rate would apply to a lower number of units Long term impact on the final charge is more complicated to predict – Depends on the customer’s other characteristics

54. Managing your charges 12 May 2011 54 | Energy Networks Association – CMG Demand side or generation side management (DSM/GSM) agreements Customers agree to reduce (or stop) their consumption or export at the request of the DNO, only when there are real benefits to the network The lower capacity is used to calculate LRIC or FCP charges All other capacity-based charges would be calculated using the maximum import or export capacity All charges, including LRIC/FCP charges would be applied to the maximum import or export capacity

55. Managing your charges 12 May 2011 55 | Energy Networks Association – CMG The EDCM does not include an explicit reactive power charge However, reactive flows are used in the formula to derive the active power unit rate based on LRIC or FCP In the case of LRIC, the active power unit rate depends on the reactive flows at the location of the customer that was assumed in the power flow analysis (based on LTDS) In the case of FCP, the active power unit rate depends on the reactive flows at the location (based on LTDS) as well as the customer’s metered reactive flow (forecast based on historical data)

56. Important caveats 12 May 2011 56 | Energy Networks Association – CMG The FCP or LRIC charge could change from year to year based on changing need for network reinforcement The EDCM has a revenue target – this causes interactions between tariffs for all customers A reduction (or increase) in tariffs for one customer is recovered from other EDCM or CDCM customers The net effect of a change in customer behaviour or attributes on EDCM tariffs (and consequently on charges)) is complex and difficult to predict

57. EDCM submission workshop Stakeholder Q & A 12 May 2011 57 | Energy Networks Association

58. Discussion points 12 May 2011 58 | Energy Networks Association – CMG Your views on the EDCM proposals given its objectives Stakeholder understanding of the EDCM Suggestions or feedback EDCM open governance Suggestions or feedback Responding to Ofgem consultation How can we help?

59. Next steps 12 May 2011 59 | Energy Networks Association – CMG EDCM submission 1 April 2011 DCMF meeting7 April 2011 CMG submission workshop12 May 2011 Ofgem consultation~ May 2011 Ofgem decision~ September 2011 Indicative tariffs for 2012/13December 2011 Final tariffs for 2012/13February 2012 EDCM implementation (if approved)1 April 2012 See ENA web site for project documentation: http://2010.energynetworks.org/edcm-file-storage/