Overview of Marchwood determination

1
Overview of Marchwood determination

• Mark Feather
• Associate Director, Ofgem
• 7 December 2006, Transmission Workstream

2
Background (1)

• Marchwood gas fired power station 860 MW
• Marchwood development owned by ESBI and SSE
• Requested firm gas supply from the NTS from Oct
  08
• NTS proposed network reinforcements for Marchwood
• 28km/900mm pipe from Barton Stacey to Lockerley
• 43m cost
• MPL constructing own connecting pipe
• Marchwood to Lockerley on NTS
• 22km/610mm pipe
• 24m cost
• MPL to own pipeline

3
Map of Marchwood area




Existing NTS Pip
eline
Existing NTS Pipeline


NTS Compressor
NTS Compressor


LNG Facility
LNG Facility




Aylesbury
Aylesbury
NTS Junction
NTS Junction












Didcot
PS
Chalgrove
Didcot
PS
Chalgrove
Wormington
NTS
Offtake
Wormington
NTS
Offtake


Proposed NTS Pipeline
Proposed NTS Pipeline







Sapperton
Nuffield
Sapperton
Nuffield
Proposed NTS
Offtake
Proposed NTS Offtake







Avonmouth

Cirencester

Avonmouth

Cirencester

Proposed Connecting Pipeline
Seabank
Seabank
Ipsden
Littleton Drew

Ipsden
Littleton Drew








Eastern Grey
Eastern Grey
Proposed Compressor Mods

East
East Ilsley
ICI
Severnside
ICI
Severnside


Illsley



Abson
Abson
AGI on LTS
Barton Stacey
Pucklechurch
Pucklechurch



Michelmersh
Existing LTS pipeline


Winkfield
Winkfield


Lockerley
Lockerley


Braishfield
Braishfield


Ilchester
Ilchester
Barrington
Barrington





Marchwood


Ottery
St. Mary
Ottery
St. Mary
Mappowder
Mappowder


Buttsash


Aylesbeare
Aylesbeare
Kenn
Kenn

Coffinswell

Fishacre

Lyneham

Plymouth PS
4
Background (2)

• Proposals for development since 2000
• Various consents already secured
• Generation licence
• Consents to construct power station
• Pipeline construction authorisation for
  connecting pipe to NTS
• Landowner consents along connecting pipe route
• Connection and construction agreement with NGET

5
The dispute (1)

• Occurs in transitional offtake period
• Release of incremental exit capacity governed by
  NTS Incremental Exit capacity release methodology
  (IEXCR)
• Marchwood power station requires reinforcement
• IEXCR specifies that ARCA required where
  investment needed
• NTS requested 14 year ARCA for payment of full
  43m
• MPL sought same terms as Langage 2 year ARCA
  for 1 years charges

6
The dispute (2)

• MPL raised dispute under
• sections 21 and 27A of the Gas Act
• Article 25(5) of Gas directive
• Focus of dispute on terms of Advanced Reservation
  of Capacity Agreement (ARCA)
• MPL sought same treatment as Langage
• MPL also raised connection issues.

7
The process

• Dispute raised late March 2006
• Ofgem initiates process April 2006
• Submissions received from parties May 2006
• Oral hearing requested June 2006
• Oral hearing August 2006
• Release decision September 2006

8
The key issue

• The level of the ARCA commitment
• Principles for determining commitment level
• Risk assessment test
• Comparisons with Langage
• What are the efficient costs of reinforcement?

9
Location of connection point

• Initially some issues raised regarding location
  of connection point for charging purposes
• The shallow connection test set out in Ofgas
  1997 document and applied in Langage.
• Point of connection for charging purposes is the
  point where the new connection pipes join the
  existing main (that is, where the existing system
  has sufficient capacity to meet the connecting
  load, disregarding existing loads at that
  point).
• Parties agreed at oral hearing that connection
  point was NTS connection at Lockerley
• Connection issues therefore NOT in dispute.

10
The level of commitment required under the ARCA

• Discussions and Conclusions
• Issue A Approach to determining the level of
  financial commitment
• Issue B Assessing the risk associated with the
  Marchwood load
• Issue C Assessing the efficient costs or
  reinforcement
• DECISION

11
Issue A Approach to determining the level of
financial commitment (1)

• Key document 1997 Ofgas report on ARCAs
• Case by Case assessment in transitional offtake
  period
• Langage a relevant comparator not necessarily a
  precedent
• ARCAs intended to protect NGG from stranded asset
  risk.
• In return the customer obtains firm exit capacity
  rights.
• Commitment beyond 1 year not normally appropriate
  as code only requires capacity to be booked on
  annual basis.
• Additional commitment may be appropriate if load
  is riskier than overall portfolio of firm loads.

12
The one year commitment

• Why is there a one year commitment?
• Inappropriate to impose greater level of
  commitment on new users whilst existing users
  roll over existing rights on a monthly basis.
• As such, protects parties from risk of undue
  discrimination.
• BUT, greater than one year commitment may be
  necessary where load poses significant risks (ie
  risker than overall portfolio of firm loads)
• Onus of proof on NGG NTS
• Key issue is allocation of risk between users,
  generality of customers and NGG NTS

13
Enduring offtake

• Marchwood decision applicable to transitional
  offtake arrangements
• Enduring offtake framework under consultation
• Not appropriate to depart from Ofgas 1997
  principles for transitional offtake
• If enduring offtake is implemented then Ofgas
  1997 principles would no longer apply.
• Enduring offtake proposals subject to Authority
  consideration

14
Case by case Assessing the risks

• Jan 2006 IEXCR letter provided guidance on risk
  assessment
• Commitments must not discriminate between new and
  existing users
• Commitments should facilitate efficient
  investment and reduce stranded asset risk
• What is the risk profile of the load making the
  capacity request relative to other present and
  future loads in the area?
• Do the reinforcements benefit other present and
  future users in the area?
• How risky are the other loads that benefit?
• Are there other risky loads expected to reduce
  usage in the future and create spare capacity in
  the area?

15
Issue B Assessing the risk associated with the
Marchwood load

• The following factors relevant to determining
  risk of Marchwood load
• More efficient than existing CCGT plant less
  likely to exit the wholesale electricity market.
• Proposed power station is favourably located in
  the SW area for electricity system
• May benefit from the EU Emissions Trading Scheme.
• 15 year tolling agreement with SSE
• Langage a relevant comparator similarities
  exist
• But, there are factors which may pose a greater
  risk to consumers
• Governments Energy Review process uncertainty
  over allowances for EU ETS (although this is a
  concern for all generators) greater gas price
  volatility.

16
Issue B Assessing the risks (2)

• Ofgem placed in position of assessing risk for
  customers
• Absence of enduring offtake framework makes risk
  assessment difficult.
• Difficult to assess riskiness of load
• Difficult to assess whether other users benefit
  from the reinforcements
• Difficult to assess whether other loads in the
  area may reduce their usage going forward
• NGG NTS did not provide bona fide risk assessment
  and required 100 commitment from Marchwood
• Effective NGG NTS risk assessment may have
  reduced user commitment and likelihood of dispute
  failure must be corrected.
• BUT, on balance
• Marchwood load is NOT significantly more risky
  than overall portfolio of firm loads including
  other firm generating loads
• insufficient evidence to suggest that
  reinforcement of the Marchwood load benefits
  others

17
Conclusions

• NGG NTS should enter into an ARCA for one years
  worth of exit capacity charges.
• Going forward we would expect NGG NTS to
  undertake risk assessments in the transitional
  offtake period on a case by case basis having
  regard to the relevant principles.
• Need for reform of existing arrangements for
  securing exit capacity.
• Appropriate for the risks associated with
  transmission reinforcement to be managed by those
  parties best able to manage them
• Efficient costs of reinforcement not considered
  in determinationissue for TPCR.

18
Transmission Price Control Final proposals

19
Offtake key conclusions

• Baselines minor adjustments to baselines for
  exit and flat capacity.
• Flex baseline 22 mcm
• Revenue drivers apply for 5 years from
  contractual delivery - updated upwards to reflect
  further information received from NGG NTS
• Indexation applied to revenue drivers
• CLNG incentive targets for 09/10, 10/11 and 11/12
  updated
• NGG NTS volume requirements accepted (SE and SW)
• Price minor variation to medium case scenario
  chosen
• No ex-ante funding of gas purchase costs in CLNG
  incentive
• CLNG manager account
• Targets 09/10 - 4.3m, 10/11 - 3.6m, 11/12 -
  2.9m.

20
TPCR Offtake - Key conclusions (2)

• Transitional offtake 15 day incentive retained
  but with zero targets and collar of -2m.
• Enduring offtake Investment buy back incentive
• 36m annual cap monthly cap of 4m.
• Aggregate downside cap across all buy back
  schemes is 48m.
• 365 days of permits at 30 Gwh/day for exit
  permits can only be used in advance of long term
  allocations.
• Permits can be cashed out if unused value set at
  3m pro-rated to number of unused days.
• Enduring offtake non-obligated capacity
  incentive
• 20m cap and 50 sharing factor
• Monitoring of conduct under NTS efficient
  operation licence condition
• Enduring offtake south west interruptibles
• Allowance for long term contracting - 3.4m per
  annum 50 sharing factor.

21
Other key highlights

• Significant capital investment allowances
• Adjustment mechanisms flex revenues according to
  demand
• Safety net and output measures
• Emphasis on user commitment models
• Post tax return 4.4
• Disallowance of proportion of St Fergus spend

22
Promoting choice and value for all gas and
electricity customers