Introduction of Gas Reserve Arrangements

1
Introduction of Gas Reserve Arrangements

• Mark Bailey
• Gaz de France ESS

2
Winter 2005/06

• Actual demand below seasonal normal during peak
  winter months
• Demand above seasonal normal
• Late November 05
• Middle March 06
• Rough Storage
• Unavailable from 16th February 06
• Minimal demand response

3
Demand Side Response - Gaz de France ESS

• Response entirely price driven
• Reliant on customers who were exposed to short
  term prices
• Limited response from customers who had hedged
• Concerns regarding next winter
• Buying behaviour may alter to move away from Day
  Ahead
• Customers are much less price responsive to
  potential opportunities rather than avoiding
  costs
• Our Customers response
• 13th March 170,000 therms (P70)
• More response on 14th and in the rest of the week

4
Customers Response

• Why was response higher after 13th March
• Day Ahead Prices for 14th onwards much higher
  than for the 13th
• 13th - 59.8p/th vs 14th - 195 p/th
• Customers need time to respond
• Decide on their own trigger level
• Discover the amount of alternate fuel available
• Under the present regime there is no incentive to
  prepare
• Without appropriate planning switching may take
  time

5
Demand Side Response
6
Why do we need gas demand side response?

• Prevent progressing into a gas deficit emergency
  and
• Expands the choice of NGG re residual balancing
• Introduces certainty and visibility around
  deliverable demand reduction
• Establishes incentives for customers to actively
  participate
• Supplies may not meet demand due to
• Very cold weather
• Supply side failure eg. Storage, Beach, LNG,
  Interconnector
• How much demand side response is needed?
• NG Gas 1 in 10 scenario for winter 06/7 requires
  50-60mcm demand side response
• Relatively low levels of demand response seen so
  far
• 75 volume CCGT, 25 volume from customers

7
Market benefits of demand response certainty

• Gives better knowledge of firm customers that may
  be available to respond
• Facilitates economic and efficient operation of
  the pipeline system
• Achieves greater certainty about actual demand
  reduction deliverable on the day as it gives
  better knowledge of firm customers that may be
  available to respond
• May allow upward adjustment of GBA trigger level
• Customer response avoids passing through problems
  to electricity market
• Diversifies risk away from storage only options
  hedges reliability (eg. Rough)
• Restore confidence in supply/demand balance which
  may reduce wholesale market volatility and smooth
  market prices

8
How did electricity accomplish demand side
participation?

• Demand Side Ancillary Services were created
• Large electricity supply customers began to
  provide services in competition with generators
• Increased competitiveness
• Increased volume of response made available
• Standing Reserve
• Delivered in 20 mins, run for 2 hours
• Availability and utilisation payments made.
• Frequency Response
• Instantaneous trip, load management 30 mins
• Availability payments only

9
Demand Side Portfolio

• Through our involvement within the IC supply
  market, we were able to offer large volumes of
  MWs to NG
• Our total Ancillary Services business brought to
  NG to date is
• FCDM 200MW
• Standing Reserve 760MW
• This growth is due to customers being
  incentivised to make load available via
  guaranteed payments
• Energy only payments would not have produced
  these volumes (see Demand Turndown)
• NG are keen to develop further in this area and
  have been reported to be looking for an
  additional 250MW in 2006/7

10
Growth of Schemes from Existing and New
Participants

• Customers initially test participation,
  offering limited volumes
• Increased response from existing providers is
  evident on both schemes
• Stems from participants experience and
  confidence in service provision grows.
• Growth in some cases as high as 75
• Companies in similar industries are also
  encouraged to participate

11
How do we see the scheme working?

• Product structure
• Quasi-storage - aggregated bundles to mirror
  storage deliverability (by storage type or
  facility type)
• NGG run a tender process number of times a year
  to be agreed
• NGG contract with shipper but dispatch customer
  directly to avoid time delay
• Prices structured to best encourage investment in
  switching fuels by offering an Availability and
  Utilisation Payment
• Customers shouldnt be limited to contracting
  with their supplier

12
Cost Recovery Route

• Cost Recovery Route
• Cost recovery would be targeting on those who
  have caused the system action to be taken i.e.
  those who are out of balance
• The Availability Payment element will be known
  immediately NGG decide how many participants
  there are known
• The cost of the flat fee will flow through to SMP
  buy price
• The Utilisation Fee element will be individually
  agreed between NGG and each participant agreed
  bilaterally during the economic assessment period
  of the tender process
• The cost of the utilisation fee will feed through
  to SAP
• Non delivery will be discouraged via events of
  default and associated contractual consequences

13
Summary

• It is time for action now ahead of winter 2006/07
• Improved scheme vital to enable demand side
  response to prevent emergency measures
• Incentive on customers to participate
• Provide a mechanism to reflect the true value of
  their services
• Follow the lead given by electricity
• Increased demand side response would
• Increase security of supply
• Dampen price spikes