Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Proposals for DN Entry Charging Steve Armstrong26 September 2011

2 Current Transportation Arrangements Gas from NTS Entry from NTS LTS Distribution Tiers Service Pipe Emergency Service NTS Exit Capacity DN Transportation Charges NBP LDZ System Charge Supply Point Facility Costs ECN Charge (2012) CustomerCharge

3 Transportation of Distributed Gas Entry from NTS LTS Distribution Tiers Service Pipe Emergency Service Entry Facility Distributed Gas NBP LDZ System Charge Supply Point ECN Charge (2012) CustomerCharge NTS Exit Capacity Avoided or Lower costs Unaffected Impact of Distributed Gas New costs

4 Connection Charges for Distributed Gas Current Treatment Entry from NTS Entry Facility NBP Supply Point ______All payable by Connectee________ (either directly or recharged) Facility Connection Pipe Equipment Costs Reinforcement or Network compression costs

5 Connection Charges for New Supply Point Entry from NTS NBP Payable by Connectee Service PipeReinforcement Costs Supply Point Payable by Connectee – subject to Economic Test Economic Test If Reinforcement costs + additional opex < NPV Incremental transportation revenue Then No Contribution Otherwise Pay for Excess

6 Issues to be Considered Connectee Which costs are incurred by each party? DN Deep or Shallowish Boundary? DeepShallowish Current Transportation Current Connection Current Transportation Revised Connection Revised Transportation Revised Connection Current Transportation Revised Connection Current TreatmentOption 1Option 2Option 3 Provide Allowances? More cost- reflective transportation methodology? NoYesNoYes

7 Assessment of Choices  Transportation Charging Methodology  Cost-reflectivity  Reflects latest developments  Facilitates competition  Overall development of economic and efficient Distribution Network  Benefits consumers  Facilitates meeting DECC target reductions in CO2 equivalent emissions?  Provides longer-term benefits to consumers

8 Which costs are Incurred by each Party?  Connectee  Gas production facilities  Connection pipe  CV enrichment  Distribution Network  Network reinforcement or within –network compression  Additional network opex  To be determined?  Pressure/Flow control  Metering  Odorant Injection  Shut-off valve  Telemetry and control equipment Issues being considered by Biomethane Working Group

9 Deep vs Shallowish Boundary?  Deep Connection Boundary  Targets costs well  Gives strong signal re location for connection  Can allow simpler transportation charges  Possibly consistent with approach for exit But  Not consistent with treatment of NTS- sourced gas – could be considered unduly discriminatory  Creates high up-front costs which create project risk and may deter some potential developments  May need to provide an Economic Test and Allowances to reflect any transportation cost variations  Shallowish Connection Boundary  Consistent with treatment of NTS- sourced gas into DN  Avoids up-front charges so reducing project risks to the connectee  May better facilitate the longer-term development of lower CO2 energy supply  More closely aligned with DNO Electricity approach so avoids distorting choices for biomethane producers But  May require more complex transportation charge arrangements in order to properly reflect costs and give locational signal  Implementation costs may be higher

10 Provide Allowances (Connection Economic Test) or Modify Transportation Charges?  Provision of Allowances, potentially reducing Up-front connection charge, or Modification of transportion charge methodology for DN Entry  Two alternative means of taking account of locational impact on costs of DN Entry  Yes  More complex  More cost-reflective  Gives better locational signal, so better enabling economic development of Distribution Network  Could result in transportation credit for DN Entry so better facilitating Distributed Gas facilities  More consistent with RHI for Biomethane  No  Simple, with low implementation costs  With shallow connection boundary, effectively socialises any additional or reduced costs

11 What cost variations would be taken into account (Options 1 and 3) for Distributed Gas? Entry from NTS LTS Distribution Tiers Service Pipe Emergency Service Entry Facility Distributed Gas NBP LDZ System Charge Supply Point ECN Charge (2012) CustomerCharge NTS Exit Capacity Avoided or Lower costs Unaffected Impact of Distributed Gas New costs

12 What cost variations would be taken into account (Options 1 and 3) for Distributed Gas?  Deemed Reduction in NTS Exit Capacity bookings  Difficult to relate precise changes in bookings to individual Distributed Gas connections  Provide credit or allowance based on average NTS Exit capacity unit cost  Use “Reliability Factor” for Distributed Gas to take into account uncertainty of Distributed Gas for meeting peak requirements?  Any credits provided would be included in costs covered by new supply point-based LDZ ECN charge  Variation in Entry equipment costs between NTS-DN offtakes and Distributed Gas entry points  Should cost variations be taken into account or just be included in LDZ System costs as at present?  Unit capacity costs of equipment for Distributed Gas likely to be considerably higher than for NTS-DN offtakes  Due to loss of economies of scale  But DN costs could be lower if provided by connectee at Distributed Gas entry points  Specific Reinforcement or (if feasible) within network compression and additional operating costs for Distributed Gas  Could be specific costs to enable Distributed Gas to flow at all times  Should these be assessed on case-by-case basis or use some simplified approach?  Lower Usage of network pipeline tiers  Current LDZ System functions assume gas enters from NTS  Average cost of use of each pressure tier determined in DNPC08 analysis underlying current charges  Take account of actual tier of connection and hence tiers not utilised for Distributed Gas?  Alternatively, use simplified approach to determine standard credit/allowance for typical lower tier utilisation?

13 How would cost variations be taken into account under Options 1?  Option 1 (Deep boundary but with Allowance against Connection Cost)  Require Distributed Gas-specific “Economic Test”  Convert cost savings for: NTS Exit Capacity, Entry Equipment (if appropriate) and lower System Usage into Allowance based on NPV of savings for ongoing cost savings  Compare to Additional Costs for Specific Reinforcement, Additional Operating Costs, Entry Equipment (if higher costs)  Connectee would be liable for Up-front charge based on excess of Costs over Allowance  No rebate if Allowance greater than Costs  Consistent type of approach to Economic Test for new Supply Points

14 How would cost variations be taken into account under Options 3?  Option 3 (Shallow boundary with Modified Transportation Methodology)  Keep existing transportation charges for gas sourced from NTS  Retains current charges for most gas  Avoids complexity of splitting current charges into DN Entry and DN Exit based charges in every case  Introduce DN entry charge/credit for Distributed Gas  Charge/credit would reflect difference in DN costs for Distributed Gas relative to NTS-sourced gas  Existing DN (supply point-based) transportation charges would still in all cases  Convert cost differences into ongoing entry charge/credit reflecting: -NTS Exit Capacity saving; -Lower Distribution Tier System Usage; -Difference in Entry Equipment costs relative to NTS-DN offtakes -Specific additional capex or opex for Distributed Gas entry point -Capital costs annuitised into ongoing charge equivalent -Can reflect particular circumstances of each Distributed Gas entry point or take more simplified approach  Enables any overall cost savings to be reflected in an ongoing credit (unlike Option 2 approach)  Structure charge as capacity charge related to capacity requirement at time of connection?

15 Comparison of Option 1 and 3 Approaches Option 3 – Shallow Boundary, Modified Transportation Charges  Variation in costs relative to existing NTS-sourced gas reflected in ongoing entry transportation charge  Cheaper than NTS-source connections get entry credit  Lower system utilisation benefit assessed relative to connection tier, forms part of ongoing entry charge/credit  NTS Exit capacity benefit reflected in level of ongoing entry charge  Different from exit connection regime  Locational signal provided at the time of connection through ongoing level of entry transportation charge/credit  Any ongoing transportation credit will better facilitate Distributed Gas/Biomethane take up  Any higher costs reflected in ongoing entry charge – timing of costs better aligned to benefits received for Distributed Gas facilities  Consistent with RHI reflecting an allowance for entry connection costs for Biomethane Option 1 – Deep Boundary, Modified Connection Costs  Variation in costs relative to existing NTS-sourced gas reflected in possible up-front payment by connectee  Cheaper than NTS-source connections do not get rebate – any benefit smeared  Lower system utilisation benefit assessed relative to connection tier, forms part of Allowance  NTS Exit capacity benefit reflected in up-front allowance within Economic test  Consistent with exit connection regime approach  Locational signal provided at the time of connection through Economic Test and level of possible up-front payment  Any ongoing lower costs not fully reflected, so facilitates Distributed Gas/Biomethane less well than Option 3  Potential up-front cost may deter some Distributed Gas facilities – increases risk for them  Consistent with RHI reflecting an allowance for entry connection costs for Biomethane

16 Next Steps  Determine timescale and approach to assess proposal  Take account of Biomethane Working Group  Consider other issues and potential solutions  Provide more analysis and indicative charges when appropriate  Keen to implement as soon as possible  DNs receiving approaches from potential Biomethane facilities  But need to reflect wider issues and implementation (system) timescales  Approach adopted needs to be resilient to likely developments over years to come