1 Project Nexus Modelling costs and benefits Andrew Wallace, Cesar Coelho Ofgem Project Nexus IA Subgroup 25 July 2012

2 Agenda Workgroup and Subgroup roles Methodology/Approach Step 1 – take-up scenarios Step 2 – Categories of cost Step 3 – Categories of benefits Step 4 – Distributional effects

3 PN IA – Workgroup role Identify a methodology to compare costs and benefits of PN (i.e. assess PN net impact), including the distributional impacts Identify the categories of potential costs and potential benefits for PN Identify methodology to assess costs and benefits, including the distributional impacts Quantify each category of costs and benefit (where possible) Where quantifiable benefits are below the level of costs, use qualitative analysis Objectives Objective: Develop a robust assessment of the costs and benefits of the Project Nexus modification proposals to allow the industry and Ofgem to take an informed view on their merits Objective: Develop a robust assessment of the costs and benefits of the Project Nexus modification proposals to allow the industry and Ofgem to take an informed view on their merits

4 PNUNC IA Subgroup role Develop strawman proposals for –methodology –identifying categories of potential costs and potential benefits Subgroup role is fundamental to guide the discussion at the workgroup level – high risk of delay if strawman proposals are not well developed Objectives Objective: Establish a clear, transparent and credible methodology, including for how to deal with uncertainty Drive the workgroup discussion Objective: Establish a clear, transparent and credible methodology, including for how to deal with uncertainty Drive the workgroup discussion

5 Methodology We need to answer three key questions –What are the costs and benefits eg system, metering, allocation, efficiencies –How are we going to estimate these costs and benefits eg how allocation benefits will be estimated, what data is needed to assess system costs –How are we going to compare these costs with these benefits Methodology needs to be consistent to allow robust assessment of impacts Proposal: NPV, modelling and scenario analysis Strawman proposals

6 Modelling and scenario analysis Step 1: Set out scenarios for take-up of services –All parties will provide data for the same scenarios –Data will be comparable (and therefore, we can add up individual responses for each category of cost/benefit) –It will be possible to compare responses to check the quality of data (eg if parties with similar portfolios in size provide significantly different data) Step 2: identify categories of costs Step 3: identify categories of benefits Step 4: modelling distributional effects Strawman proposal - Methodology

7 Step 1 - Take-up of services Scenarios – drivers of costs or/and benefits –Take-up of services Settlements: Daily metered products AQ/Meter Point Reconciliation: frequency of submission of meter reads –Any other driver? Strawman proposal - Methodology

8 Take-up Scenarios - Settlements The use of settlements products will impact costs and benefits Two questions: –Aggregate usage of products 1, 2 and 3 –Any differences on cost/benefits between products 1, 2 and 3 l Scenarios for usage of daily settlements products (1, 2 & 3 in aggregate): Low usage, Medium usage, High usage Counterfactual: Maintain current functionality Step 1 - Scenarios

9 Take-up Scenarios – AQ & MPR (Product 4) AQs calculation and MPR processes triggered when meter read is submitted Frequency of submission of meter reads drives distributional effects –For product 4, does frequency drive costs/benefits too? [increased complexity] Question: How frequently are meter reads submitted for product 4 Meter reads scenarios: Low frequency, Medium frequency, High frequency Counterfactual: Maintain current funtionality Step 1 - Scenarios

10 Steps to design the take-up scenarios 1.Explain and agree the methodology 2.For settlements: Discuss distributions of costs between products 1&2 and product 3 3.For AQs/MPR: Discuss whether costs would change significantly 4.Ask individual shippers responses on: –Their minimum and maximum take-up, in aggregate, of products 1, 2 and 3 –Their lowest and highest frequency of submission of meter reads 5.Collate responses and propose three scenarios each for settlements and Aqs/MPR (as discussed above) 6.Discuss and fine tune scenarios Step 1 - Scenarios Workgroup Shippers Workgroup

11 Step 2 – Categories of costs Steps to identify categories of costs 1.PN Sub-group to have a first stab at discussing categories of costs and setting strawman proposal 2.PN workgroup do discuss and agree categories of costs relevant for PN implementation Costs are possibly different for suppliers/shippers and transporters Costs may be one-off or ongoing Strawman proposal - Costs

12 Step 3 – Categories of benefits Steps to identify categories of benefits 1.PN Sub-group to have a first stab at discussing categories of benefits and setting strawman proposal 2.PN workgroup do discuss and agree categories of benefits relevant for PN implementation Benefits are possibly different for suppliers/shippers and transporters If quantifiable benefits are insufficient when compared to the costs, need to develop approach for assessing qualitative benefits Strawman proposal - Benefits

13 Step 4 – Distributional effects Steps to identify categories of benefits 1.PN Sub-group to discuss methodology for assessing distributional effects and set out strawman proposal 2.PN workgroup do discuss and agree methodology 3.Ask individual organisations for their estimate of the errors Proposed methodology: –2 types of error if daily meter reads are not used Errors in allocation (what sources?) Errors in reconciliation (what sources?) Bottom-up approach (zero-sum game between providers, but possibly not between segments of customers) –Assume error for allocation –Assume error for reconciliation Strawman proposal – Distributional effects

14 Next steps Develop a detailed project plan for delivery of subgroup and workgroup outputs PN sub-group to discuss proposals and strawmans Develop strawman proposals document – explain in detail approach and methodologies, provide definitions and examples where possible PN workgroup to discuss strawman and agree –methodologies –categories of costs –categories of benefits Develop consultation questions Develop consultation document

15 Appendix

16 Supplier one-off costs Step 2 - Costs Cost CategoryLow usage Medium usage High Usage Internal process Internal systems (billing and settlement) Hardware/systems Agency costs Other costs

17 Supplier ongoing costs Step 2 - Costs Cost CategoryLow usage Medium usage High Usage Data collection Internal processes Other costs

18 Transporters one-off costs Step 2 - Costs Cost CategoryLow usage Medium usage High Usage Internal systems (billing) Internal systems (other) Registration systems Process changes Hardware/systems Other costs

19 Transporters ongoing costs Step 2 - Costs Cost CategoryLow usage Medium usage High Usage Data processing Invoicing Other costs

20 Supplier benefits Step 3 - Benefits Cost CategoryLow usage Medium usage High Usage Internal process Better planning of gas purchases Reduce unidentified units Other benefits

21 Transporter benefits Step 3 - Benefits Cost CategoryLow usage Medium usage High Usage Internal processes Better network planning Reduce upstream unidentified units Other benefits

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