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 – Analysis of Further Options Steve Armstrong9 th January 2012

2 Developments since last Workgroup meeting  Meeting held with Ofgem in December  Useful feedback  Two further charging options suggested  Further analysis undertaken  Worth considering these other options prior to finalising favoured charging option

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 capex and opex costs

4 Potential Boundaries for Distributed Gas Entry from NTS Entry Facility NBP Supply Point Always payable by Connectee Gas production facility Connection Pipe Equipment Costs Reinforcement or Network compression costs Deep Boundary Semi-shallow Boundary Shallowish Boundary

5 Options Previously 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 These assumed current transportation chargesThese assumed no connection allowances

6 Full Options To Consider Connectee Which costs are incurred by each party? DN Deep or Shallowish Boundary? Current Trans Current Conn Current Treatment Option 1Option 2 Option 3 No Deep Shallowish Revised Transportation charges? Revised Transportation charges? Connection Allowances? No Yes NoYes No Yes NoYes No Connection Allowances? Connection Allowances? Connection Allowances? Revised Transp Conn:Deep+Allow Revised Trans Current Conn Current Transp Conn:Deep+Allow Option 1b NEW! Current Trans Shallow Conn Current Transp Conn:Shlw+Allow Revised Transp Conn:Shlw+Allow Revised Trans Shallow Conn Option 3b NEW!

7 Options choices are the same for a deep or shallowish connection boundary Connectee Which costs are incurred by each party? DN Deep or Shallowish Boundary? Current Trans Current Conn Current Treatment Option 1Option 2 Option 3 No Deep Shallowish Revised Transportation charges? Revised Transportation charges? Connection Allowances? No Yes NoYes No Yes NoYes No Connection Allowances? Connection Allowances? Connection Allowances? Revised Transp Conn:Deep+Allow Revised Trans Current Conn Current Transp Conn:Deep+Allow Option 1b NEW! Current Trans Shallow Conn Current Transp Conn:Shlw+Allow Revised Transp Conn:Shlw+Allow Revised Trans Shallow Conn Option 3b NEW!

8 Same options in different layout Revised Transportation Charges? Current Transportation Conn: No Allowance Current Transportation Connection Allowance Revised Transportation Connection Allowance Revised Transportation Conn: No Allowance Current Treatment Option 1 Option 2 Option 3 Provide Connection Allowance? Provide Connection Allowance? NoYesNoYes No DEEP BOUNDARY: SHALLOWISH BOUNDARY: Option 3b NEW! Option 1b NEW! Over complex? Options to consider further

9 Details of Options Deep Boundary Revised Transportation No connection allowance Current Transportation Connection Allowance Shallowish Boundary Option 3b  Deep assets included in transporter RAV  No transportation entry charge or credit – existing charges just scaled Option 3  Deep assets included in transporter RAV  Transportation ongoing entry charge/credit reflects particular deep asset use but also deemed lower general system usage Option 1  Connection charge reflects deep connection capex and opex costs but with allowance equivalent to NPV of deemed lower system usage  No transportation entry charge or credit Option 1b  Connection charge reflects deep capex and opex costs in full  Transportation ongoing entry credit reflects deemed lower system usage Under any of the options the connectee could opt to own and operate much of the entry facilities so reducing the DN assets

10 Example of Costs and Charges for Distributed Gas Entry and Transportation

11 Example of Charges under Option 1

12 Example of Charges under Option 1b

13 Example of Charges under Option 3

14 Example of Charges under Option 3b Into RAV & Allowed Revenue – impacts general transportation levels This option doesn’t seem sensible – rule out?

15 Comparison of 3 Main Options

16 Example of Costs for Larger Facility requiring Within-Network Compression

17 Comparison of 3 Main Options for Larger Facility Example Entry flows 66% higher, entry costs 40% higher than for previous example Options similar to before

18 Significance of Entry Charges Transporter entry costs for 25 years covered by less than 2 months gas+RHI value

19 Decisions between 3 Main Options Is it appropriate to annuitise entry-related capex? - Are entry facilities and any deep capex for sole use of connectee? - Stranding risk to other users? - Will annuitisation significantly improve likelihood of connections? Is it appropriate to convert ongoing opex and transportation credits to NPV? - Does NPV basis provide clearer signal or distort decision? - Would Xoserve billing costs for new entry transportation charge(s) be disproportionate to their value? - Is handling through connection costs a lot simpler? Option 1b vs Option 3 Option 1 vs Option 1b Previously favoured option Is Option 3 still favoured ? Other issues to consider - Consistency with treatment of NTS-sourced DN gas - Comparison to DNO Electricity treatment for connectee - Consistency of approach with basis of RHI for Biomethane

20 Next Steps  Analysis complete?  Agree favoured charging option  Useful to get further Ofgem feedback?  Determine business rules for that option  Produce draft workgroup report