1. Review Group 291- Ofgem Update
21 June 2010

2. Contents Objectives of cashout and linepack Issues Background to SLC27
Rationale behind current fixed differential
Linepack: Interactions with Third Package
European Framework guidelines on gas balancing

3. Objectives of cash out and linepack
Imbalance charges should
provide the incentive to balance
be reflective of costs incurred
be placed on those who cause costs
Consultees feel that NGG should be incentivised to minimise impact on market
In particular consultees would like the linepack measure (LM) to be removed (i.e. remove the incentive to keep linepack at a specific level)
Ofgem is also concerned that LM limits use of linepack as a balancing tool

4. Issues
If SO avoids taking balancing actions by using linepack, costs may be misallocated between days (as was the situation prior to 2001)
Ofgem has approved some changes e.g. approving the introduction of a deadband in the LM
To remove the LM altogether we would need confidence costs would not be misallocated between days
In other words we would need confidence that an appropriate value of linepack was reflected in the arrangements
This could be achieved through:
an appropriate default cash out price
possibly a linepack product/trading scheme

5. Background to SLC 27
NGG agreed to explore further a linepack trading scheme during 2009/10
In setting the SO incentives we considered that NGG had made insufficient progress to date
Given this and the objective of moving to longer term schemes Ofgem felt it necessary to require NGG to explore these issues further

6. Further background to SLC 27
Improvements in shippers’ balancing performance have been observed
Investments in new infrastructure have been delivered
Ofgem considered 433 to be an interim solution and has consistently stated that the fixed differential is not an appropriate long term solution for targeting costs (433 workstream and decision letter, 2004 electricity and gas cashout review)
Project Discovery identified a period of tight supplies and a large investment requirement in the face of new challenges
Necessary to ensure costs are appropriately targeted in order that supply security is maintained
There may be potential to link a differential to a linepack product that can provide a more appropriate price for flexibility

7. Rationale behind current fixed differential
Fixed differential follows principle that Shippers who balance their positions should be better off than those who do not.
Uses the price of Hornsea injection/ withdrawal as a proxy for the value of flexibility in the system in the absence of appropriate value of linepack.
Hornsea chosen as this was the most obvious storage flexibility price that could be used to go long or short on a difficult day. It was argued that LNG was more used for peak shaving and transmission support and Rough more for large volumes of gas taken over a sustained period.
Network Code modification 433 workstream

8. Linepack: Interactions with Third Package
Compliance with the Third Package will be an important characteristic of any linepack product
Potential products need to be further developed before a conclusive assessment is possible or appropriate
A question was raised at the last meeting as to whether NGG in offering a linepack product would be categorised as a Storage System Operator (SSO)
Our preliminary view is that NGG would not be an SSO as the definition of “linepack” in Article 2 and the wording of Articles 33 and 41 of the Gas Directive distinguish between linepack providers and SSOs

9. European Framework guidelines on gas balancing
ERGEG working on gas balancing guidelines until ACER is operational in March 2011
The earliest we’ll see a network code is 2012
Draft Framework Guidelines for consultation in summer will contain proposals for harmonisation
Given different stages of market development unlikely that all balancing rules will be harmonised - the approach will be to define a target model
On linepack there are different experiences across Member States

11. Alternatives proposed since 433
Network Code Modification Proposals 606 and 607
0606- “Reform of the cash out arrangements and the inclusion of costs of OM gas used for end of day balancing using a stack process”
607- “Changes to the cash out arrangements where Transco defines OM gas usage for end of day balancing purposes”
Both proposals were rejected because of concerns over introducing non market-related costs into cash out prices and the appropriateness of increasingly determining cash out prices via fixed price differentials.
However, Ofgem considered that in principle the inclusion of OM gas could make the regime more cost effective

12. Framework Guidelines development process
Source: Discussion paper on Third package guidelines and codes