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Balancing Gas Demand and Charging Structure: Solutions for Stability and Efficiency

Explore the impact of seasonal gas demand on billing structures and the need for efficient pricing signals. Discover solutions to balance revenue shortfalls and cost reflectiveness in the gas industry.

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Balancing Gas Demand and Charging Structure: Solutions for Stability and Efficiency

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Presentation Transcript

  1. GDN Charging Structure Bill Bullen Managing Director, Utilita

  2. Seasonality of Gas Demand • Gas demand is seasonal and volumes vary significantly over the year (4:1) – especially in residential sector • Cost base is fixed • but driven by high winter demand • If income is related to consumption: • there will be a shortfall during summer months • there will be volatility due to colder/warmer winters • It’s always been like that! • why change the charging structure now? • what reduction in price did it give?

  3. New 95:5 Charging Structure • Intended to give more stability against year-on-year weather variation • DN charges represent only 20% of customers’ bills • But with summer consumption only one quarter of winter consumption the DN charge amounts to over 40% • Negative gross margin for suppliers during the summer months (June to August) • Funding issue transferred from network operators to suppliers

  4. Cost of Capital • Who is best placed to fund the shortfall in revenue during the summer: • Lowest cost of capital is network operators • Shift away from this means that customers’ bills will rise • There is a competition issue because smaller suppliers are likely to have a higher cost of capital than larger suppliers

  5. Efficient Pricing Signals • Cost reflective • Even better if they reflect MARGINAL costs • No meaningful relationship between capacity charge based on AQ and customers’ usage • AQ “deadband” of +/- 20% • Weather correction • Estimated profile factors • Costs driven by winter demand – therefore have higher charge during winter

  6. Solutions • Return to 50:50 split • or at least to a split that gives some positive gross margin during summer (NB this is dependent on summer/winter gas wholesale price differentials) • Modify cash collection from smaller suppliers • this should not hit overall DN cashflow significantly

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