Proposals for DN Entry Charging – Analysis of Further Options

1. Proposals for DN Entry Charging – Analysis of Further Options Steve Armstrong 9th 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 Impact of Distributed Gas NBP ECNCharge (2012) NTS Exit Capacity Avoided or Lower costs Entry from NTS LDZ System Charge LTS Avoided or Lower costs Distributed Gas Distribution Tiers Entry Facility New capex and opex costs Service Pipe Emergency Service Customer Charge Unaffected Supply Point

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

5. Options Previously Considered Which costs are incurred by each party? DN Connectee Deep or Shallowish Boundary? Deep Shallowish More cost- reflective transportation methodology? Provide Allowances? No Yes No Yes Current Transportation Current Connection Current Transportation Revised Connection Current Transportation Revised Connection Revised Transportation Revised Connection Current Treatment Option 1 Option 2 Option 3 These assumed current transportation charges These assumed no connection allowances

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

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

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

9. Deep Boundary Revised Transportation No connection allowance Details of Options Current Transportation Connection Allowance 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 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 3b • Deep assets included in transporter RAV • No transportation entry charge or credit – existing charges just scaled Shallowish Boundary 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 exampleOptions 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 Previously favoured option Option 1b vs Option 3 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? Option 1 vs Option 1b 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? 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 Is Option 3 still favoured ?

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