0504 - development of a demand side response methodology

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0504 -Development of a Demand Side Response Methodology

02 July 2014

2

AGENDA Development of a DSR Methodology

1. Development Background

2. Broad Structure of proposed DSR so far

3. Key Issues

4. Proposed Workgroup Schedule

5. Issue 1:

a) What is the DSR Product – Turn Down to/ Turn Down by


DSR Development Background

Significant Code Review (SCR) Security of Supply (SoS) Background Ofgem Raised in January 2011

Aim of the Gas SoS SCR:

to reduce the likelihood, severity and duration of an emergency;

ensure market arrangements provide appropriate incentives on shippers to maintain SoS

In the context of the Customer:

Key issue the SCR sought to address was:

cost of involuntary demand reduction in an Emergency, i.e. Firm Load Shedding (FLS) is not factored into cashout price, therefore much of the risk sits with consumer;

Develop appropriate payment arrangements for voluntary and involuntary DSR

SCR Proposed DSR Compensation Payment Price (without DSR Methodology in place)

Daily Read sites Firm Load Shed at GDE Stage 2 will receive a DSR payment based on;

Unit Price = 30 day average SAP price (set on the Day

preceding entering into Stage 2 GDE) per kWh

Entitlement for this payment will be for each day of the Daily Read site’s curtailment during the GDE (subject to stage 3 isolation).

A Draft Licence Obligation on NGG

to develop a DSR Mechanism

in consultation with the industry.

(Statutory Licence Consultation Summer 2015)

Introduction of the DSR Licence Obligation

Ofgem’s SCR SoS Review – Final Policy Decision issued 12 February 2014

Included as part of consultation:

Proposed DSR Licence Obligation

Draft Licence Condition on NGG to;

Develop a draft DSR Methodology, in consultation with stakeholders; and

Submit the DSR Methodology, to the Authority, by March 2015

Where directed by the Authority run a trial (paper based) of the DSR Methodology; and

Report back to the Authority on the outcome of the trial; and

Subject to the trial, implement the DSR Mechanism and Methodology by winter 2016/17.

DSR Methodology and Mechanism Timescales

SC

8I draft p

ub

lished

12/02/201

4

2014 2015 2016

Su

bm

it a draft M

etho

do

log

y to

O

fgem

May 2014 – Jan 2015

Co

nsu

ltation

closes

09/04/2014

01/03/2015

Industry Developmentof a draft DSR

Methodology & DSR Mechanism

May – Jul

Run Trial(subject to Authority Direction)

Sep - Dec

FinalModification and consult

Imp

lemen

t me

tho

do

log

y &

mech

an

ism

01/10/2016

Su

bm

it repo

rt on

trial to O

fgem

? ??

?

Ofg

em d

ecision

?

Feb - Sep

System Design,Build,Test

&Implementation

?

Summer 2014Stat consultation

onLicence changes

SC8I – ‘Development and Implementation of a DSR Methodology for use after a GDW’ proposed timeline

13 June 2014 SC8I licence drafting due to be submitted for statutory consultation on the 13th June 2014

16 July 2014 Consultation Closeout

Sept 2014 Publish Authority decision on the SC8I Licence drafting and the SoS SCR legal text

Development process so far:

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Since April, NGG has held DSR Development meetings with industry parties (End Users, Shippers and Suppliers) to understand needs, opinions, concerns and ideas

New engagement opportunities with ~ 60 stakeholders

Outcome of meetings, and Ofgem SCR SoS policy decision consultation responses, provide initial building blocks for DSR Methodology draft strawman

Continued development of DSR Methodology would now benefit from a more centralised collaborative industry engagement.

UNC Modification 0504

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19 June 2014 - Proposal submitted for Panel direction – recommending workgroup development

02 July 2014 – First DSR Development Workgroup – to agree workgroup schedule, ToRs, Issues to be addressed

July – December 2014 – Run a suite of Workgroups to develop the DSR Methodology and address outstanding issues


Initial Structure of the Proposed DSR

DSR Licence Condition

Ofgem’s key principles for DSR Development are:

To create “route to market” for additional DSR and not prevent commercial interruption from emerging

Reveal price for DSR and factor into Cashout

Minimise market distortions, and

Be compatible with existing market arrangements

Feedback suggests that any DSR mechanism should focus on providing the Customer with;

Confidence that product is only utilised by NG

Confidence that product will only by utilised on specified occasions

Flexibility for customers to respond to price changes and volume availability

Provision that any customer offer, to reduce offtake, must be compatible with their operational schedules

Simple route to market, familiar platform, easy to access & use, as not expected to be frequently utilised

Key Features of the DSR Mechanism

Trigger Gas Deficit Warning (GDW)

DSR Offers accepted from GDW up to end of stage 1 GDE (NGG still in the market)

Three way party interaction – NGG to Shipper/Supplier (on behalf of Customer)

DSR Offers only accepted by NGG

DSR Offer prices held in price stack order with all other OCM offers price - lowest price in stack first accepted

DSR offer could be made in Tranches

As DSR mechanism on an OCM platform has potential to feed automatically into Energy Balancing system clearing contract

DMC (site > 2 Million therms per annum)

Key areas of the DSR Methodology 1. Eligibility rules for Participation in the DSR Tender Process

2. Definition of DSR product and service

3. Timescales of the DSR service

4. DSR Process - contractual arrangements

5. DSR Mechanism submission process and operational arrangements:-DSR Offer posting process-DSR Offer acceptance process

6. DSR Service Fees

7. DSR offer price feed into daily Cashout price (real-time)

8. Payment and Settlement arrangements; -Pre Stage 2 -Post Stage 2 (including settlement process for DSR offers not that were not accepted through the DSR mechanism)

9. Payments, Costs, Expenses and Liabilities for failing to deliver DSR

16We need to ensure that development of key areas complies with key principles

set out the DSR Licence Condition


Key Issues

Ofgem’s Final Policy Decision Document

Ofgem’s view is that: a DSR methodology would be unlikely to meet the principles if it included:

CCGT involvement;

Option fees;

And there was merit in development of:

A market based mechanism facilitated by the SO

Ofgem expressed support for the development of a market based approach as described by NGG

Issues identified by the Industry Key Issues

I1 DSR product Turn down to / Turn down by

I2 Eligibility rules Gas Fired Generation eligibility and interaction with Electricity Market Reform

I3 Contractual Relationships

Define contractual arrangements between Shipper/Supplier and end consumers facilitating transactions, contractual relationships, liabilities and how contracts should be reported on under existing regulatory requirements

I4 DSR Trial Define trial success criteria, volumetrics will need to be established to ensure viability of mechanism

I5 OCM platform Need to understand the costs associated with OCM development and implementation

I6 Option Fees19

Resolution of these Issues needs to be consistent with the key principles set out the DSR Licence Condition


Proposed Workgroup Schedules

0504 Workgroup meeting schedule:

All 0504 workgroup sessions will be held at:31 Homer Road, Solihull, West Midlands

WG1: Wed, Jul 2, 2014 10:30

WG2: Wed, Aug 13, 2014 10:30

WG3: Wed, Sep 10, 2014 10:30

WG4: Mon, Oct 13, 2014 10:30

WG5: Tue, Nov 11, 2014 10:30

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Contact the Joint Office of Gas Transportersto request attendance on: Tel: 0121 288 2107Email: [email protected]

mailto:[email protected]

Scheduling of Issues and development areas

Proposed Workgroup agenda schedule

WG1 - Background, agreement of TORs, Scheduling of Issues and key areas to be developed.

- Issue 1: What is the DSR product, Turn down to or turn down by?

WG2 Issue – Key Area –

WG3 Issue –Key Area -

WG4 Issue –Key Area –

WG5 Draft and agreement of Workgroup report

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Planning and agreement of schedule and agenda items


Turn Down To Vs Turn Down By

What is the product – Turn Down To versus Turn Down By or hybrid ?

Actual Load

Offtaken

On Day

Expected Volume available to NGG

Need to fully understand the issues and requirements of Customers, Shippers and NGG

Reducedofftake

ScheduledOfftake

for Day

Actual LoadOfftaken

On Day

Increased offtake

Example 1:

ScheduledOfftake

for Day

Example 2:

Features of the DSR mechanism – Offer Volume

Offers to be for a volume of energy (kWh)

End User may offer several tranches of volume

For instance:

5% (plant can run between 100% and 95%)

10% (Minimum Operational Load = 85%)

@ 6 Hours notice

With high risk of tripping off costed in to offer

30% site minimum Gas required to protect plant load

55% (manufacturing shut down) 3 day Start up costs ~ £0.5M

DSR mechanism three way party interaction

End User

Offers to reduce

gas offtake

NGG

Accept Offersfor

volume

Shipper

OffersVolume on the OCM

(to NGG only)

cost and risk mitigation

certainty of volume &

level cashout exposure

certainty of volume for

safety purposes

Turn Down To:

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The End User will define and offer a level which they will cease to flow above , the End User defined p/unit rate will be applied ex-post to any volume reduction

Pros: Preference for some End Users that don’t monitor their gas usage on the day but understand the minimum they need to protect essential operations

Cons: Volumes of response will not be known on the day. System Operator will not know what volumes of physical response have been effected, or whether it is an efficient action likely to assist in prevention of the emergency.

Cannot be priced into SAP, can only set SMP Buy price due to volume uncertainty

End User won’t have knowledge of final compensation level until after the day, as ex-post process will calculate volume.

Volume uncertainty leads to increased uncertainty for the shipper/supplier in terms of balancing their portfolio - an increased cashout risk

Turn down by DSR product:

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The End User defines and offers a quantity that it commits to reduce load by, from the prevailing nomination level. This volume will be an End User determine p/unit rate.

Pros: System Operator has more certainty, on the day, of the volume associated with accepted DSR Offers and is better able to access whether accepting such offers is likely prevent escalation into an emergency with in the day.

The accepted DSR Offers can be fully reflected in both SAP and SMP Buy within day.

End Users can define tranches of load reduction – still allowing protection of a minimum load akin to turn down to, which enables End Users to value and offer discrete levels of load.

Cons: Some End Users consider they are unable to participate in this style of product due to uncertainty around their load volume on the day.

DSR as a Risk mitigation tool

Would expect Gas prices to rise during a sustained period of high supply demand deficit.

We have been told that prices may reach levels where it may not be economic to continue to manufacture.

The DSR mechanism may provide a risk mitigation tool to recover some of the costs which result from reduction in production.

Reduction in gas offtake may help maintain more critical loads and avoid the system progressing into emergency

Next Steps

Draft initial strawman proposal - August

One page, high level email summary of discussions and updates on key issues and developments to be issued following each workgroup session.

DSR expressions of interest Feedback Survey to be published to End Consumers.

Any further views/issues/concerns you may wish to discuss further please get in touch:

[email protected] Tel : 01926 656383: or [email protected] Tel:01926 653493



tel:01926

0504 - development of a demand side response methodology

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