IUK provides clarity on its implicit gas allocation mechanism proposal

Gas companies booking capacity through a new implicit allocation mechanism on the IUK pipeline between Britain and Belgium will have to wait until the day before they buy to know how much the booking cost.

The details emerged at an IUK workshop on Monday aimed at clarifying proposed updates to its charging methodology and a new implicit allocation mechanism, set to launch in spring 2018.

The consultation letter states that IUK will publish IAM prices “at least a day in advance of relevant sales offerings” which stands for all products available for sale at the time, for every product offered through implicit allocation.

At any one time there may be several products offered for sale in this way, as long as they do not clash with an auction on the PRISMA platform for the same product. For example, on Wednesday the price will be set for all IAM products offered on Thursday, and on that Thursday there may be a weekly, monthly, quarterly and annual product for sale.

This short notice may seem a scary proposition for shippers, but IUK argues that since capacity can be booked every day a price pattern will develop which will give shippers a general idea of the price further in advance than one just day.

Shippers can buy capacity as far out as 15 years, but promoting those kinds of long-term bookings is not IUK’s aim with the launch.

The operator wants to let companies to book as and when they need it, rather thanbeing constrained by booking windows.

It also allows the operator to maximise the use of the pipeline and its own revenues.

This attitude is one which is shared across the industry at the moment, with a trend of shifting from long term products, to shorter term and more flexible solutions.

“[We] have to earn our living from the short term market”, IUK programme manager Ayan Bhattacharji said, which is potentially an insight into how much the operator is reliant on this project being a success given the expiration of several long term capacity contracts on 31 September 2018.

Greater flexibility

The implicit allocation mechanism (IAM) will allow shippers to buy capacity outside of the traditional PRISMA auction schedule. The product is aimed at providing greater flexibility for shippers to book capacity as they are currently constrained by the PRISMA auction calendar.

Both the operator and shippers see value in the flexibility which is why, according to IUK, feedback on the IAM proposals has been well received.

Flexibility in contracting capacity, however, will require flexibility in prices.

“Tariff levels are being developed right now,” Bhattacharji said when discussing the balance between flexible prices and price certainty, for both shippers and the operator.

There is value for both the operator and shippers of knowing charges in advance of capacity auctions for obvious business reasons. But there is also value in being able to react to market conditions in the short term and the operator is ultimately aiming to strike the correct balance with the final pricing structure.

Timeline

IUK expects the consultation, which runs until 22 November, to be the final step in formulating the IAM proposal, with a proposal submitted to the British and Belgian regulators in December. A decision from the regulators is expected early March, allowing a spring 2018 launch of IAM capacities.

IUK hopes that the launch of IAM and the flexibility it offers will help it secure capacity bookings when long term capacity contracts on the pipeline expire on 31 September 2018. At the moment, only around 14% of the technical capacity has been sold from October 2018 onwards according to the IUK website. chris.johnson@icis.com