Industry granted extension to thrash out new British natural gas tariff regime

Author: Thomas Rodgers

2019/03/08

LONDON (ICIS)--Ofgem has granted British natural gas stakeholders extended time to draft an overhaul to the grid tariff regime, the energy regulator said on Friday.

Ofgem head of gas systems David O’Neil said in a letter that the industry would have until 10 April to finalise a draft working group report. The initial deadline was for Friday.

“This extension is granted in light of the exceptional circumstances surrounding the development of the [...] proposals, namely the breadth of the changes to the GB gas charging arrangements and the reliance of this process on deliverables from [National Grid] that have not been made fully available so far,” O’Neil said.

Industry representatives remain increasingly doubtful that an agreement can be reached with a mountain of analytical work still incomplete and the EU deadline of May 2019 fast approaching.

Running out of time

In July 2017, system operator National Grid proposed a modification to the Uniform Network Code (UNC) – the rulebook under which gas is transported in the network – that would bring the British regime in line with the EU network code on tariffs.

However, a plethora of alternative modifications and a truncated timetable constrained debate on the overhaul.

Ofgem’s eventual rejection of all proposals in December 2018 left the industry with a limited timeline to thrash out a new methodology the regulator deems compliant with the EU code.

Under the European code, a methodology must be in place by May 2019 for October 2019 implementation. The EU would be within its rights to bring a case against the UK government in the event of non-compliance.

Industry sources told ICIS they are relatively unconcerned by the deadline as any infraction process would take years and the EU would recognise that Britain is working towards a solution. Ofgem however remains committed to the May deadline while stakeholders now consider 2020 to be a more viable completion date.

The industry had around six weeks to issue a draft modification report for consultation – initially due on Friday – and another five weeks to deliver a final report to be voted on by the UNC Panel.

Stakeholders told ICIS they have remained consistently downbeat on the viability of a timely solution.

Tipping point

Faced with a mountain of analytical work and numerous points of contention, the UNC panel that vote on modifications before they can be implemented moved to delay the deadline.

Independent chair of the UNC modification panel Mark Shurmer penned a request to Ofgem on 28 February for an extension to the conclusion of the work group report by over a month to 10 April.

Shurmer said that the complex nature of the alternatives and a lack of time for a host of tasks might prevent Ofgem getting a “full and reasoned decision” from the industry.

In a 5 March meeting Ofgem told the industry the draft deadline would be pushed back, a source at a work group meeting said.

In the letter published on Friday, Ofgem said the extension was necessary to allow National Grid to publish analytical work and legal text, and review how existing capacity contracts would be treated under the new regime. The system operator has until 21 March to make all relevant documents available.

Doomed to fail?

The new modification has mirrored its predecessor, with shippers and transporters proposing a slew of alternatives to National Grid’s initial modification. As of 8 March there were 10 proposals including the original.

Alternatives largely reflect vested interests of the proposers, sources have told ICIS, with shippers reluctant to have their margins cut by the new system.

Key battlegrounds have failed to shift from the start of the process. The industry has failed to reach a consensus on storage and interconnector discounts, treatment of existing capacity contracts, and short-haul which refers to discounts for point-to-point nominations.

Even the overarching methodology remains up in the air. Stakeholders worked during much of the original modification process assuming the new tariffs would be calculated by a capacity-weighted distance (CWD) system, in which the distance between and capacity of entry and exit points from the basis of a tariff. The higher the capacity-weighted distance between an entry and exit, the higher the tariff.

However, some shippers have put forward a postage stamp methodology, in which tariffs for all entry and exit points are the same, with scope for adjustments.