1 Project Nexus Modelling costs and benefits Andrew Wallace, Cesar Coelho Ofgem Project Nexus IA Subgroup 25 July 2012.

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Project NexusModelling costs and benefits

Andrew Wallace, Cesar Coelho

Ofgem

Project Nexus IA Subgroup25 July 2012

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Agenda

• Workgroup and Subgroup roles

• Methodology/Approach

• Step 1 – take-up scenarios

• Step 2 – Categories of cost

• Step 3 – Categories of benefits

• Step 4 – Distributional effects

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PN IA – Workgroup role

• Identify a methodology to compare costs and benefits of PN (i.e. assess PN net impact), including the distributional impacts

• Identify the categories of potential costs and potential benefits for PN

• Identify methodology to assess costs and benefits, including the distributional impacts

• Quantify each category of costs and benefit (where possible)

• Where quantifiable benefits are below the level of costs, use qualitative analysis

Objectives

Objective:Develop a robust assessment of the costs and benefits of the Project Nexus modification proposals to allow the industry and Ofgem to take an informed view on their merits

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PNUNC IA Subgroup role

• Develop strawman proposals for

– methodology

– identifying categories of potential costs and potential benefits

• Subgroup role is fundamental to guide the discussion at the workgroup level – high risk of delay if strawman proposals are not well developed

Objectives

Objective:• Establish a clear, transparent and credible methodology, including for how to deal with uncertainty• Drive the workgroup discussion

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Methodology

• We need to answer three key questions

– What are the costs and benefits

• eg system, metering, allocation, efficiencies

– How are we going to estimate these costs and benefits

• eg how allocation benefits will be estimated, what data is needed to assess system costs

– How are we going to compare these costs with these benefits

• Methodology needs to be consistent to allow robust assessment of impacts

• Proposal: NPV, modelling and scenario analysis

Strawman proposals

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Modelling and scenario analysis

• Step 1: Set out scenarios for take-up of services

– All parties will provide data for the same scenarios

– Data will be comparable (and therefore, we can add up individual responses for each category of cost/benefit)

– It will be possible to compare responses to check the quality of data (eg if parties with similar portfolios in size provide significantly different data)

• Step 2: identify categories of costs

• Step 3: identify categories of benefits

• Step 4: modelling distributional effects

Strawman proposal - Methodology

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Step 1 - Take-up of services

• Scenarios – drivers of costs or/and benefits

– Take-up of services

• Settlements: Daily metered products

• AQ/Meter Point Reconciliation: frequency of submission of meter reads

– Any other driver?

Strawman proposal - Methodology

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Take-up Scenarios - Settlements

• The use of settlements products will impact costs and benefits

• Two questions:

– Aggregate usage of products 1, 2 and 3

– Any differences on cost/benefits between products 1, 2 and 3 l

• Scenarios for usage of daily settlements products (1, 2 & 3 in aggregate): Low usage, Medium usage, High usage

• Counterfactual: Maintain current functionality

Step 1 - Scenarios

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Take-up Scenarios – AQ & MPR (Product 4)

• AQs calculation and MPR processes triggered when meter read is submitted

• Frequency of submission of meter reads drives distributional effects

– For product 4, does frequency drive costs/benefits too? [increased complexity]

• Question: How frequently are meter reads submitted for product 4

• Meter reads scenarios: Low frequency, Medium frequency, High frequency

• Counterfactual: Maintain current funtionality

Step 1 - Scenarios

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Steps to design the take-up scenarios

1. Explain and agree the methodology

2. For settlements: Discuss distributions of costs between products 1&2 and product 3

3. For AQs/MPR: Discuss whether costs would change significantly

4. Ask individual shippers responses on:

– Their minimum and maximum take-up, in aggregate, of products 1, 2 and 3

– Their lowest and highest frequency of submission of meter reads

5. Collate responses and propose three scenarios each for settlements and Aqs/MPR (as discussed above)

6. Discuss and fine tune scenarios

Step 1 - Scenarios

Workgr

oup

Shippers

Workgr

oup

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Step 2 – Categories of costs

• Steps to identify categories of costs

1. PN Sub-group to have a first stab at discussing categories of costs and setting strawman proposal

2. PN workgroup do discuss and agree categories of costs relevant for PN implementation

• Costs are possibly different for suppliers/shippers and transporters

• Costs may be one-off or ongoing

Strawman proposal - Costs

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Step 3 – Categories of benefits

• Steps to identify categories of benefits

1. PN Sub-group to have a first stab at discussing categories of benefits and setting strawman proposal

2. PN workgroup do discuss and agree categories of benefits relevant for PN implementation

• Benefits are possibly different for suppliers/shippers and transporters

• If quantifiable benefits are insufficient when compared to the costs, need to develop approach for assessing qualitative benefits

Strawman proposal - Benefits

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Step 4 – Distributional effects

• Steps to identify categories of benefits

1. PN Sub-group to discuss methodology for assessing distributional effects and set out strawman proposal

2. PN workgroup do discuss and agree methodology

3. Ask individual organisations for their estimate of the errors

• Proposed methodology:

– 2 types of error if daily meter reads are not used

• Errors in allocation (what sources?)

• Errors in reconciliation (what sources?)

• Bottom-up approach (zero-sum game between providers, but possibly not between segments of customers)

– Assume error for allocation

– Assume error for reconciliation

Strawman proposal – Distributional effects

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Next steps

• Develop a detailed project plan for delivery of subgroup and workgroup outputs• PN sub-group to discuss proposals and strawmans• Develop strawman proposals document – explain in detail approach and

methodologies, provide definitions and examples where possible• PN workgroup to discuss strawman and agree

– methodologies– categories of costs– categories of benefits

• Develop consultation questions• Develop consultation document

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Appendix

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Supplier one-off costs

Step 2 - Costs

Cost Category Low usage

Medium usage

High Usage

Internal process

Internal systems (billing and settlement)

Hardware/systems

Agency costs

Other costs

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Supplier ongoing costs

Step 2 - Costs

Cost Category Low usage

Medium usage

High Usage

Data collection

Internal processes

Other costs

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Transporters one-off costs

Step 2 - Costs

Cost Category Low usage

Medium usage

High Usage

Internal systems (billing)

Internal systems (other)

Registration systems

Process changes

Hardware/systems

Other costs

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Transporters ongoing costs

Step 2 - Costs

Cost Category Low usage

Medium usage

High Usage

Data processing

Invoicing

Other costs

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Supplier benefits

Step 3 - Benefits

Cost Category Low usage

Medium usage

High Usage

Internal process

Better planning of gas purchases

Reduce unidentified units

Other benefits

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Transporter benefits

Step 3 - Benefits

Cost Category Low usage

Medium usage

High Usage

Internal processes

Better network planning

Reduce upstream unidentified units

Other benefits

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