A study into the benefits which storage facilities may provide to the UK gas transmission system

A study into the benefits which storage facilities may provide to the UK gas transmission system

Nick WyePresentation to NTS Charging Methodology Forum

19 May 2014

Background•In November 2013 ACER published the Framework Guidelines on rules regarding harmonised EU transmission tariff structures for gas.

•In December 2013 ENTSOG commenced work on drafting a corresponding Network Code. This will conclude end December 2014.

•With regards to storage, ACER deliberately kept the Framework Guideline text ‘open’ to allow flexibility within Member States:

“The Network Code on Tariffs shall specify that, in setting or approving tariffs for entry and exit points from and to gas storage facilities, NRAs shall consider the following aspects:

– The benefits which storage facilities may provide to the transmission system– The need to promote efficient investments in networksNRAs shall also minimize any adverse effect on cross border flows.”

• ENTSOG preference is that decisions on tariffs for entry and exit points, from and to gas storage, should be made on the national level and thus the Code should avoid prescriptive detail.

– Current ENTSOG thinking is to keep Code text close to that in ACER’s Framework Guidelines

The benefits which storage facilities may provide to the transmission system: the 2007 WWA analysis

•In response to these developments, the Gas Storage Operators’ Group (GSOG) asked WWA to update its 2007 analysis which assessed the UK Gas Transmission System Benefits from Gas Storage. •Recap on the 2007 analysis:

– tested the hypothesis that gas storage sites provide a benefit to the transmission system because on peak days they deliver to the system close to consumer demand, thereby reducing the need for pipe and compression capacity between alternative sources of gas and the demand offtakes.

• The 2007 analysis performed consisted of following steps:–Evaluate the role which gas storage facilities play in GB gas supplies on a peak winter day for which the gas transmission system is designed–Identify the transmission investments which would be required to manage peak gas demands and flows if those storage facilities did not exist–Convert those investments into a transmission benefit of gas storage, which can be expressed as an annual cost saving and/or an NPVNo attempt was made to assess any OPEX benefits, as the information required to carry out the analysis is only available to National Grid

•The 2007 results concluded that gas storage facilities provided substantial benefits (in terms of the avoided transportation infrastructure) to GB and quantified that those benefits could be in the range of £24m to over £200m per annum with most concentration around £30m to £40m range.

The benefits which storage facilities may provide to the transmission system: updated analysis

• In order to re-evaluate the findings from the WWA 2007 storage benefits report, it was necessary to redefine the supply merit order employed by National Grid to underpin its Transportation Model (TM).

– The current supply merit order has been changed since 2007. It assumes that no MRS supplies are required to meet 1 in 20 peak day gas demand which, in turn, forms the basis for the determination of the LRMCs used by National Grid to derive NTS TO related capacity charges.

– WWA has carried out supply/demand correlation analysis based on historical flow patterns over the two most recent winter periods

– The analysis shows• a positive correlation between MRS supplies and demand• a negative correlation between LNG supplies and demand• on the peak demand day MRS flows equated to 53% of available withdrawal capacity compared to a LNG

equivalent measure of 20%.

• WWA analysis coupled with the Winter Outlook “cold day” forecasts suggests that 50mcm/d is a more realistic assumption for LNG supplies on a peak day, than the current 121mcm/d which is allowed for in the supply stack.

• This provides a robust justification for a re-examination of the supply merit order currently employed within the TM

The benefits which storage facilities may provide to the transmission system: updated analysis

• Two scenarios were used to test the NTS CAPEX benefits which could be ascribed to storage.

– The first scenario, termed the Amended Base Case, translates the findings in the correlation analysis into relative peak day demand supply contributions, with LNG supplying 551.5 GWh and MRS supplying 783.2 GWh.

– The second scenario termed the High Storage Case provides a more extreme scenario, with peak day LNG supplies set to zero (placed below MRS in the merit order) and MRS supplies at 1334.7 GWh

• Ten different alternate supply scenarios were used to evaluate the impact of ‘no storage’ and thus identify CAPEX benefits for each of the Cases.

– The results for the Amended Base Case show a range of annual savings of £3m to over £197m with most concentration around the £40m to £65m range.

– The results for the High Storage Case show a range of annual savings of £6m to over £312m with most concentration around the £50m to £70m range.

The benefits which storage facilities may provide to the transmission system: conclusions and recommendations

• EU Tariffs Framework Guideline makes special provision for the treatment for storage

• Gas storage sites do provide a benefit to the GB transmission system because on peak days they deliver to the system close to consumer demand, thereby reducing the need for pipe and compression capacity between alternative sources of gas and the demand”

• In summary, WWA’s recommendations are as follows:– i) Consider proposing changes to the Transportation Model supply merit order;– ii) Consider introducing “bespoke” charging arrangements for storage related transmission

charges. Options include:• potential for negative capacity charges (as in electricity transmission) or simply removing all

transmission charges currently applied at storage;• application of ex-ante credits for storage flows akin to those applied at DN entry points;• potential for the application of a “corrective” ex post credit to storage users delivering gas on peak

days (e.g. using a mechanism akin to electricity transmission ‘triad’).

The benefits which storage facilities may provide to the transmission system: Back-up slides

Updated Analysis – underlying supply assumptions

SourceOriginal TM assumption Base

Case flowsMarch 2014 QSEC auction TM assumptions Base Case flows

GWh % of total GWh % of totalBacton 1492.5 26% 1780.0 29%Easington (less Rough) 629.8 11% 863.9 14%

Isle of Grain LNG 140.8 2% 542.2 9%

Milford Haven 0 0% 792.5 13%St Fergus 1232.7 21% 1107.9 18%Teesside 341.1 6% 445.1 7%Other Terminals 579.3 10% 148.6 2%

LNG Storage 526.1 9% 0 0%Underground Storage 844.8 15% 455.0 7%

TOTAL 5787.1 100% 6135.1 100%• NGG modified the basis upon which it “allocated supply” to meet demand in 2009.• The replacement supply stack: 1) Beach 2) Interconnectors 3) LRS 4) LNG 5) MRS 6) SRS

• Comparing 2007 & 2014• LNG increased from 2% to 22%• Underground storage decreased from 15% to 7% (just LRS Rough)

• Carrying out analysis on this basis would not produce any positive results & the structure of the supply stack is highly questionable

Alternative Supply Merit Order – correlation analysis

Interconnectors LNG Total Storage MRS RoughSample 369 369 369 369 369Correlation coeff. r

0.77 -0.02 0.75 0.51 0.76

Stacked representation of supplies (mcm) - 1st Oct 2012 and 23rd May 2013 and 1st Oct 2012 to 11th Feb 2014

“If we look at the “peak day” during the period, when demand was 393 mcm, supplies from LNG were 30 mcm and 53 mcm from MRS. Perhaps more telling is the comparative use of capacity – LNG supplies were at 20% of aggregate peak available capacity, in contrast MRS supplies were at 53%. ”

Alternative Supply Merit Order – basis for change

  2012/13 actual 2013/14 forecastmcm/d Range 350+ Range Range Cold DayUKCS 76 - 104 79 - 102 76 - 110 99Norway 37 - 129 90 - 129 60 - 130 110BBL 10 - 45 18 - 45 10 - 45 40IUK 0 - 74 7 - 74 0 - 74 45LNG Imports 8 - 74 8 - 74 8 - 100 50Total 131 - 426 202 - 424 154 - 459 344Storage 0 - 109 9 - 109 0 - 135  Total incl. Storage 131 - 535 211 - 533 154 - 594  

Table 5 – National Grid winter 2013/14 Cold Day forecast

“This shows that LNG imports are expected to be around 50 mcm on a 344 mcm ‘Cold Day’. Our analysis of actual data outlined above showed that. on the highest demand day seen over the 2012/13 winter and 2013/14 winter period to date (393 mcm), LNG imports were only at 30 mcm. As a consequence we believe that around 50 mcm is more likely to be the supply from LNG imports on a 1 in 20 peak day. rather than on a 344 mcm demand day. This is the assumption we have used for the initial amended supply stack (Amended Base Case).Note the table as given by National Grid does not contain any forecast figures for Storage.”

“While the correlation analysis does not consider peak day supply sources, as required by the Transportation Model, it does show that MRS facilities delivered gas into the NTS on the highest demand days experienced in the period examined. Under more extreme conditions, it would be reasonable to expect that MRS facilities will deliver supply. In fact, based on our analysis combined with a wider appreciation of the operation of the international gas market it would be rational to propose that MRS facilities possess a greater propensity to supply volumes during periods of high demand than LNG and arguably, interconnectors.”

Alternative Supply Merit Order – Amended Base Case scenario

MRS site2013 TYS Deliverability

figure for 2016/17

Resultant prorated MRS supplies and LNG supplies used in TM - Base Case 1

GWh GWhGarton 440 241.0Hatfield Moor 22 12.0Hole House Farm 121 66.3Hill Top Farm (Hole House Farm)

16590.4

Holford (Cheshire) 242 132.5

Stublach (Cheshire) 165 90.4

Hornsea 198 108.4Barton Stacey 77 42.2Total MRS 1430 783.2Isle of Grain 224.1Milford Haven 327.5Total LNG Importation 551.5

TOTAL 1334.7Total amount of storage replacement gas in the Amended Base Case of 1238.2 GWh/d (783.2 GWh/d from table for MRS, plus 455.0 GWh/d for Rough).

Note that 1334.7GWh = total supply from LNG in current peak day merit order

Pro-rated share of the assumed current LNG supply

Alternative Supply Merit Order – High Storage Case scenario

MRS site2013 TYS Deliverability

figure for 2016/17

Resultant prorated MRS supplies and LNG

supplies used in TM - Base Case 2

GWh GWhGarton 440 410.7Hatfield Moor 22 20.5Hole House Farm 121 112.9Hill Top Farm (Hole House Farm) 165 154.0

Holford (Cheshire) 242 225.9Stublach (Cheshire) 165 154.0

Hornsea 198 184.8Barton Stacey 77 71.9Total MRS 1430 1334.7Isle of Grain 0Milford Haven 0Total LNG Importation 0

TOTAL 1334.7

.

100% share of the assumed current LNG supply

Total amount of storage replacement gas in the High Storage Case of 1789.7 GWh/d (1334.7 GWh/d from table for MRS, plus 455.0 GWh/d for Rough).

Investment Savings Analysis – replacement gas scenarios

.

Repeat scenarios from 2007 study: • storage replacement gas is sourced at only one of the six main terminals• storage replacement gas is sourced in equal volume at each of the terminals;• storage replacement gas is sourced in equal volume from the Bacton, Easington and Teesside terminals only;• storage replacement gas is sourced in equal volumes only via Bacton and TeessideNew scenario for 2014:In addition, WWA have considered a further alternative scenario, such that the maximum supply being assumed at the relevant entry points, if storage sites were unable to deliver gas onto the system on the 1 in 20 peak day, has been capped to ensure that it does not exceed the relevant obligated Entry Capacity level, as shown below.

• Bacton (1783.4 GWh/d)• Easington (1407.15 GWh/d)• Teesside (445.09 GWh/d)• St Fergus (1607.7 GWh/d)• Isle of Grain (699.68 GWh/d)• Milford Haven (950 GWh/d).

TerminalAmended Base

Case additional gasHigh Storage Case

additional gasGWh GWh

Bacton 3.42 3.42Easington 308.69 446.57Teesside 0 0St Fergus 308.69 446.57Isle of Grain 308.69 446.57Milford Haven 308.69 446.57TOTAL 1238.2 1789.7

Table 8 – Storage replacement gas capped at obligated levels

Investment Savings Analysis – Amended Base Case results

All values shown in £million capital Bacton Easington Isle of Grain Milford Haven St Fergus Teesside Total

Single Source Replacement of Storage Gas

100% £ 304m100% £ 435m

100% £ 27m100% £ 630m

100% £ 1,921m100% £ 688m

Replacement Gas Sourced in proportions: 16.7% 16.7% 16.7% 16.7% 16.7% 16.7% £ 404m

33.3% 33.3% 0.0% 0.0% 0.0% 33.3% £ 376m50% 0.0% 0.0% 0.0% 0.0% 50% £ 390m

Replacement Gas capped at obligated levels proportions: 0.3% 24.9% 24.9% 24.9% 24.9% 0.0% £ 458m

All values shown in £million annual cost Bacton Easington Isle of Grain Milford Haven St Fergus Teesside Total

Single Source Replacement of Storage Gas

100% £ 31m100% £ 45m

100% £ 3m100% £ 65m

100% £ 197m100% £ 71m

Replacement Gas Sourced in proportions: 16.7% 16.7% 16.7% 16.7% 16.7% 16.7% £ 41m

33.3% 33.3% 0.0% 0.0% 0.0% 33.3% £ 39m50% 0.0% 0.0% 0.0% 0.0% 50% £ 40m

Replacement Gas capped at obligated levels proportions: 0.3% 24.9% 24.9% 24.9% 24.9% 0.0% £ 47m

Amended Base Case: Total CAPEX savings

Amended Base Case – Annual CAPEX savings

Note: As in 2007 we removed the 0.0001p/kwh floor and used an updated Expansion Constant

Investment Savings Analysis – High Storage Case results

All values shown in £million capital Bacton Easington Isle of Grain Milford Haven St Fergus Teesside Total

Single Source Replacement of Storage Gas

100% £ 470m100% £ 665m

100% £ 54m100% £ 581m

100% £3,042m100% £ 1,138m

Replacement Gas Sourced in proportions: 16.7% 16.7% 16.7% 16.7% 16.7% 16.7% £ 359m

33.3% 33.3% 0.0% 0.0% 0.0% 33.3% £ 612m

50% 0.0% 0.0% 0.0% 0.0% 50% £ 680mReplacement Gas capped at obligated levels proportions: 0.2% 25.0% 25.0% 25.0% 25.0% 0.0% £ 359m

All values shown in £million annual cost Bacton Easington Isle of Grain Milford Haven St Fergus Teesside Total

Single Source Replacement of Storage Gas

100% £ 48m100% £ 68m

100% £ 6m100% £ 60m

100% £ 312m100% £ 117m

Replacement Gas Sourced in proportions: 16.7% 16.7% 16.7% 16.7% 16.7% 16.7% £ 37m33.3% 33.3% 0.0% 0.0% 0.0% 33.3% £ 63m

50% 0.0% 0.0% 0.0% 0.0% 50% £ 70mReplacement Gas capped at obligated levels proportions: 0.2% 25.0% 25.0% 25.0% 25.0% 0.0% £ 37m

High Storage Case: Total CAPEX savings

High Storage Case – Annual CAPEX savings

Pricing Sensitivities – storage exit

Original TM run

Original TM data, remove

min price

Amended Base Case

Amended

Base Case remove

min price

HighStorage Case

High Storage

Caseremove

min price

Avonmouth Max Refill 0.0223 0.0243 0.0249 0.0274 0.0266 0.0301Barton Stacey Max Refill (Humbly Grove) 0.0233 0.0252 0.0223 0.0248 0.0247 0.0282Caythorpe 0.0001 -0.0001 0.0001 -0.0039 0.0001 -0.0046Cheshire (Holford) 0.0219 0.0238 0.0174 0.0199 0.0089 0.0124Dynevor Max Refill 0.0037 0.0057 0.0224 0.0249 0.0281 0.0317Rough Max Refill 0.0001 -0.0052 0.0001 -0.0056 0.0001 -0.0030Garton Max Refill (Aldbrough) 0.0001 -0.0033 0.0001 -0.0050 0.0001 -0.0024Glenmavis Max Refill 0.0001 -0.0049 0.0001 -0.0062 0.0001 -0.0125Hatfield Moor Max Refill 0.0010 0.0029 0.0001 0.0021 0.0008 0.0043Hill Top Farm (Hole House Farm) 0.0225 0.0244 0.0183 0.0208 0.0096 0.0131Hole House Max Refill 0.0225 0.0244 0.0183 0.0208 0.0096 0.0131Hornsea Max Refill 0.0001 -0.0015 0.0001 -0.0054 0.0001 -0.0038Partington Max Refill 0.0212 0.0232 0.0194 0.0219 0.0109 0.0144Stublach (Cheshire) 0.0219 0.0238 0.0174 0.0199 0.0089 0.0124Saltfleetby Storage (Theddlethorpe) 0.0001 -0.0015 0.0001 -0.0020 0.0001 0.0006Average of the Storage Offtake Point Exit price range 0.0107 0.0107 0.0107 0.0103 0.0086 0.0089Minimum of Storage Offtake Exit price range 0.0001 -0.0052 0.0001 -0.0062 0.0001 -0.0125Maximum of Storage Offtake Exit price range 0.0233 0.0252 0.0249 0.0274 0.0281 0.0317Standard deviation for the Storage Offtake Point Exit price range 0.0112 0.0133 0.0105 0.0138 0.0102 0.0136

Storage Offtake Point

Exit Price (p/kWh/day)

-0.0150

-0.0100

-0.0050

0.0000

0.0050

0.0100

0.0150

0.0200

0.0250

0.0300

0.0350

Original TM run Original TM data, remove min price LNG supplies 50 mcm/d, MRS supplies 71 mcm/d

LNG supplies 50 mcm/d, MRS supplies 71 mcm/d & remove min

price

No LNG on replace with 121 mcm/d from MRS

No LNG on replace with 121 mcm/d from MRS & remove min price

p/kW

h/d

Impact of Changing Supply data and removing min price restriction on Storage Offtake Point Exit price variation

Average of the Storage Offtake Point Exit price range Minimum of Storage Offtake Exit price range Maximum of Storage Offtake Exit price range Standard deviation for the Storage Offtake Point Exit price range

Analysis - observations

“The results for the Amended Base Case show a range of annual savings of £3m to over £197m with most concentration around the £40m to £50m range. The results for the High Storage Case show a range of annual savings of £6m to over £312m with most concentration around the £50m to £70m range.

“The first main observation to make is that the TM is structured in such a way that it is exceedingly sensitive to changes in assumptions. This is a well understood feature of the TM, but the results produced from this analysis highlight that any modifications to the supply and demand flow assumptions produce extraordinary swings in prices.Secondly, and perhaps less surprising, is that removing the price floor leads to greater swings at each individual system point and higher standards of deviation.Thirdly, when considering those scenarios which include a floor price, the impacts are generally more favourable in relation to exit charges than entry charges for MRS sites.Finally, the analysis does not consider the impacts on overall levels of revenue and by extension does not consider the potential impacts on the TO commodity charge. “

“Gas storage sites do provide a benefit to the transmission system because on peak days they deliver to the system close to consumer demand, thereby reducing the need for pipe and compression capacity between alternative sources of gas and the demand.”

Alternative Charging Methodologies

GB Power Transmission“In the case of the GB electricity there are reasonable analogies to be made if one views gas deliveries into the system as ‘negative demand’ - this is conceptually similar to triad avoidance in electricity (consider the analogous behaviour of embedded generators in electricity). For example an annual capacity charge payment could be made to users based on the average delivery made at a relevant entry point during the year 1 April to 31 March on days:• where overall system demand is greater than 85% of the 1 in 20 peak demand; or• where a) does not apply in a given year, the highest three demand days between (say) November and February “

Gas Distribution Networks“The gas DN entry capacity arrangements are less clear-cut, however, they do permit the application of negative charges based on the premise that the connected entry points provide benefits to the local network. The charge/credit is applied in the form of a commodity charge even though the formula employed to calculate the rate includes elements which are essentially capacity related i.e. the ECN credit and the LDZ credit. This approach to charging for capacity-related elements could be considered in relation to charges applied at storage”

Overview of transportation tariffs at EU storage facilities

Member State

TSO Specific Transportation Tariff For Storage

Tariff characteristics summarised

UK National Grid yes

Potential to use product with Zero reserve price, commodity charge only applied for gas used by the storage facility

DE Open Grid Europe yes Entry & Exit tariffs reduced 50%

DE Thyssengas yes >33%% reduction exit, small

reduction entryIT SNAM Rete

Gas yes More than 60% reduction entry and exit

FR GRTGaz yes More than 80% reduction on entry and exit updated

NL GTS yes 25% reduction for entry and exit tariffs

ES Enagas yes Zero exit tariff and zero entry tariffsPT REN yes Entry tariff reduced by 97% no

updateBE Fluxys yes Exit tariff reduced by about 50%, no

reduction of entry tariff updatedPol Gaz-

System yes Up to 80% discount on fixed charges and 100% on variable

Hun FGSZ yes 100% reduction on exit and @40% reduction on entry

Cro Plinacro yes 90% reduction on entry, 100% on exit

Cze Net4gas yes Up to 98% on exit and 90% on commodity