EDCM Development Workshop

EDCM Development Workshop

Welcome

18 November 20101 | Energy Networks Association

Introduction

Andrew Neves

CMG Chair


Agenda


Ofgem

Background and governance

EDCM Workstream summary

Main demand charging issues: • Scaling

• Justifying level of charges

Questions

----------------------- Lunch --------------------

Break Out Sessions

Output from Breakout Sessions

Q & A Session

Next steps

Close

Background / governance

Harvey Jones

DCMF Chair


Background


• Original submission date: 1 September 2010

• DNOs worked to meet Ofgem requirements and to complete by deadline.

• Ofgem consulted in August 2010 and decided to extend the deadline to 2011

• DNOs published ‘EDCM Information Report’ early September

Decision to delay


Revised timetable


Boundary change


Current Boundary for applying site specific charges:

• All customers connected at 22kV or above

• Any customers connected at less than 22kV but on site specific charges prior to 1st April 2010, will continue to be charged site specific charges

• Any new connectee lower than 22kV will receive CDCM tariffs

Boundary change


New Boundary for applying site specific charges:

(effective from 1st April 2012)

• All customers at 22kV or above

• All customers metered at a EHV/HV substation

Note: Customers who are currently on site specific charges who do not meet the above criteria will migrate to CDCM on 1st April 2012.

Ofgem’s decision


• Ofgem decided to move the boundary for “site-specific” customers down to C1 and C2 – i.e. customers connected between 1kV and 22kV directly to the substation

• This decision will be implemented in April 2012 alongside the pre-2005 connected generation arrangements and the EDCM

Treatment of pre-2005 generation

• DPCR5 removed the exemption on pre April 2005 DG from paying use of system charges

• Ofgem issued a decision on 23rd August requiring an unbundled solution

• We await Ofgem decisions on what, if anything should be compensated for

• We also require Ofgem to consider and decide on:– a practicable compensation scheme – a uniform national basis for compensation – clear, definite and secure arrangements for DNOs to recover all

compensation paid (in DPCR6 or otherwise)

16 | Energy Networks Association 18 November 2010

Governance


• Modifications process managed under DCUSA, like any other DCUSA change

• Ofgem has asked for issues and modification ideas to be raised first at DCMF

• DNOs are planning their own resources under the auspices of ENA (Commercial Operations Group)

The open governance process

CDCM issue raised

Recommendationreceived

Issue assessed and developed

Min 15 WD Consultation for standard changes

DNO modeling carried out(note: possibly coordinated by the COG Charging Group)

Review and challenge

Consultation presented to SIG

Initial assessment Report presented to the DCUSA Panel

Response to consultation reviewed & published

ProgressCP?

Added to next SIG

Progression route and timetable conf irmed

Working Group Invitations sent and assessment carried out

Authority decision

letter issued

Change declaration issued to Ofgem

Yes

Potential resource provision f rom COG

Parties vote and issue DCUSA recommendation

Next steps for the DCM SIG


• Set out the process in more detail for the next DCMF.– DCMF SIG terms of reference

– DCMF terms of reference

– COG (CMA) group terms of reference

– Criteria for urgent modifications

– Step by step guidance of the process.

• Establish a chair (seek DNO volunteers) for SIG• Establish a secretariat - Proposal is that this is DNO funded

via the ENA• Establish a meeting regime for the SIG• Hold the first meeting and prioritise the outstanding issues• Report back to the DCMF

EDCM workstream update

Andrew Neves

CMG Chair


Workstream A

Marginal / incremental costing


Marginal / incremental costing


• Each DNO must implement the Forward Cost Pricing (FCP) or the Long Run Incremental Costing methodology (LRIC)

• Network studies used to identify future reinforcement requirements

• Marginal / incremental charges based on future reinforcement requirements– Only capacity-related considered

• Marginal / incremental charges form part of final Use of System tariffs

Overview of methodologies

Long Run Incremental Costing (LRIC)

Forward Cost Pricing(FCP)

Price granularity Node Network group

Reinforcement requirements

Change in NPV of reinforcements due to 0.1MW increment

Cost of reinforcements in 10 yr period

Demand growthFixed at 1% across entire network

Derived from LTDS data


Improvements - LRIC


• Revision of generation modelling in the ‘Minimum Demand’ scenario– generation coincidence within GSPs introduced

• ‘Sense-checking’ of power flows derived from the application of security factors– thresholds applied

• ‘Sense-checking’ of overall recovery of branch reinforcement costs– scaling factors introduced for branches with excessive recovery

Improvements - FCP


• Increased testing of impact of generation across network– increased testing around perimeter of network group in order to

create a more rigorous and reflective generation testing regime

• ‘Sense-checking’ of ‘test size’ generators (TSGs)– ‘circuit’ and ‘substation’ TSGs introduced

– thresholds introduced

Ongoing work


• Development of the ‘Notional Path’ methodology– calculation and apportionment of the EDCM ‘pot’ based on EDCM

customer usage of the EHV network

Workstream B

Development work since September has focused on:•Pre allocation of more identifiable costs, reducing residual revenue allocation when scaling.

•Refined allocation methods (notional path assets used)

•Different approaches to scaling residual:– Fixed adder (Ofgem guidance)– Voltage level adder– Site specific adder

•Changes to generation scaling

•Developing in-year charging options

•Improved definition for sole use assets


Workstream C - Objectives

The workstream C objectives are:

• To assess the volatility of CDCM and EDCM

• To improve the transparency and predictability of CDCM and EDCM

• If necessary, to develop long term products to allow customers/suppliers to mitigate the volatility inherent in the charging methodologies.


Workstream C – EDCM Work

• Completed EDCM Work– EDCM Volatility Analysis produced for September 2010

information pack – on ENA website

• Current EDCM Work– Produce a 1 year volatility analysis once EDCM methodology

is locked down.

– Produce 5 year EDCM prices for each customer by varying Allowed Revenue.

– Volatility assessment to be included in Dec 2010 consultation – dependant on locking down EDCM methodology in November.

– Full volatility analysis and 5 year prices to be provided with EDCM submission in April 2011.

– Standardise EDCM inputs once methodology agreed


Approaches to demand scaling

Shankar Rajagopalan Reckon LLP (ENA/CMG consultant)


Demand charging issues

The purpose of this development workshop is to seek views and feedback on two specific issues:

• Approaches to demand scaling

• Justification of prices


Charges overview (1)

EDCM tariff elements for demand:

• p/kVA/day import capacity charge

• p/kWh consumption at peak time charge

• p/day fixed charge (sole use asset charge)


Charges overview (2)

EDCM charge elements for demand:

•Marginal charges (based on LRIC/FCP)

•Allocation of transmission exit charges

•Allocation of direct and indirect costs

•Allocation of network rates

•Allocation of residual allowed revenue (scaling)


Need to scale

• DNO allowed revenue set by price controls

• DNOs need to recover the revenue from EDCM and CDCM customers

• Marginal charges and allocated costs may not match the revenue entitlement

• Scaling is used to adjust the charges to match the revenue target


Methodology overview (1)

• Each EDCM demand customer is given a notional asset value based on the network levels it uses and its sole use assets.

• The CDCM customers are taken together as a group and given an asset value based on the 500 MW model.

• The DNO’s direct costs, indirect costs, network rates are allocated between EDCM and CDCM users based on these notional asset values.

• Residual revenue (allowed revenue minus these costs) is allocated on the same basis

• The allocation of these elements to EDCM users gives the EDCM revenue target.



FCP/LRIC charges are applied to EDCM demand users.

Identifiable DNO costs are allocated to EDCM demand users.

These include:• Direct operating costs

• Indirect costs

• Network rates

• Transmission exit charges

These are allocated to each EDCM user. The method of allocation varies between options.



The recovery from cost allocation and marginal charges is compared to the target EDCM revenue.

The difference (shortfall or excess) is allocated to EDCM demand users. The process of allocating the difference is called scaling.

We are considering three options:

• Fixed adder• Voltage level adder• Site specific adder




EDCM demand revenue


Breakdown of EDCM demand revenue

-1 0 1 2 3 4 5 6 7 8 9 10 11 12

WPD West

WPD Wales

UKPN SPN

UKPN LPN

UKPN EPN

SSE SHEPD

SSE SEPD

ENW

CE YEDL

CE NEDL

£ millions

Sole use asset charges Transmission exit Direct costs Indirect costs

Network rates LRIC/FCP charges Demand scaling

Fixed adder method

• Direct and indirect costs, network rates and revenue shortfall/excess are allocated to each EDCM demand user.

• This allocation between EDCM demand users does not use assets. It uses a measure of aggregate network use (kVA) calculated as the sum of 50 per cent of agreed import capacity and historical demand at peak-time of all EDCM demand users.

• A single DNO-wide charging rate in £/kVA is calculated and applied to the sum of 50 per cent of agreed import capacity and historical demand at the time of peak of each EDCM demand user.


Voltage level adder

• Direct costs, indirect costs, network rates and revenue shortfall (or excess) are allocated to each EDCM demand user

• This allocation between EDCM demand users does not use assets. Instead, it uses a measure of network use at each network level that is used by the customer

• The measure of network use at the network level of connection is based on agreed import capacities. At higher network levels used, it is based on demand at the time of peak


Site specific adder

• Direct costs, indirect costs, network rates and revenue shortfall (or excess) are allocated to each EDCM demand user.

• The allocation is based on the value of assets used by each EDCM demand user.

• This allocation between EDCM demand does not assume average use of assets at each network level by each user. It uses a “network use factor” for each network level and user.

• This allocation method is consistent with the construction of the EDCM revenue target.


Stylised example

• DNO allowed revenue - £20 million

• Total notional assets - £200 million

– EDCM notional assets - £20 million (£10 million at 132 kV and £10 million at 33 kV)

– CDCM notional assets - £180 million

• EDCM notional assets are 10 per cent of total

• Therefore EDCM demand revenue target is £2 million


Stylised example

The DNO has three EDCM demand customers:


Customer 132 kV customer

33 kV customer 1

33 kV customer 2

Capacity 50,000 kVA 10,000 kVA 40,000 kVA

LRIC charge £2/kVA/year £10/kVA/year £5/kVA/year

Notional assets at 132 kV

£2 million £5 million £3 million


Not used £7 million £3 million

Stylised example

• EDCM demand revenue target is £2 million

• Revenue forecast from the LRIC charge is £400,000

• Total other costs to be allocated are £1 million

• Amount to be recovered from scaling is £600,000


Fixed adder

• £1 million other costs and £600,000 scaling are split between customers based on capacity

• Total EDCM capacity is 100,000 kVA

• Other costs are charged at £10/kVA

• The scaling fixed adder is £6/kVA


Fixed adder

The fixed adder approach (based on kVA alone)


Customer 132 kV customer 33 kV customer 1 33 kV customer 2







LRIC recovery £100,000 £100,000 £200,000

Cost allocation£10/kVA

£500,000 £100,000 £400,000

Scaling£6/kVA

£300,000 £60,000 £240,000

Final charge £900,000 £260,000 £840,000

Voltage level adder

• £1 million other costs and £600,000 scaling are split between network levels based on assets

• Half the EDCM notional assets are at 132 kV and the other half at 33 kV

• Therefore £500,000 other costs and £300,000 scaling at allocated to each network level

• These amounts are allocated to users of the network levels based on capacity


Voltage level adder









LRIC recovery £100,000 £100,000 £200,000

Cost allocation£1 million

£250,000 £150,000 £600,000

Scaling£600,000

£150,000 £90,000 £360,000

Final charge £500,000 £340,000 £1,160,000

Site specific adder

• £10 million of assets at 132 kV is split between the users of the network level based on capacity and network use factors.

• £10 million of assets at 33 kV is split between the users of 33 kV network level based on capacity and network use factors

• Total notional assets are used to allocate £1 million costs and £600,000 scaling


Site specific adder









LRIC recovery £100,000 £100,000 £200,000

Cost allocation£1 million

£100,000 £600,000 £300,000

Scaling£600,000

£60,000 £360,000 £180,000

Final charge £260,000 £1,060,000 £680,000

Summary







Notional assets at 33 kV Not used £7 million £3 million

LRIC recovery £100,000 £100,000 £200,000

Final charge with a fixed adder

£900,000 £260,000 £840,000

Final charge with a voltage level adder

£500,000 £340,000 £1,160,000

Final charge with a site specific adder

£260,000 £1,060,000 £680,000

Scaling objectives

Demand scaling must meet the following objectives:

1.It should recover a fair allocation of allowed revenues from EDCM users.

2.It should preserve forward-looking cost signals from LRIC/FCP.

3.The final charges after scaling should be cost-reflective and justifiable.


Objective 1

“It should recover a fair allocation of allowed revenues from EDCM users.”

•All three approaches allocate the same amount of revenue to the EDCM group as a whole.

•The revenue split between EDCM and CDCM users is done on the basis of assets used (using notional path).

Is this a fair allocation method?


Objective 2

“It should preserve forward-looking cost signals from LRIC/FCP”

•What does preserve signals mean in practical terms?

•We have three candidate definitions.

There may be others. Suggestions are welcome during the breakout session.


Objective 2

Definition 1:

An approach preserves signals if the difference in the final charge between two locations (within the same DNO area) is equal to the difference between their LRIC/FCP charges.


Objective 2

How do the different approaches satisfy definition 1?

•The fixed adder does well if we compare two customers identical in capacities, demand at the time of peak and sole use assets.

•The voltage level adder only does well if the two customers also used the same network levels.

•The site specific adder is the most restrictive. It requires these identical customers to use the same value of network assets.


Objective 2

Definition 2:

An approach preserves signals if the difference between the final charge arising from a reduction in demand at peak by 1 kVA is equal to the FCP/LRIC charge in £/kVA.


Objective 2

How do the different approaches satisfy definition 2?

•Our current proposal is to apply a part of the LRIC/FCP charge (the part that relates to higher network levels) and the transmission exit charge to in-year consumption at the time of peak.

•To preserve signals under definition 2, we would need to:

– Continue to apply a part of the LRIC/FCP charge to in-year consumption.

– Consider applying the local FCP/LRIC charge to in-year consumption as well.

– Apply the transmission exit charge as a capacity charge.


Objective 2

Definition 3:

An approach preserves signals if the difference between the final charge and the recovery from the application of the FCP/LRIC charge represents a fair or cost-reflective allocation of residual revenue across customers.

How do our approaches do if we use definition 3?

To answer this question, we need to ask a further question: Which leads us to objective 3.


Objective 3

“The final charges after scaling should be cost-reflective and justifiable.”

•What do we mean by “cost reflective”?

We take cost-reflective to mean that the final charges are no higher than an allocation of DNO expenditure (or revenue) based on tangible cost drivers.

• Network assets used• Capacity• Demand at peak• Need to reinforce (congestion)

Some costs might not have individual customer based drivers


Objective 3

Fixed adder:

•Allocates residual revenue using a single DNO-wide £/kVA/year charging rate.

•Capacity and peak demand drive residual revenue allocation.

•Customers with higher capacities have a higher allocation (all else being the same)


Objective 3

Voltage level adder:

•Allocates residual revenue using different £/kVA/year charging rates for different network levels.

•Capacity at voltage of connection and peak demand at higher levels are used to calculate the charging rate.

•Takes some account of network level usage. e.g. 132/11 kV connected customers do not pay an allocation in respect of 33 kV circuits.


Objective 3

Site specific adder (unique £/kVA/year for each user):

•Allocates residual revenue on the basis of notional assets used within each network level (using network use factors).

•Method of calculating EDCM revenue target is the same as the method for allocating the costs and residual revenue to EDCM users.

•Customers who use 1 km of 33 kV cable pay less per kVA than customers who use 10 km of 33 kV cable.


Questions on scaling

• What are the advantages and disadvantages of each scaling approach?

• Which one best meets the EDCM objectives?

• Which approach should we adopt?

• Are there other approaches we should consider?


Justification criteria

Oliver Day

WSB


Justification (1)


Justification (2)


Justification (3)


Justification (4)


Justification (5)


Justification (6)


Justification (7)


Justification (8)


Justification (9)


Question and answer session


Lunch

Restart at 1pm


Breakout sessions

Session 1:

•What are the advantages and disadvantages of each scaling approach? (30 minutes)

Session 2:

•Justification of prices. (30 minutes)


Breakout sessions feedback

Feedback from breakout sessions.

•Scaling– Group A– Group B– Group C

•Justification– Group A– Group B– Group C


Next steps

Andrew Neves


Next steps

•Workshop review

•Further work on EDCM development

•Issue consultation


Outline timeline

• DCMF meeting 2 December 2010• Consultation published 10 December • Consultation workshop 13 January 2011• Consultation closes 31 January • DCMF meeting 3 February• EDCM submission deadline 1 April

See ENA web site for details of timeline:

http://energynetworks.squarespace.com/edcm-file-storage/05-edcm-meeting-dates-project-plan-and-project-risks/


Revised plan

83 | Energy Networks Association

Model Lockdown

End of December

April 2011 Submission

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

DCMF 7/10

Trial Justification

Workshop 18/11

Further Development

Consultation Testing

Industry Briefing

Industry Briefing

DCMF 2/12

Workshop 13/1

DCMF 3/2

Prepare Consultation

DCMF TBC

Justification Criteria

18 November 2010

EDCM Development Workshop

Thank you!


EDCM Development Workshop

Documents

energy networks association18

energy networks associationset

aboveall customers

sitespecific customers

aboveany customers

ofgem decisions

ofgem requirements

dcmfandrew nevescmg