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EDCM Development Workshop. Welcome. 18 November 2010. 1 | Energy Networks Association. Introduction. Andrew Neves CMG Chair. 18 November 2010. 2 | Energy Networks Association. Agenda. 18 November 2010. Ofgem Background and governance EDCM Workstream summary

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edcm development workshop
EDCM Development Workshop

Welcome

18 November 2010

1 | Energy Networks Association

introduction
Introduction

Andrew Neves

CMG Chair

18 November 2010

2 | Energy Networks Association

agenda
Agenda

18 November 2010

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

3 | Energy Networks Association

background governance
Background / governance

Harvey Jones

DCMF Chair

18 November 2010

9 | Energy Networks Association

background
Background

18 November 2010

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

10 | Energy Networks Association

decision to delay
Decision to delay

18 November 2010

11 | Energy Networks Association

revised timetable
Revised timetable

18 November 2010

12 | Energy Networks Association

boundary change
Boundary change

18 November 2010

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

13 | Energy Networks Association

boundary change1
Boundary change

18 November 2010

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.

14 | Energy Networks Association

ofgem s decision
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

18 November 2010

15 | Energy Networks Association

treatment of pre 2005 generation
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)

18 November 2010

16 | Energy Networks Association

governance
Governance

18 November 2010

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)

17 | Energy Networks Association

next steps for the dcm sig
Next steps for the DCM SIG

18 November 2010

  • 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

19 | Energy Networks Association

edcm workstream update
EDCM workstream update

Andrew Neves

CMG Chair

18 November 2010

20 | Energy Networks Association

workstream a
Workstream A

Marginal / incremental costing

18 November 2010

21 | Energy Networks Association

marginal incremental costing
Marginal / incremental costing

18 November 2010

  • 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

22 | Energy Networks Association

overview of methodologies
Overview of methodologies

18 November 2010

23 | Energy Networks Association

improvements lric
Improvements - LRIC

18 November 2010

  • 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

24 | Energy Networks Association

improvements fcp
Improvements - FCP

18 November 2010

  • 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

25 | Energy Networks Association

ongoing work
Ongoing work

18 November 2010

  • Development of the ‘Notional Path’ methodology
    • calculation and apportionment of the EDCM ‘pot’ based on EDCM customer usage of the EHV network

26 | Energy Networks Association

workstream b
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

18 November 2010

27 | Energy Networks Association

workstream c objectives
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.

18 November 2010

28 | Energy Networks Association

workstream c edcm work
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

18 November 2010

29 | Energy Networks Association

approaches to demand scaling
Approaches to demand scaling
  • Shankar Rajagopalan
  • Reckon LLP (ENA/CMG consultant)
demand charging issues
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
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)

18 November 2010

32 | Energy Networks Association

charges overview 2
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)

18 November 2010

33 | Energy Networks Association

need to scale
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
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.
methodology overview 2
Methodology overview (2)

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.

18 November 2010

36 | Energy Networks Association

methodology overview 3
Methodology overview (3)

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

18 November 2010

37 | Energy Networks Association

edcm demand revenue
EDCM demand revenue

18 November 2010

39 | Energy Networks Association

fixed adder method
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.

18 November 2010

40 | Energy Networks Association

voltage level adder
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

18 November 2010

41 | Energy Networks Association

site specific adder
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.

18 November 2010

42 | Energy Networks Association

stylised example
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

18 November 2010

43 | Energy Networks Association

stylised example1
Stylised example

The DNO has three EDCM demand customers:

18 November 2010

44 | Energy Networks Association

stylised example2
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

18 November 2010

45 | Energy Networks Association

fixed adder
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

18 November 2010

46 | Energy Networks Association

fixed adder1
Fixed adder

The fixed adder approach (based on kVA alone)

18 November 2010

47 | Energy Networks Association

voltage level adder1
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

18 November 2010

48 | Energy Networks Association

voltage level adder2
Voltage level adder

18 November 2010

49 | Energy Networks Association

site specific adder1
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

18 November 2010

50 | Energy Networks Association

site specific adder2
Site specific adder

18 November 2010

51 | Energy Networks Association

summary
Summary

18 November 2010

52 | Energy Networks Association

scaling objectives
Scaling objectives
  • Demand scaling must meet the following objectives:
  • It should recover a fair allocation of allowed revenues from EDCM users.
  • It should preserve forward-looking cost signals from LRIC/FCP.
  • The final charges after scaling should be cost-reflective and justifiable.
objective 1
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
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 21
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.

18 November 2010

56 | Energy Networks Association

objective 22
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.

18 November 2010

57 | Energy Networks Association

objective 23
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.

18 November 2010

58 | Energy Networks Association

objective 24
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.

18 November 2010

59 | Energy Networks Association

objective 25
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
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 31
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 32
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 33
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
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?

18 November 2010

65 | Energy Networks Association

justification 1
Justification (1)
  • Ofgem asked DNOs:
  • “To make changes to the methodology as required following sense checks, to ensure they are able to justify the level of charges - particularly where charges are moving significantly (either up or down) from current levels.”
justification 2
Justification (2)
  • Ability to justify becomes more of a requirement depending whether a service provided is seen as ‘good’ or quantifiable value or just a component cost.
  • Sometimes explanation is only required for the movement in charges.
  • Are we trying to explain value for money or comparative cost or just why the charges have moved?
                  • How is value for money measured?
                  • What comparators could be used?
                  • Why have charges moved?
justification 3
Justification (3)

How is value for money measured?

  • Security of supply
  • Assets used
  • Capacity required
  • Peak demand
justification 4
Justification (4)

What comparators could be used?

  • Some purchases have equivalent benchmarks – similar specification cars etc
  • With other purchases buyer experience seem to be the main comparator – previous bills etc
  • When unsure charges can be broken down into component parts to provide other benchmarks – hourly rates or materials used
justification 5
Justification (5)

Why have charges moved?

  • Typically charges move due to changing economic factors
  • The energy market is changing
  • Considerable investment planned and methodologies have to adapt
  • Focus on economic principles for allocation of cost rather than just cost
justification 6
Justification (6)
  • Ofgem focus on current levels of charges:
  • “To make changes to the methodology as required following sense checks, to ensure they are able to justify the level of charges - particularly where charges are moving significantly (either up or down) from current levels.”
                  • Should current charges be seen as the starting benchmark?
                  • Are current charges suitable?
justification 7
Justification (7)
  • Does having a breakdown of component parts help understand charges?
                  • What component parts should be detailed?
                  • Sole Use charges
                  • Marginal charges
                  • Transmission exit charges
                  • Business rates
                  • Direct and some indirect costs
                  • Scaling
                  • Replacement
justification 8
Justification (8)

A key determinant of charges is the size of allowed revenue and how the allowed revenue is allocated.

  • Do we need to justify the EDCM revenue?
  • Size of allowed revenue as set?
  • Amount of revenue between EDCM and CDCM?
  • How do we do this?
justification 9
Justification (9)

A method of justifying maybe through determining suitable benchmarks

  • How do we establish appropriate benchmarks?
  • Current charges – different methodologies!
  • Standard alternate method e.g. notional path
  • Extended CDCM charges
  • Per unit comparators i.e. £/kVA
  • CO2 emissions
slide76

Question and answer session

18 November 2010

76 | Energy Networks Association

slide77

Lunch

Restart at 1pm

18 November 2010

77 | Energy Networks Association

breakout sessions
Breakout sessions

Session 1:

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

Session 2:

  • Justification of prices. (30 minutes)

18 November 2010

78 | Energy Networks Association

breakout sessions feedback
Breakout sessions feedback

Feedback from breakout sessions.

  • Scaling
      • Group A
      • Group B
      • Group C
  • Justification
      • Group A
      • Group B
      • Group C

18 November 2010

79 | Energy Networks Association

next steps
Next steps

Andrew Neves

18 November 2010

80 | Energy Networks Association

next steps1
Next steps
  • Workshop review
  • Further work on EDCM development
  • Issue consultation

18 November 2010

81 | Energy Networks Association

outline timeline
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/

18 November 2010

82 | Energy Networks Association

revised plan
Revised plan

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

Volatility Analysis

Methodology Review

Industry Briefing

Justification Criteria

Generation in Generation Dominated Areas

Benchmarking / Justification

DCMF 7/10

IDNO Networks

Further Development

Workshop 18/11

Trial Justification

Model Lockdown

Prepare Consultation

WSC Review Volatility Analysis

DCMF 2/12

Consultation Testing

Consult 10/12

Testing / Quality Review

Documentation

End of December

11/12 Prices Modelling for Submission

DCUSA Review

Workshop 13/1

DCMF 3/2

Review

DCUSA Review

DCMF TBC

Publish Responses

Document

Industry Briefing

April 2011 Submission

18 November 2010

83 | Energy Networks Association

edcm development workshop1
EDCM Development Workshop

Thank you!

18 November 2010

84 | Energy Networks Association

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