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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


The open governance process

The open governance process


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


    Methodology overview 4

    Methodology overview (4)


    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 criteria

    Justification criteria

    • Oliver Day

    • WSB


    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


    Edcm development workshop

    Question and answer session

    18 November 2010

    76 | Energy Networks Association


    Edcm development workshop

    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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