OFGEM has issued a ‘minded to’ final consultation on proposed amendments to the gas transmission charging regime contained in the Uniform Network Code (UNC) dated 23rd December 2019 (the UNC678 Consultation). A minded to decision is issued by Ofgem setting out its intended actions prior to a ‘final decision’ being made, it offers the market a final say on proposed changes.
The UNC amendments change how gas capacity charges are calculated, moving from a system based on network users paying for the ‘right’ to flow gas onto and off the National Transmission System (NTS) (i.e. capacity charges) plus top up commodity charges, to a Reference Price Methodology (RPM) based on what is termed a ‘Postage Stamp’ methodology. This means that the new pricing structure will not fluctuate because of distance between entry/exit points.
Protections have been included to exempt ‘existing contracts’ from the new regime.
Why are changes being made?
Ofgem state that the UNC is being adapted for two primary reasons:
- The first, and most important, is to align the UNC with Commission Regulation (EU) 2017/460 of 16 March 2017 establishing a network code on harmonised transmission tariff structures for gas (TAR NC); and
- The second is to facilitate the recovery of more revenue by National Grid Gas Transmission (NGGT).
Consultations on the required changes have been taking place by Ofgem sine 2015, the latest set of eleven proposals (UNC678/A/B/C/D/E/F/G/H/I/J) were published in May 2019. From these, Ofgem has determined that only two of them are compatible with TAR NC (UNC 678 and UNC678A) and has issued a ‘minded to’ decision specifying that its preferred approach is to amend the UNC in line with UNC678A.
What are the changes?
UNC678A specifies that the capacity charges under the new regime should be calculated using a ‘Postage Stamp’ approach in the RPM. This approach applies the same reference price per unit of capacity at all entry and exit points across the NTS and does not include any pricing fluctuations linked to the distance between entry and exit points on the NTS.
New indicative capacity prices for all of the various entry and exit points in the NTS are set out in Appendix 7 to the consultation.
Protections for existing contracts
Existing contracts (which are those which were concluded prior to 6 April 2017) are expressly excluded from the new charging regime “…where such contracts or capacity bookings foresee no change in the levels of the capacity- and/or commodity-based transmission tariffs except for indexation, if any” (Article 35, TAR NC). This grandfathering provision has been transposed directly from TAR NC.
Therefore, holders of ‘existing contracts’ will pay a lower entry capacity price until those contracts expire. There’s also a proposal for a transitional arrangement for contracts dated between February and December 2018 if prices increase by 5%.
The consultation process
The consultation was opened on 23 December 2019 and responses are due by 24 February 2020 (the Deadline).
Ofgem will publish responses a month after the Deadline. Two months after the Deadline the Agency for the Cooperation of Energy Regulators (ACER) will publish and send to Ofgem and the European Commission, an analysis on whether the proposals are compatible with TAR NC. Within five months from the Deadline, Ofgem will publish a final (motivated) decision. It is unclear how Brexit will impact this timetable, more clarity on the post Brexit regime will likely be provided in Ofgem’s final decision. The changes will still likely be implemented regardless of any Brexit impact in order to meet the second objective, to facilitate the recovery of more revenue by NGGT, as mentioned above.
If approved, the new measures will be implemented on 1st October 2020 in time for the start of the new gas year.
The information contained in this Client Alert is intended to be a general guide only and not to be comprehensive, nor to provide legal advice. You should not rely on the information contained in this Client Alert as if it were legal or other professional advice.
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