UK energy regulator Ofgem has approved system operator National Grid's proposal to change the way its gas revenues are calculated going forwards.

The regulator's decision today was despite a rejection of the proposal by the panel which advises Ofgem on modifications to gas transmission rules.

The implementation of the proposal — which called for the inclusion of revenues collected from within-day and interruptible entry capacity in National Grid's allowed revenue stream — will address one of the key causes of National Grid's under-recovery in revenues so far this gas year, Ofgem said.

This will allow the system operator to revise down its entry revenue recovery charge (RRC). The capacity-based fee, levied on firms without long-term contracts signed before 6 April 2017, was lifted to 2.1p/th for February-June from zero earlier in the gas year.

The proposed change will to some extent reduce the volatility and unpredictability of charges this year and on an enduring basis, Ofgem said.

National Grid's proposal to reduce the RRCs with short notice is justified as it is a one-off opportunity to remedy a significant source of market disruption, Ofgem said.

And many of the issues raised in the three-day consultation, while important, are beyond the scope of the modification proposal, the regulator ruled.

The regulator noted market participants' concerns over National Grid's request to be granted a one-off relaxation of its obligation to provide two months' notice of pricing changes. National Grid should aim to provide a minimum of 30 days' notice, with five business days the minimum allowed under the modification proposal, Ofgem said.

Existing arrangements are discriminatory and have adverse consequences for competition, Ofgem said. They mean that different users face different costs for the same gas transmission service, with some users being paid to use the national transmission system and others facing particularly high costs.

The implementation of the proposal will reduce barriers to entry for gas being shipped to the UK and mitigate the risk of early storage withdrawals, the regulator said. This will in turn increase security of supply, Ofgem said.

Advice on RRC changes

Ofgem has encouraged National Grid to factor in more than just today's decision when updating its RRCs.

The proposed implementation of RRCs for five months at entry and two months at exit could exacerbate the negative effects, Ofgem warned in a letter to National Grid. National Grid should instead consider applying it over a longer period of time, the regulator said.

National Grid should consider the effect on prices for this and future gas years when deciding where to set its RRCs, and should aim as far as possible to avoid any other interventions which could "further undermine market confidence", the regulator said.

The system operator should act on the lessons learned to "achieve robust forecasting and limit unnecessary volatility" in pricing arrangements in future gas years, Ofgem said. And it should ensure that adequate information is made available to the market to allow it to make reasonable forecasts about future prices and understand the uncertainties involved.

Ofgem also advised National Grid to take a flexible approach to addressing under-recovery in this and future gas years, including licence flexibility with regard to the timing of allowed revenue recovery. And it called on the system operator to consider the effect of changes to RRCs on all users, including potential windfall gains and losses and ultimately the effect on consumers.

source:argusmedia.com