Further enhancements to gas demand flexibility mechanism

Changes have been made to the gas demand flexibility mechanism to remove barriers which were putting off eligible consumers.

Ofgem has approved a package of further enhancements to the gas demand flexibility mechanism introduced in 2016, including the introduction of a new five-day-ahead product.

The modifications to the Uniform Network Code (UNC) will also extend eligibility to provide demand-side response to a wider pool of consumers.

Back in February 2016, Ofgem approved the modification UNC504 to facilitate the creation of a demand-side response mechanism for large consumers of gas. The mechanism enables these consumers to receive greater financial compensation for voluntarily curtailing their demand than they would be if they were involuntary curtailed during a supply shortfall.

After National Grid Gas (now National Gas Transmission) received no offers during the ‘Beast from the East’ weather event in March 2018, the company proposed the modification UNC822, which introduced separate ‘option’ and ‘exercise’ stages to the procurement process, with separate payments for each. The modification was approved by Ofgem in October last year.

Each year, National Gas Transmission invites consumers, via their gas shippers, to offer demand-side response quantities over the next three winter periods. The options they offer can be exercised when a Margins Notice is issued or a Gas Balancing Notification is in effect.

As part of its decision on UNC822, Ofgem encouraged National Gas Transmission to explore ways to broaden the participation of consumers and maximise volumes of demand-side response (DSR).

Following a review of the arrangements, the company proposed the modification UNC845 in April. The modification, which has now also been approved by the regulator, introduces a new five-day-ahead (D-5) in addition to the existing day-ahead (D-1) and within-day products.

The D-5 product allows consumers to offer demand reduction with a five-day lead time between the option being exercised and the day on which a supply deficit is expected.

National Gas Transmission will be able to exercise these options if it is forecasting a deficit of at least 14 million cubic metres of gas over the day in question.

The modification also allows consumers to offer more than one product, from which the company may choose. Within-day options may be prioritised over D-1 options, which may in turn be prioritised over D-5 options.

Explaining its decision to approve the modification, Ofgem said some large industrial gas consumers have stated that they were “willing to reduce their demand voluntarily but were unable to achieve such demand reduction within the timescales required by the current DSR arrangements. The introduction of a D-5 DSR product will create a route for those consumers to participate in DSR.”

Arjan Geveke, director of the Energy Intensive Users Group, told Utility Week the D-5 product will provide “more certainty and clarity to large gas users and – as some large manufacturing processes cannot quickly turn off and on – the longer lead time allows them to adjust… Indeed, some of my members were considering participating but the day-ahead, or even within day, notification put them off.”

Ofgem noted concerns that imbalances forecast five days in advance are subject to greater uncertainty, adding: “The demand reduction triggered at D-5 would be exercised on day D even if the market fundamentals have improved by then.

“This will be funded by users through balancing neutrality which may then be passed on to consumers, potentially leading to higher wholesale prices than would otherwise be the case.”

The regulator said it therefore considers it appropriate for the volumes and prices associated with the exercise of D-5 options to be excluded from imbalance cash-out calculations: “This will minimise distortions and unintended consequences on existing market arrangements.”

Wider eligibility and options

UNC845 also extends eligibility to more consumers. The gas demand flexibility mechanism was previously only open to class 1 consumers. The modification will also enable class 2 consumers to submit offers so long as they are able to provide at least 100,000kWh of demand reduction per day. Ofgem said there are currently 563 class 1 consumer and 701 class 2 consumers connected to gas distribution networks.

Furthermore, the modification allows consumers to specify a minimum quantity of demand reduction as part of their offers and specify restrictions to the days on which options can be exercised. In the case of the latter, they may specify the maximum number of days on which National Gas Transmission (NGT) may exercise an option during a winter period as well as a minimum number of days between options being exercised.

Consumers were previously able to submit multiple different quantities of demand reduction as part of their offers. The modification amends these rules so consumers can submit one daily quantity of gas consumption per product that they will not be exceed if the option is exercised.

For the purposes of assessing offers and determining option fees, the quantity of demand reduction will be calculated as the difference between consumers’ average daily demand over the previous winter period (excluding any days on which they were instructed to reduce their consumption) and the daily consumption limit they have offered. Exercise fees will be determined on the same basis if a D-5 option is exercised.

If a within-day or D-1 option is exercised, exercise fees will be calculated based on the difference between consumers’ prevailing output nomination and the daily consumption limit they offered.

“Introducing a ‘reduce to’ approach will allow consumers to specify a minimum threshold that they can offer, which will encourage more consumers to participate, as they will be able to tailor their demand response to their specific needs,” said Ofgem.

“Overall, we consider that the changes proposed will result in a more effective DSR tool, whereby more parties can participate. This should provide NGT with more material volumes of demand response, which would help NGT to respond to a potential supply shortage, thereby mitigating the risk of a supply shortage escalating to a Gas Deficit Emergency.”

The regulator said this would help to avoid compulsory load shedding which would result in “disruption and inefficiency in the operation and use of the networks”.

Direct contracting

Ofgem has additionally approved the code modification UNC844, which enables National Gas Transmission to deal directly with consumers, rather than having to go through their gas shipper.

The modification requires directly contracted consumers to notify their gas shipper if their offer is going to be exercised. Ofgem noted concerns that if the consumer fails to do this in time, their gas shipper could be left out of balance and therefore exposed to imbalance charges. It said a further modification, designated UNC852, has been proposed that would require National Gas Transmission to notify has shippers if an option is exercised.

UNC844 and 845 came into effect on Monday (7 August).

Geveke said: “We’ll find out whether these changes have been sufficient when National Grid Gas publishes the response to its tender for large gas users to bid for its gas DSR product.”