Ofgem approves availability payments for gas flexibility

Ofgem has approved a proposal to allow National Grid Gas to offer availability payments for gas consumers that are willing to reduce their usage when the transmission network is under stress.

In 2016, the regulator approved a modification to the Uniform Network Code (UNC) that introduced a demand-side response (DSR) mechanism for large consumers of gas.

Under the arrangements, when a Gas Balancing Notice is place, gas shippers, on behalf consumers, can post offers onto the on-the-day market to reduce their consumption at a price of their choosing. National Grid, as the only purchaser of flexibility, then decides whether or not to accept these offers.

However, since implementation, National Grid has only issued a Gas Balancing Notice on one occasion – during the so-called ‘Beast from the East’ weather event in March 2018 – and no offers were made.

Given the previous absence of offers and current concerns over gas supplies this winter, National Grid proposed another UNC modification in early September that sought to reform the mechanism, with Ofgem granting its request to fast-track the modification.

The proposal document noted that, with potential providers of flexibility only receiving a payment if their offer is exercised, “there are no provisions within the UNC to recognise that costs are incurred for parties to be available to make such offers, regardless of whether demand reduction is actually required.”

It said these could include contracting costs incurred by shippers, suppliers and consumers, as well as preparatory costs incurred by consumers to be able to reduce their usage when needed.

The modification, designated UNC822, aims to address this issue by introducing a process for National Grid to invite offers from gas shippers in advance of winter, with these offers including both an “option price” that will be paid for consumers to be available to reduce their consumption and “exercise price” that will be paid if the service is actually utilised.

These payments will be made to the gas shipper and then passed onto consumers via their supplier under the contractual terms negotiated between the parties.

Gas shippers will be able to make offers for this winter and the next two winters on behalf of consumers whose annual demand is greater than 2 million therms (58.6GWh).

Option payments will be funded as a balancing cost but must not exceed a limit, initially set at £5 million, without approval from Ofgem.

The trigger for opening the market for demand-side response market will also be extended to include the issue of a Margins Notice by National Grid to enable consumers to commit to curtail their gas usage at the day-ahead stage.

Explaining its decision to approve the modification, Ofgem noted the benefits of a functional demand-side response tool in mitigating the risk of compulsory load shedding during an emergency. It said stakeholder engagement and “real-world evidence” from the Beast from the East indicate that the current mechanism is insufficient.

The regulator also recognised the need for availability payments to compensate consumers for the costs incurred in making themselves available to provide demand-side response.

Ofgem acknowledged concerns raised by one consultation respondent that the arrangements would place an additional operational burden on gas shippers as the intermediaries between National Grid and consumers, particularly on weekends when most non-domestic shippers are not open for business, but said this would more than outweighed by the benefits.

The modification took effect on Monday (17 October).