Ofgem rejects proposals to resolve unidentified gas issue

Ofgem has rejected a series of proposals which sought to rectify an ongoing problem over the allocation of unidentified gas.

The issue has arisen since 1 June 2017, when changes were made to gas settlement procedure as part of Project Nexus – the programme to replace Xoserve’s ageing IT system for gas settlement and supply point administration. They included an overhaul to the process for allocating unidentified gas.

Since then, the volume of gas which cannot be attributed to metered consumption and is therefore deemed to be unidentified – for example, due to theft or metering errors – has substantially increased and become extremely volatile on a day-to-day basis. This has caused headaches for suppliers and shippers, who have faced difficulties in forecasting and managing costs.

In an effort to address the problem, industry parties proposed three modifications – UNC642, UNC642A and UNC643 – to the Uniform Network Code (UNC) governing the supply and transportation of gas. The urgently tabled proposals were all turned down by the UNC panel at a meeting in February.

Ofgem too has now rejected the modifications. In an open letter to stakeholders on its minded-to decision, interim director for consumers and markets, Rob Salter-Church, wrote that “none of the proposals would reduce the overall volume and volatility of unidentified gas or provide greater certainty to the market as a whole.”

The problem

Prior to the implementation of Project Nexus, gas was allocated using a top-down procedure known as “reconciliation by difference”. Under this process, any gas that was fed into a local distribution zone that could not be attributed to leakages (“shrinkage”), gas transporters or daily metered (DM) supply points, would be initially be allocated to non-daily metered (NDM) supply points.

Over time, allocations were adjusted as meter readings were submitted for larger NDM supply points. However, there was no individual reconciliation for smaller NDM supply points. This meant they generally picked up the tab for any unidentified gas.

In recent years, efforts were made to spread some of the costs onto larger NDM supply points following the cut-off date for reconciliation (three to four years after consumption).

However, the introduction of the new IT system for gas settlement for the first time allowed for the reconciliation of all supply points – regardless of their size or how frequently the meters were read.

Accordingly, a new settlement procedure was implemented which incorporated the reconciliation of all supply points. Unidentified gas was introduced as a discrete variable in the process.

Unidentified gas is now estimated on a daily basis using an algorithm that utilises projections for consumption by NDM supply points. Unidentified gas is then spread proportionally across all meters. Adjustments are made as meter readings are gradually submitted.

Before the introduction of the new arrangements, the volume of unidentified gas was calculated at 1 to 1.3 per cent of total demand.

According to the Joint Office of Gas Transporters, the body which administers the UNC, the figure has since risen to an average of 4.65 per cent. The daily estimate has also fluctuated wildly, from as much as 25 per cent of total demand to less than zero.

Speaking to Utility Week before the release of the Ofgem decision, Eon’s head of volume forecasting, Sallyann Blackett, attributed this volatility to the inaccuracy of the algorithm used to calculate the amount of unidentified gas.

She said the generic customer profiles, on which the projections for NDM consumption are based, are not up to scratch. In particular, she said the profiles grouped too many customers together and therefore failed to distinguish differences in responses to weather conditions.

The modifications

Both UNC642 and UNC643 sought to address the issue by reverting to the pre-Nexus reconciliation by difference settlement process. The former was proposed by Corona Energy and the latter by Orsted.

Unidentified gas would be set at a fixed level, starting at 1.1 per cent in the first year, and would be allocated proportionally to all meters.

A new variable of “settlement error” would be introduced to account for any otherwise unallocated gas. The settlement error would be spread among all unreconciled supply points unless a reconciliation target was met. At this point, the remaining balance would be spread market-wide across all meters.

UNC643 additionally sought to backdate the change, unwinding all unidentified gas allocation since the introduction of the current arrangements.

UNC642A would maintain the current bottom-up settlement procedure. But like the others it would also set unidentified gas at a fixed level. Any remaining unallocated gas would be accounted for through a new “balancing quantity” variable. This would be apportioned to all supply points other than those with mandatory daily meter reads.

UNC642A was proposed by Eon.

Ofgem’s decision

Responding to the proposals, Salter-Church acknowledged the difficulties which the industry has faced in predicting and managing the costs of unidentified gas.

He recognised the modifications were not proposed simply to reverse the redistributive impacts of the new allocation arrangements by those “seeking to avoid or at least mitigate their exposure”. He noted that some industry parties would “prefer the certainty of a fixed allocation of unidentified gas, even if that certainty came at a premium”.

However, Salter-Church also argued none of the proposals would offer “immediate or effective relief from this issue”.

He said the new arrangements are operating in line with their intended purpose, namely to: allocate unidentified gas more fairly across supply points; improve competition between suppliers and shippers; and encourage the industry to take action to reduce the volume of unidentified gas. He said the proposed modifications could jeopardise these aims.

Salter-Church said it is “premature” to conclude that the current allocation arrangements are “inherently flawed”, as the problem which have emerged are partly the result of other industry arrangements that “not currently operating to a reasonable standard”. He said the increased frequency of meter reads in future would go some way towards resolving the issue.

He invited stakeholders to comment on Ofgem’s assessment of the proposals. The deadline for responses is 5 July 2018.

Other code modifications 

Eon has also tabled UNC644 which aims to improve the accuracy of the algorithm used to estimate unidentified gas on a daily basis. It would do this by making adjustments to the customer profiles used to forecast consumption by NDM supply points and the way they respond to weather.

Npower has proposed UNC652 which would oblige certain customers to submit two meters readings each year in order to establish a ratio between their winter and average annual demand. The modification also seeks to improve the accuracy of consumption forecasts and hence the daily estimates for unidentified gas.

Both are awaiting consideration by the UNC panel.