Rise in transmission fees will make ‘bad situation even worse’ for gas storage

Planned changes to the charging regime for gas transmission will make “a bad situation even worse” for storage operators, the Energy and Utilities Alliance (EUA) has warned.

Roddy Monroe, chair of the EUA’s Gas Storage Operators Group, said they are already dealing with deteriorating market conditions and excessive business rates and now face a substantial increase in network charges as well.

Transmission fees are currently split between capacity charges – which grant users the rights to flow gas onto and off the network but are payable regardless of whether they are exercised – and commodity charges, which are paid on actual flows. Both sets are further divided into entry and exit charges.

The commodity charges are used to recover any residual costs that are not recouped through the capacity charges. Unlike the capacity charges, they do not vary depending on the point of entry or exit.

Last month, Ofgem confirmed plans to proceed with a modification to the Uniform Network Code that will reduce the geographical variation in capacity charges. Under this “postage stamp” model, the reference prices for capacity auctions will be equalised between entry and exit posts. Discounts are applied to the reference prices to determine the reserve prices for auctions.

UNC678A would also introduce a new revenue recovery charge (RRC) to replace the current commodity charges. As the name suggests, the RRC will similarly be used to recoup any networks costs not recovered through the capacity charges.  However, in line with EU regulations, the charges will be based on capacity and not flows.

Speaking to Utility Week, Monroe said the modification will bring an end a number of favourable arrangements for storage operators: “For example, on exit the current regime allows you to book interruptible exit capacity that is currently priced at zero.

“If you’re willing to take the risk that you can’t take gas into your facility – you’re not guaranteed you can inject – then you can run off this interruptible product at zero cost. Now that’s going to disappear under the new regime so that immediately adds a significant cost burden to gas storage operators who now have to pay for their exit capacity.”

Monroe said they do not currently pay commodity charges but will be liable for the RRC: “In the new regime, there is going to be this thing called a revenue recovery charge that will applied to gas storage operators, so not only do they pay their capacity charges on entry they also have to pick up under-recovery costs as well.”

He continued: “The current regime is favourable to gas storage. The future regime is not, both on entry and exit. The costs there will increase.”

Monroe said this comes at a time when storage operators are already struggling. Back in the late 2000s, they were “clearly in the money” but since then “both the seasonal spread and volatility have continued to reduce in line with market conditions.” There is no longer a shortage of gas in the winter or a surplus of gas in the summer.

“Charging is just one of many aspects that have led to the viability of gas storage becoming clearly at risk,” he added. “We saw that when Rough closed in 2017. It was an asset, like a lot of the assets, that was getting old and costs were increasing. There was a need for a major well refurbishment programme to keep it going because the wells were unsafe and the market just wasn’t there to support it so Rough closed.”

He said storage operators are also burdened by high business rates, which were raised back in their heyday but are now excessive – accounting for half of operating costs for some companies: “All signs are that capacity is coming off the market because it not viable to keep it operating and this is just another example of additional costs being laid on top of storage that are going to make a bad situation even worse.”

The aforementioned EU regulations stipulate that storage operators should receive a 50 per cent discount on capacity-based transmission fees to prevent them being from being doubled charged due to their nature. Ofgem has proposed only this minimum but said it remains open to a discount of more than 50 per cent if it is “well justified and appropriate”.

“Some European countries have looked at the value of gas storage and given them a 100 per cent discount on capacity charges,” said Monroe, adding that he would like Ofgem to do the same. Although he was unclear whether this is already the plan, he said the discount should be applied to the RRC.

Moroe said the discount is not due to be applied to capacity they sell to their customers and called for this decision to be reversed. He said most storage operators offer network capacity as part of their service.

The overhaul to transmission charging has also faced criticism from industrial gas users in Teesside due to the planned removal of a special short-haul tariff for those connected nearby to entry points. They said the abolition of this tariff would lead to a massive increase in costs for those affected by the change who would most likely respond by building their own private pipeline.