Looming UK gas tariff changes add to 1Q21 uncertainty

Looming and as-yet unquantified changes to UK gas transmission capacity charges expected early next year have reduced the visibility of the cost of moving gas in and out of the UK.

UK system operator National Grid on 10 November announced a 36pc shortfall in revenues collected in October, the first month in which the new gas charging regime was in place. National Grid will make up for the under-collection in revenues by hiking capacity charges for early next year. But it has not yet specified the size of the increase or when it will take effect.

National Grid can adjust capacity fees within the gas year by adjusting the revenue recovery charge (RRC), which is designed to compensate for under or over-recovery in revenue and was set at zero ahead of this gas year.

The RRC can be revised with at least one month's notice. National Grid plans to finalise the required adjustments to charges by 1 December. It initially said it would implement the modifications as early as possible and "up to and including March". But the system operator suggested yesterday that it may aim to introduce RRCs from 1 February instead, and spread the changes over more months.

National Grid also plans to raise two uniform network code (UNC) modifications, which it will request to be handled by the regulator with urgency. The first will look to change how the firm's allowed revenue is calculated going forwards, while the second will seek to adjust how the payments have been collected as of the start of October with a view to recovering some or all of the payments already made.

The main driver behind the substantial shortfall in revenues last month was a change in booking behaviour, which meant that more revenues were derived from overrun charges, within-day and interruptible bookings — none of which count towards National Grid's maximum allowed revenue under the existing system. The logic behind the exclusion of these types of fees — categorised as "capacity neutrality" — needs reviewing, National Grid said.

If National Grid compensates for the revenues lost through capacity neutrality through entry and exit RRCs, then capacity-based charges could rise substantially. But if the system operator assumes that the revenue collection system will be adapted and backdated to the start of October, then the increase in RRCs could be smaller.

Layers of risk The impending increase in capacity-based charges adds another layer of unpredictability ahead of early 2021, on top of uncertainty arising from other potential charging changes and the UK's exit from the EU.

UK gas and electricity market regulator Ofgem is yet to make a final decision on various proposals seeking to modify aspects of the UNC.

UK storage operator Storengy has submitted a proposal to increase the discount applied to capacity charges at storage connection points to 80pc from 50pc. It expects Ofgem to make a decision shortly before the deadline on 3 January, despite having fast-tracked the modification proposal.

Storengy has also proposed the introduction of a discount to the RRCs at storage connection points, arguing that double charging puts storages at a disadvantage. The deadline for Ofgem to make a final decision is mid-March next year.

Storengy earlier this week cancelled storage auctions for the 2021-22 and 2022-23 storage years, citing an unpredictable regulatory environment.

Shippers have to factor significant risk into any gas storage capacity valuation, because the predictability and stability of network prices are in limbo, Storengy said.

Reduced visibility on transmission fees could discourage firms from booking more capacity on the BBL pipeline to the Netherlands or the Interconnector to Belgium until there is more clarity. And the lack of a trade deal ahead of the UK's exit from the EU on 1 January has increased the risk associated with committing to cross-border transmission capacity, some market participants have said.

But cross-Channel differentials have held far too tight to cover the costs of booking more Interconnector or BBL capacity ( see prices graph ) . Mild forecast weather, high mid-range stocks and a recent rebound in the UK's LNG receipts has raised the prospect of little need for imports from the continent in the second half of winter.

By Natasha Fielding

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