UK gas charging reform to be implemented from 1 October

UK energy regulator Ofgem will introduce a reform to the UK's gas transmission charging regime from the start of October, with no changes from its previous recommendations.

The regulator has opted to use a postage stamp methodology to calculate tariffs, rather than basing the fees on distance, in line with its preference in the preliminary decision published in late December. This will result in a uniform entry and exit tariff being levied at each point, regardless of its location.

Revenue under the new system will be largely collected through capacity-based rather than commodity-based charging. This could significantly reduce variable fees for entry into the national transmission system (NTS).

Ofgem made its final decision having considered responses to its consultation as well as the assessment made by European regulator Acer.

But Acer has left open the possibility of two additional modifications to the main gas charging review finalised today.

The proposal in its existing form does not include a short-haul tariff to avoid inefficient bypassing of the NTS.

But Ofgem said today it is committed to working with the industry to facilitate the development, "timely consideration and where appropriate implementation" of a modification that seeks to address this issue.

The regulator "welcomes" the industry's efforts — through the NTS charging methodology forum — to develop options for new short-haul arrangements that could be compliant with NC TAR. Whatever solution is eventually decided must be "targeted, proportionate and compliant", it added.

Ofgem had initially rejected all proposals that included a short-haul tariff on the grounds that they did not meet the legal requirement of avoiding undue cross-subsidisation.

The regulator also reiterated today that it "remains open" to a discount at storage connection points higher than the 50pc included in the proposal approved today, "where this is well justified and appropriate".

UK storage operator Storengy plans to resubmit a modification proposal that argues for a 60pc discount. Storengy has repeatedly warned that a discount of only 50pc could be "detrimental" to mid-range storage and may end up making storage seasonal by discouraging firms from making full use of their fast-cycling capabilities.

All contracts concluded before 6 April 2017 will be exempt from the new capacity-based charging.

Regulator justifies 1 October implementation

Many stakeholders called for a delay to the changes in light of Covid-19.

While the regulator is "very mindful" of the uncertainty caused by Covid-19, it said introducing the reform sooner rather than later will best serve gas and electricity consumers.

Ofgem has a statutory duty to implement EU law, and the network code on harmonised transmission tariffs (NC TAR) should have already been fully effective by 31 May 2019, it said.

Several participants had pushed for the reform to be delayed until 2021 or later because of the extra financial and administrative burdens that might have come with the Covid-19 pandemic.

But the regulator noted that not all firms have expressed these concerns, with some indicating that they are well placed to handle the changes.

Some firms have argued that a combination of increased charges resulting from removal of the short-haul discount and the potential for weak demand resulting from the Covid-19 pandemic would result in "significant financial stress".

Other point to the financial risk to shippers and suppliers of the changes being introduced this October, arguing that cash flow difficulties faced by some industrial and commercial customers could move up the supply chain to gas shippers.

And some companies said they have fewer resources available to manage the administrative changes needed for the tariff overhaul, although others suggested that delaying its implementation would only add to the uncertainty.

By Natasha Fielding