G3 Update to DCMF22nd November 2007

Significant progress made

• Consultation on common methodology - May• Stakeholder workshop - June• Summary of responses - July• Updates to all DCMF meetings• Series of helpful discussions with Ofgem• Significant development in several key areas

– refinements to tariff model, generation, scaling, reactive charges

• Impact generally to reduce price disturbance

% price movements compared to current charges.

Scottish Power Energy Networks SPM SPD

Tariff May % Nov % May % Nov %

Domestic Unrestricted 12.34% 8.61% 11.27% 7.76%

Domestic 2 rate -7.66% -14.12% -17.11% -26.36%

Business Single Rate, LV 29.21% 26.33% 10.20% 4.06%

Business Two Rate, LV 8.60% 6.08%    

Business MD, LVN 20.31% 18.14% -5.68% -8.00%

Business MD, LVS -26.84% -5.25%    

Business HH, LVN 9.31% 7.70% 18.27% 15.16%

Business HH, LVS -27.59% -7.51%    

Business HH, HVN -43.52% -28.22% -36.93% -3.95%

Business HH, HVS -56.88% -40.83%    

UMS, good inventory -27.79% -25.90% -11.16% -11.69%

UMS 24hr, good inventory -48.95% -50.04% -35.79% -37.74%

% price movements compared to current charges.

Central Networks CNW CNE

Tariff May % Nov % May % Nov %

Domestic Single Rate 24% 13% 25% 13%

Domestic Two Rate 10% 3% 20% 9%

Small Non Domestic Single Rate 22% 14% 24% 18%

Small Non Domestic Two Rate -1% -8% 19% 12%

Medium Non Domestic LV 2 Rate 15% 6% 12% 7%

Medium Non Domestic HV 2 Rate -57% -28% -56% -28%

LV Half Hourly -8% -18% -19% -24%

HV Half Hourly -55% -23% -51% -21%

Unmetered Supplies -25% -30% -17% -18%

% price movements compared to current charges.

SSE Power Distribution SEPD SHEPD

Tariff May % Nov % May % Nov %

LV Demand Domestic Unrestricted (PC1)1.9% -2.3% 16.3% 2.8%

LV Demand Domestic Restricted (PC2)29.9% 16.0% 3.6% 3.1%

LV Demand Off-Peak 16.0% 9.4% 31.5% 23.7%

LV Demand Non Domestic Small Unrestricted (PC3) 1.8% -1.2% -21.6% -16.6%

LV Demand Non Domestic Small Restricted (PC4) -5.9% -7.6% -37.9% -15.4%

LV Demand Non Domestic Medium Restricted (PC5-8) -7.7% -5.5% 16.7% 15.9%

LV Demand Non Domestic Large (HH) 11.0% 7.8% 5.9% 5.1%

HV Demand Non Domestic Large (HH)) -29.7% -1.6% -25.7% 6.8%

Unmetered supplies 22.2% 18.2% -34.2% -35.1%

Implementation plans

• April 2008 probably remains achievable• Would cause uncertainty around indicative tariffs• G3 has therefore decided not to push for April• G3 companies will make their separate proposals

early in 2008– Implementation targeted for October 2008, or April 2009 – Aim for early approval and therefore certainty for

stakeholders

Possible G3+ approach!

• G3 is already a common methodology• Developed and amended our approach• Now close to fully integrated methodology• Methodology “better” than G3 currents• Methodology compatible with different

network models and different tariffs• G3 happy to share common methodology• Could achieve Ofgem option 3

Recant development areas

• FCP/ LRIC Comparison

• Example of FCP on a real network

• Revenue Reconciliation

• Reactive Charging

• Generator Charging

Comparison of FCP and LRIC approaches

LRIC/ FCP Comparison 1.0% Growth

£0.00

£1.00

£2.00

£3.00

£4.00

£5.00

£6.00

7,78

87,

866

7,94

58,

025

8,10

68,

187

8,27

08,

353

8,43

78,

521

8,60

78,

694

8,78

18,

869

8,95

89,

048

9,13

99,

231

9,32

49,

418

9,51

29,

608

9,70

49,

802

9,90

010

,000

25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Demand/ Years to Reinforce

Cha

rge/

kVA

LRIC

FCP

NPV Cost £17.64 kNPV FCP Revenue £19.19 kNPV LRIC Revenue £213.60 k

Comparison of FCP and LRIC approaches

LRIC/ FCP Comparison 0.5% Growth

£0.00£1.00£2.00£3.00£4.00£5.00£6.00£7.00£8.00£9.00

£10.00

8,82

58,

869

8,91

48,

958

9,00

39,

048

9,09

49,

139

9,18

59,

231

9,27

79,

324

9,37

19,

418

9,46

59,

512

9,56

09,

608

9,65

69,

704

9,75

39,

802

9,85

19,

900

9,95

010

,000

25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Demand/ Years to Reinforce

Cha

rge/

kVA

LRIC

FCP

NPV Cost £17.64 kNPV FCP Revenue £19.19 kNPV LRIC Revenue £450.37 k

Comparison of FCP and LRIC approaches

LRIC/ FCP Comparison 0.2% Growth

£0.00

£5.00

£10.00

£15.00

£20.00

£25.00

9,51

29,

531

9,55

09,

570

9,58

99,

608

9,62

79,

646

9,66

69,

685

9,70

49,

724

9,74

39,

763

9,78

29,

802

9,82

29,

841

9,86

19,

881

9,90

09,

920

9,94

09,

960

9,98

010

,000

25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Demand/ Years to Reinforce

Cha

rge/

kVA

LRIC

FCP

NPV Cost £17.64 kNPV FCP Revenue £19.19 kNPV LRIC Revenue £1,180.44 k

Example of FCP on a real networkTotal and FCP Charges

£0.00£2.00£4.00£6.00£8.00

£10.00£12.00£14.00£16.00£18.00

102,7

12

103,9

31

105,1

65

106,4

13

107,6

76

108,9

54

110,2

47

111,5

56

112,8

80

114,2

20

115,5

76

116,9

48

118,3

36

119,7

41

121,1

62

122,6

00

124,0

55

125,5

28

127,0

18

128,5

25

130,0

51

131,5

95

133,1

57

134,7

37

136,3

37

137,9

55

139,5

92

141,2

49

142,9

26

151413121110 9 8 7 6 5 4 3 2 1 0 -1-2-3-4-5-6-7-8-9-10-11-12-13

Demand/ Years to Reinforce

Ch

arg

e/

kV

A

Total Charge

FCP Charge

NPV Cost £2,862.54 kNPV FCP Revenue £2,935.30 k

Current Demand: 122,600 kVAGrowth Rate 1.18%Reinforcements At Capacity MVACost (k) DescriptionReinforcement 1 122,600 £2,091 33kV circuit reinforcementReinforcement 2 127,504 £1,783 33kV circuit reinforcementReinforcement 3 128,730 £920 132/33kV transformer reinforcmentReinforcement 4 129,956 £3,082 33kV circuit reinforcementReinforcement 5 134,860 £1,815 33kV switchgear reinforcementReinforcement 6 136,086 £1,454 33kV circuit reinforcementDiscount Rate 6.90%FCP Cost Recovery Period 10 years

Revenue reconciliation

• Revised MEAV fixed adder approach excludes customer funded assets at voltage of connection.

• More accurately reflects what the ‘scaling’ represents, i.e. return on capital employed for existing assets

• Avoids the cross subsidy issue that arise with other fixed adder approaches

• Reduces tariff disturbance from current charges

Revenue reconciliation

Total kVA [A]

MEAV £m [B]

MEAV excl. cust cont £m i.e. Shared Assets [C]

Scaling Portion [D]

allocation (£) [E]

Allocation (kVA) [F]

allocation (£/kVa) [G]

Voltage Level Fixed adder applicable to: [H]

132kV Network 6375091 620.12 620.12 0.124 £20,776,178 6375091 £3.26

All customers that use the shared 132 assets: 132kV; 132/EHV sub; EHV;EHV/HV Sub; HV; HV/LV Sub; and LV customers

132/ EHV Substation 6328100 1031.79 1031.79 0.206 £34,568,872

6328100 £5.46

All customers that use the shared 132/EHV substation assets: EHV;EHV/HV Sub; HV; HV/LV Sub; and LV customers

EHV Network 6281797 407.65 401.01 0.080 £13,435,327 6281797 £2.14 All customers that use the shared EHV assets: EHV;EHV/HV Sub; HV; HV/LV Sub; and LV customers

EHV/ HV Substation 6125776 530.04 530.04 0.106 £17,758,393

6125776 £2.90

All customers that use the shared EHV/HV substation assets: HV; HV/LV Sub; and LV customers

HV Network 6072917 1581.46 1208.97 0.242 £40,505,013 6072917 £6.67 All customers that use the shared HV assets: HV; HV/LV Sub; and LV customers

HV/ LV Substation 4544515 1208.79 1208.79 0.242 £40,498,982 4544515 £8.91

All customers that use the shared HV/LV substation assets: LV customers

LV Network 4450533 5641.40 0.00 0.000 £0 4450533 £0.00 All customers that use the shared LV assets: LV customers

Total 11021.25 5000.73 1.000 £167,542,764

Column [A]: contains the total kVA at each voltage level for all customer groupsColumn [B]: contains the unadjusted MEAV of the network at each voltage levelColumn [C]: contains the adjusted MEAV excluding deemed customer contributions. The amount to be excluded is calculated by using the proportion of the total demand at that network level that is represented by the customers directly connected at that level. What is therefore left is the MEAV of the network that is shared both by the customers at that level and the customers connected further down the network.Column [D]: uses the MEAV of the shared assets to work out the scaling proportion appropriate for each network level.Column [E]: uses the proportion from column D and applies it to the total amount of required scaling to calculate the scaling cost to be attributed to each network level.Column [F]: lists the amount of kVA at each network level that this scaling cost is to be apportioned between. Note: at the transformation levels (132/EHV, EHV/HV, HV/LV) this will not include customers connected at that level on a substation tariff but at the network levels (132, EHV, HV, LV) it will include the customers connected at that level on a network tariff. This is because customers connected to the substation are assumed to have paid the cost of their full share of that substation on connection and therefore should not pay for any of the remaining shared substation assets, however customers connected to the network will only have paid for their sole use assets and will still be making use of the shared network to which they have connected.Column [G]: calculates the voltage level kVA adder to be applied to all applicable customer groups by dividing column [E] by column [F].Column [H]: list the applicable customer groups for each voltage level fixed adder.

Reactive charging• The proposed methodology broadly follows that already

approved for United Utilities.• Reactive charging for half-hourly metered HV and LV customers.• EHV customers and generators are charged per kVA. No separate

reactive charges as costs are in the kVA charge. • For each customer class the Network Cost (excluding the Fixed

Charge) and Availability Charge are derived from the Tariff model as £/kVA/year. The Availability Charge is subtracted from the Network Cost to remove charges included elsewhere.

• The Load Factor is then used to derive a cost in p/kVAh.• The marginal cost is given by the rate of increase of the kVA with

kVAr. This defines the excess charge rate p/kVArh.• Marginal cost determined at the average power factor of

customers whose power factor is worse than 0.95 • The excess charge rate is then applied to all kVArh in excess of

one third of the kWh.

Reactive charging

• Network Cost = £54.37/kVA/yr (excluding fixed charge)

• Availability Charge = £12.50/kVA/yr• Load Factor = 0.43

• Network Cost - Availability Charge = £41.87/kVA/yr= 100*41.87/(0.43*365*24)= 1.11 p/kVAh

• Average power factor for Customer Class for half hours with power factor < 0.95: = 0.85

• Sin(t) = Sqrt(1 - 0.85^2) = 0.527• Reactive charge = 0.527*1.11 = 0.585 p/kVArh

Generator charging

• Reconsidered our approach to align methods for demand and generation

• For generation, the following information is known:

H0 = the initial headroom,

A = the cost of reinforcing the network

G0 = current level of generation

S = a test size generator, determined by undertaking statistical analysis of past and current

connection applications.

• If the headroom, H0, is greater than the test size, then no marginal

generation charge is levied as the connection of another generator is unlikely to cause any reinforcement costs.

Generator charging• First, it is assumed that a generator of size S will connect within the

period that is used for determining charges, N years (to match demand FCP, N is set to 10). The generation G at t years prior to reinforcement is then:

G = G0 +S – t S/N

• For an asset reinforcement cost of £A and a discount rate of i, then the charge per kVA per annum at t years prior to reinforcement is assumed of the same form as demand.

FCP = k A Exp (-i t)

where k is a constant determined from the condition that the total income accumulated equals the cost of the reinforcement.

• The value of the contribution from the generation in year t by the time of reinforcement is therefore:

= (G0 +S – t S/N) k A Exp(-i t) Exp(i t)

= k A (G0 +S – t S/N)

Generator charging

• This is summed over N years prior to reinforcement to give a total value by the time of reinforcement of:

k A N(G0 + S / 2)

• The value of k is given by equating this value to A, giving:

k = 1/(N (G0 + S / 2) ) 

• The annual charge rate per kVA at time t years prior to reinforcement is therefore given by:

FCP = A Exp(- i t)/ (N (G0 + S / 2)) (£/kVA p.a.)

with a zero rate at all times more than 10 years prior to reinforcement, where the time to reinforcement is H0 N / S.

Generator charging• Previous analysis based on the assumption that a test size generator

is attached to each network group within the 10 year period.• To match the revenue to the estimated cost, it is necessary to multiply

by the probability of new generation locating to each network group.• This probability, Pv, will be different for each voltage level.

• The method proposed to derive Pv is to use the assumptions for total GB DG capacity used in the joint government – OFGEM report “Review of Distributed Generation” published in May 2007 together with the Energy White paper and estimate the total ratio of DG as a proportion of demand. For the GB demand, we have used NGET’s Electricity demand projections as per their 7-years statement.

• The above are used to determine the total new MW of generation over the 10 year period.

• This is allocated to each voltage level in proportion to the existing generation capacity at each level.

• Pv is then evaluated by dividing this value by the total implied by adding generation to each network group for that voltage level.

 

Generator charging

Derivation of Pv 

10 year growth in generation as percent of demand 30% Total demand 6000 New generation 1800 new Network test test Probability Existing generation MW % generation Groups size MW Pv

132kV 484 48.16% 866.9 16 90 1440 0.60 33kV 273 27.16% 489.0 105 25 2625 0.19 HV 243 24.18% 435.2 460 2.5 1150 0.38 LV 5 0.50% 9.0

Total 1005 1800 5215

Generator charging example

• Effect on charge rates following the addition of 12,500 kVA generators to the 33kV network. The test size generator is 25,000kVA.

• No current generation connected and 16,800kVA of generation can be connected without the need of any reinforcement.

• Should the reinforcement be required it will cost £1,573k and will provide additional headroom of 154,500kVA.

• When the first generator connects, there is still no need to reinforce. The time to reinforce reduces, increasing the charge rate, but offset by the increase in the charge base reducing the charge per kVA.

• When the second generator connects the reinforcement will be carried out. Charges will reduce to zero as the the new headroom is such that the future costs are zero.

• This is a feature of all approaches that use forward-looking costs.• However, the second generator is likely to pay for a proportion of the reinforcement

costs through the connection charge using the cost apportionment rules.

recovery period (years) 10 discount rate 6.90% Example 1 Reinforcement cost (£) 1573000 Including

Additional headroom (kVA) 154500 Pv Generation Headroom Years £/kVA

0 16800 6.72 1.474 12500 4300 1.72 1.041

25000 133800 53.52 0.000

Generator charging

• Current analysis indicates charges from this approach similar to what would be expected from the DG assumptions used in the DG price control.

• Approach will be used for HV generation charges and above, though not initially locational for HV.

• LV costs are currently forecast to be zero.

Significant development summary

• We have developed and amended our approach, as required, to reflect the constructive feedback we have received.

• The FCP approach for deriving marginal costs has been demonstrated to be robust, works with different growth assumptions and produces time of day signals.

• The overall tariff model is also robust with auditable data sources.• Changed our approach to reactive charging following feedback to

use a similar approach that has already been approved.• The approach to generation has been significantly amended

following feedback but we believe that the new methodology is sound and now consistent with the approach used for demand.