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Gas transmission pricing models for entry-exit systems6th Annual CRNI Conference, BrusselsNovember 22 – 2013Bert Kiewiet
ContentsThis paper discusses the major gas transmission pricing models. It explains how they allocate costs to entry/exit points. It assesses the applicability to network topologies.
Application of
four models to
two networks
Conclusions
Introduction to
entry-exit
systems
Four cost
allocation
models
Main objectives
of tariff design
Gas Transmission Pricing Models and Implementation Options
3
Introduction / The Entry-Exit SystemThe functionality of the entry-exit system is explained using a schematical representation.
Production
Storage
LNG
N X
X
Cross border
N
Directlyconnected customers
Storage
Cross border
Trading
VP
Local Local
TS
O l
evel
DS
O l
eve
l
X
N Physical entry point X Physical exit point Contractual flow of gas System boundary
Source: DNV KEMA 2013 – Entry-exit regimes in gasavailable on: http://ec.europa.eu/energy/gas_electricity/studies/gas_en.htm
4
Introduction / The Entry-Exit SystemOne of the main features is that network users contract entry and exit capacity separately.
Production
Storage
LNG
N X
X
Cross border
N
Directlyconnected customers
Storage
Cross border
Trading
VP
Local Local
TS
O l
evel
DS
O l
eve
l
X
Network users can contract entry and exit capacity separately.
5
Introduction / The Entry-Exit SystemAnother feature is that gas which has entered the system can be nominated to any off-take point.
Production
Storage
LNG
N X
X
Cross border
N
Directlyconnected customers
Storage
Cross border
Trading
VP
Local Local
TS
O l
evel
DS
O l
eve
l
X
Gas brought into the system at any entry point can be made available for off-take at any exit point within the system on a fully independent basis, without any restrictions
6
Introduction / The Entry-Exit SystemThe virtual point is a fundamental feature of the entry-exit model. It facilitates the bilateral title transfer of gas between network users.
Production
Storage
LNG
N X
X
Cross border
N
Directlyconnected customers
Storage
Cross border
Trading
VP
Local Local
TS
O l
evel
DS
O l
eve
l
X
The virtual trading point offers the users the possibility to bilaterally transfer title of gas and/or swap imbalances between network users.
7
Introduction / The Entry-Exit SystemIdeally the shipper books the exit capacity only at the network level where final exit takes place.
Production
Storage
LNG
N X
X
Cross border
N
Directlyconnected customers
Storage
Cross border
Trading
VP
Local Local
TS
O l
evel
DS
O l
eve
l
X
Network users only book exit capacity on the level where the final exit takes place. Imbalances between injections and withdrawals are aggregated across all entry and exit points in a network user’s portfolio, regardless of the network level.
8
Introduction / The Entry-Exit SystemThe functionality of the entry-exit system is explained using a schematical representation.
Production
Storage
LNG
N X
X
Cross border
N
Directlyconnected customers
Storage
Cross border
Trading
VP
Local Local
TS
O l
evel
DS
O l
eve
l
X
N Physical entry point X Physical exit point Contractual flow of gas System boundary
Source: DNV KEMA 2013 – Entry-exit regimes in gasavailable on: http://ec.europa.eu/energy/gas_electricity/studies/gas_en.htm
Introduction / EU Regulations
Regulation (EC) no. 715/2009:
Implementation of the entry-exit system is mandatory in the European Union.
Tariff setting in the entry-exit model:
- Tariffs should be set separately for every entry and exit point
- Tariffs should not be calculation on the basis of contract paths
- Non-discrimination between domestic transport and transit
Member States developed different solutions.
Harmonisation:
- ACER: Framework guidelines regarding harmonised transmission tariffs structures
- ENTSOG: Development of a network code on harmonised tariff structures (to do)
The entry-exit systems is the mandatory access model for gas transmission system operators in the European Union. Regulation provides overall requirements for tariffs.
Main Objectives Of Tariff Setting
Third Energy Package objectives:
Cost reflectivity
Non-discrimination
Avoid cross-subsidisation
Economic efficiency
Cost recovery
Transparency
The Third Energy Package specifies objectives for the setting of tariffs. Experience shows that other, more practical, aspects are important also.
Practical requirements:
Stability and predictability
Stakeholder acceptance
Efficient regulation
Macro-economic constraints
Transit network
Cost Allocation Models Applied To Two NetworksCost allocation models address the issue of different ways to allocate the allowed revenue to the specific entry and exit points. Four models are applied to two networks.
Cost allocation
Capacity Weighted Distance
Postage stamp
Matrix
Distance to Virtual Point
Entry 1
Entry 2
Exit 1
Exit 2
Exit 3
Entry 1
Entry 2
Entry 3
Exit 1
Exit 2
Exit 3
Ring shaped network
Entry 1
Entry 2
Entry 3
Exit 1
Exit 2
Exit 3
Some features
Different Keys For Allocation Of Costs To Entry-Exit PointsCost allocation models address the issue of different ways to allocate the allowed revenue to the specific entry and exit points. Four models are applied to two networks.
Cost allocation
Postage stamp
Matrix
· Most straightforward. · Single uniform tariff, does not provide locational signals· Likely to involve cross subsidies between network users.· Not particularly suitable for networks with longer
distances
· Uses replacement cost as a key to allocate revenue· Optimisation problem: additional constraints can easily be
applied.
Some features
Different Keys For Allocation Of Costs To Entry-Exit PointsCost allocation models address the issue of different ways to allocate the allowed revenue to the specific entry and exit points. Four models are applied to two networks.
Cost allocation
· Uses distance as a key to allocate costs· Based on the assumption that tariffs should reflect the
costs of bringing gas to the virtual point.· Takes into account the direction of the flow under peak
conditions. Negative distances = cost savings.· Resulting tariffs provide locational signals.
· Uses distance as a key to allocate costs as well. · Additional weighing by technical capacities of the entry
and exit points.
Distance to Virtual Point
Capacity Weighted Distance
Postage Stamp – calculation steps
Features: Single uniform tariff applied to either the entry or exit points Does not provide any locational signals Not particularly suitable for transmission networks with longer distances Likely to involve cross subsidies between network users due to the uniform tariff level
The postage stamp is the most straightforward of all cost allocation methodologies. It does not provide any locational signals. It is less suitable for long distance networks.
2. Allocation of
Cost to Entry or
Exit points
1. Setting of
Allowed Revenue
· Starting point of the tariff calculation
· Set by regulator
· Costs are allocated to entry and exit points in proportion to the booked capacity
· Results in a uniform tariff for all points
Steps:
Matrix approach – calculation stepsThe matrix approach used replacement costs of sections as a key for the allocation of revenues.
4. Supplementary
Adjustments
3. Derivation of
Entry-Exit Tariffs
2. Allocation of
Cost to Pipeline
Sections
1. Setting of
Allowed Revenue
· Starting point of the tariff calculation
· Set by regulator
· Allocation of allowed revenue to different pipeline sections (external key for allocation: replacement costs of sections)
· Derivation of unit cost by incorporating chargeable capacity
· Construction of unit cost matrix.
· Calculation of tariffs by minimizing differences between unit costs and entry-exit tariffs.
Entry AB
Entry CB
Exit BD Exit EF Exit EG
UCAB+UCBD
UCCB+UCBD
UCAB+UCBE + UCEF
UCCB+UCBE + UCEF
UCAB+UCBE + UCEG
UCCB+UCBE + UCEG
Entry AB
Entry CB
Exit BD Exit EF Exit EG
TariffAB+ TariffBD
TariffCB+ TariffBD
TariffAB + TariffEF
TariffCB+ TariffEF
TariffAB+ TariffEG
TariffCB + TariffEG
· Tariffs adjustments to meet the requirements of being competitive, sustainable and affordable to network users and ensuring a successful transition.
y
x
Steps:
General calculation approach
Cost Allocation Models Applied To Two NetworksCost allocation models address the issue of different ways to allocate the allowed revenue to the specific entry and exit points. The models are applied to two networks.
Cost allocation
Capacity Weighted Distance
Postage stamp
Matrix
Distance to Virtual Point
· Basic starting point is the allowed revenue· Arbitrarily chosen value for the allowed revenue· Focus is on the revenue allocation question· Only capacity charges are considered
(EUR/kWh/day/year)
Transit network
Cost Allocation Models Applied To Two NetworksCost allocation models address the issue of different ways to allocate the allowed revenue to the specific entry and exit points. The models are applied to two networks.
Entry 1 = 360 GWh/day
Entry 2 = 5 GWh/day
Exit 1 = 3 GWh/day
Exit 2 = 2 GWh/day
Exit 3 = 360 GWh/day
Entry 1
Entry 2
Entry 3
Exit 1
Exit 2
Exit 3
Ring shaped network
Entry 1 = 97 GWh/day
Entry 2 =
170 GWh/day
Entry 3 = 97 GWh/day
Exit 1
Exit 2
Exit 3
Results Transit NetworkThe four cost allocation models were applied to the transit network. The resulting (capacity) tariffs for the entry and exit points are presented.
1 2 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
The main entry and exit point are priced
Results Transit NetworkThe four cost allocation models were applied to the transit network. The resulting (capacity) tariffs for the entry and exit points are presented.
1 2 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
The main entry and exit point are priced similarly for each model.
Results Transit NetworkThe four cost allocation models were applied to the transit network. The resulting (capacity) tariffs for the entry and exit points are presented.
1 2 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
In the distance to virtual point the exits closest to the main entry point is priced lowest:
• Value of chosen cost driver (total distance) is lower.
Results Transit NetworkThe four cost allocation models were applied to the transit network. The resulting (capacity) tariffs for the entry and exit points are presented.
1 2 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
This effect is also observed in the capacity weighted distance model (though less pronounced):
• In CWD this effect is lessened by the capacity as additional cost driver.
Results Transit NetworkThe four cost allocation models were applied to the transit network. The resulting (capacity) tariffs for the entry and exit points are presented.
1 2 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
The trend is different in the matrix approach:
• Both spur lines have same dimensions, but exit 2 has lower bookings unit cost higher.
Transit network
Cost Allocation Models Applied To Two NetworksCost allocation models address the issue of different ways to allocate the allowed revenue to the specific entry and exit points. The models are applied to two networks.
Entry 1 = 360 GWh/day
Entry 2 = 5 GWh/day
Exit 1 = 3 GWh/day
Exit 2 = 2 GWh/day
Exit 3 = 360 GWh/day
Entry 1
Entry 2
Entry 3
Exit 1
Exit 2
Exit 3
Ring shaped network
Entry 1 = 97 GWh/day
Entry 2 =
170 GWh/day
Entry 3 = 97 GWh/day
Exit 1
Exit 2
Exit 3
Results Ring Shaped NetworkThe four cost allocation models were applied to the ring shaped network. The resulting (capacity) tariffs for the entry and exit points are presented
1 2 3 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
Results Ring Shaped NetworkThe four cost allocation models were applied to the ring shaped network. The resulting (capacity) tariffs for the entry and exit points are presented
1 2 3 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
Tariffs of distance to virtual point = postage stamp:
• Due to symmetry in network topology.
• Distance to virtual point does not take into account differences in booked capacities.
Results Ring Shaped NetworkThe four cost allocation models were applied to the ring shaped network. The resulting (capacity) tariffs for the entry and exit points are presented
1 2 3 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
On the entry side the capacity weighted distance model = distance to virtual point model:
• Booked capacities at exit points are equal to each other.
• Network symmetry and thus equal distances.
Results Ring Shaped NetworkThe four cost allocation models were applied to the ring shaped network. The resulting (capacity) tariffs for the entry and exit points are presented
1 2 3 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
Exit 3 is priced highest:
• Furthest away from entry with highest booked capacity
Results Ring Shaped NetworkThe four cost allocation models were applied to the ring shaped network. The resulting (capacity) tariffs for the entry and exit points are presented
1 2 3 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
Matrix approach results in opposite outcomes:
• Exit tariffs are similar (booked capacity is same)
• Thus difference in booked capacity is now solely reflected in entry tariffs.
Results Ring Shaped NetworkThe four cost allocation models were applied to the ring shaped network. The resulting (capacity) tariffs for the entry and exit points are presented
1 2 3 1 2 3Entry Exit
0
0.1
0.2
0.3
0.4
0.5
D2VPMatrixCWDPS
Ta
riff
[€
/kW
h/d
ay
/ye
ar]
Tariff entry 2 is lower:
• Due to higher booked capacity at entry 2 (lower unit costs).
• This effect discourages the use of the other entry points (undesired effect).
Concluding Remarks
For all four models the basic starting point is the allowed revenue of the network operator.
Postage stamp model:
Generally, the postage stamp model may be suitable in highly meshed networks where models resulting in locationally different tariffs might be too cumbersome
Application of equal tariffs does not affect cost-reflectivity too much Additionally relevant when tariff equality is prioritized over other principles
Distance to virtual point:
Distance as key for cost allocation Takes into account direction of the flow
Capacity weighted distance model:
Distance as key for cost allocation Capacity weighing
We have demonstrated four cost allocation models for calculating network tariffs. Results differ due to algorithms applied and the chosen cost drivers.
Concluding Remarks
Matrix approach:
Replacement cost as key to allocate revenues Allows for an easy incorporation of additional pricing considerations, for example:
- Equity requirements- Transition needs, and - Price stability
General:
The models are just different mathematical ways to describe reality and largely aim to achieve the same.
Results differ due to differences in the algorithms applied and in particularly the chosen cost drivers.
Trade-offs between the complexity of the model and its outcome- More complex networks may require more detailled modelling- Unilateral networks could be represented by less sophisticated modelling efforts
We have demonstrated four cost allocation models for calculating network tariffs. Results differ due to algorithms applied and the chosen cost drivers.
Contact
KEMA Nederland B.V. Energieweg 17, 9743 AN GroningenP.O. Box 2029, 9704 CA Groningen
The Netherlandswww.dnvkema.com
Bert KIEWIETSenior Consultant Markets & RegulationManagement & Operating Consulting
[email protected]: +31 50 700 98 69Fax: +31 50 700 98 59
33
Back-up slides
34
Derivation of Entry-Exit Tariffs
Example of applying the replacement value of pipeline sections to distribute the Allowed Revenue to be recovered by the various sections
Pipeline section
Length [km]
Diameter[inch]
Replac. value[mil. €]
AB 50 36 76,25
CB 100 36 152,50
BD 125 30 153,75
BE 200 30 246,00
Etc… Etc… Etc… Etc…
Entry
Entry Exit
Exit
Exit
Each pipeline section has its own replacement value
Stylized network:
AB
C
D
E
F
G
Unit cost[€/(Nm3/d)]
0,15
0,20
0,23
0,40
…
Capacity.[Nm3/d]
50 000 000
75 000 000
65 000 000
60 000 000
…
Allocation of Revenu [%/M€]
5% / 7,5
10% / 15
10,1% / 15,1
16,1% / 24,2
…
35
Derivation of Entry-Exit Tariffs
Unit cost matrix can be constructed by applying the shortest-path method
Tariffs from one network point to another (entry tariff + exit tariff) should equal (as much as possible) the unit costs of this route
Entry A
Entry C
Exit D Exit F Exit G
UCAB+UCBD
UCCB+UCBD
UCAB+UCBE + UCEF
UCCB+UCBE + UCEF
UCAB+UCBE + UCEG
UCCB+UCBE + UCEG
TariffAB+ TariffBD
TariffCB+ TariffBD
TariffAB + TariffEF
TariffCB+ TariffEF
TariffAB+ TariffEG
TariffCB + TariffEG
Unit cost matrix:
Tariffs:
Entry A
Entry C
Exit D Exit F Exit G
36
Derivation of Entry-Exit Tariffs
Values for sum of the entry and exit tariffs need to the same as the corresponding values of the unit cost matrix (cannot be solved algebraically)
This can be achieved by applying an Least Squares approach which results in the following minimization task:
- min ∑ij (Cij – (TNi + TXj))2
This minimization problem can be solved by using a numerical solver (for example using Excel’s Solver)
Usually, additional adjustments are necessary to attain the eventual tariffs:- Scaling to the required revenue- Incorporation of the main objectives in tariff setting (equity goals, stability and predictability,
transparency, etc.)
Distance To Virtual PointThe distance to the virtual point is based on the assumption that the entry and exit tariffs should reflect the costs of bringing gas to the virtual point.
4. Calculating
tariff
3. Calculate
distance to
reference node
2. Calculate flows
and direction
in network
1. Setting of
Allowed Revenue
· Starting point of the tariff calculation
· Set by regulator
· Definition of network sections
· Calculate flows at peak demand situation.
· Determine flow directions
· Reference node can be arbitrarily chosen
· Calculate distance from each point to reference node
· Distances may be negative (cost savings)
Entry AB
Entry CB
Exit BD Exit EF Exit EG
UCAB+UCBD
UCCB+UCBD
UCAB+UCBE + UCEF
UCCB+UCBE + UCEF
UCAB+UCBE + UCEG
UCCB+UCBE + UCEG
Entry AB
Entry CB
Exit BD Exit EF Exit EG
TariffAB+ TariffBD
TariffCB+ TariffBD
TariffAB + TariffEF
TariffCB+ TariffEF
TariffAB+ TariffEG
TariffCB + TariffEG
· Tariff = distance * constant unit cost of infrastructure
· Scaling tariffs in order to reach allowed revenue
y
x
Steps:
Distance To Virtual PointThe distance to the virtual point is based on the assumption that the entry and exit tariffs should reflect the costs of bringing gas to the virtual point.
Features: Costs are allocated to the different entry and exit points based on the distance to the virtual
point (reference node). The reference node can be arbitrarily chosen. Resulting tariffs provide locational signals.
Capacity Weighted DistanceUses distance as a key to allocate costs as well, but weighs them with the technical capacities of the demand/supply node.
4. Calculate tariffs
3. Calculate
capacity weighted
distance
2. Create a
distance matrix
1. Setting of
Allowed Revenue
· Starting point of the tariff calculation
· Set by regulator
· Create a matrix with the distances between every entry point and exit point.
· Calculate the proportion of the capacity of each entry/exit point relative to the total capacity
· Calculate capacity weighted distance for each entry point and exit point.
· Multiply distance by the share of capacity exit j in reltaion to total exit capacity
· For each point the revenue recovered is calculated.
· Dividing the revenue per point and the booked capacity yields the tariff
Steps:
40
Templates
41
Entry
Entry Exit
Exit
Exit
AB
C
D
E
F
G
Operational costs € / yearCapital costs € / yearReturn on assets € / year+
Allowed revenue € / year
42
Entry
Entry Exit
Exit
Exit
AB
C
D
E
F
G
Allowed revenue € / year
Booked capacity kWh/day/year
43
D =
D11
Dl1
D1j
DIJ
AD
Different keys for allocation of costs to entry-exit points
Postage stamp model:
Single uniform tariff applied to either the entry or exit points Does not provide any locational signals Likely to involve cross subsidies between network users due to the uniform tariff level Not particularly suitable for transmission networks with longer distances
Distance to Virtual Point Model: Uses distance as a key to allocate costs Takes into account the direction of the flow under peak conditions
Capacity Weighted Distance Model: Uses distance as a key to allocate costs as well, but weighs them with the technical capacities
of the demand/supply node
Matrix Approach Uses replacement cost as a key (and thus implicitly assumes length/diameter as major cost
drivers
x
Matrix approachThe matrix approach used replacement costs of sections as a key for the allocation of revenues.
Features: Replacement costs of sections used as key for allocation of revenue bears some similarity
with marginal cost pricing. Calculation of unit costs per segment:
- Low utilisation of sections may lead to higher unit costs for that section. May result in signals opposite to what would be desired.
- Alternatively a marginal cost concept can be applied. This approach will require additional adjustments t ensure revenue recovery.
Since this is an optimisation problem, additional constraints can be applied.