National Grid has recently carried out a review of the Gas Demand Side Response (DSR) voluntary curtailment mechanism through July and August. The Gas DSR allows shippers to offer a consumption curtailment service to National Grid Gas (NGG) during periods of acute gas supply constraint called a Gas Deficit Emergency (GDE). Under this mechanism large consumers, defined as those with Annual Quantities (AQs) of 2mn therms or more, are able to have their shipper submit offers when invited by NGG to reduce their consumption of gas by an agreed amount and period.
From conversations with industry stakeholders, National Grid has found that under current arrangements there would be little if any response should a Gas DSR ‘invitation to offer’ be issued. This is because currently, compensation payments are only granted for DSR offers which are exercised (used for curtailment) by NGG. It was widely felt by industry that this was not sufficient given the considerable work required to establish the contractual arrangements between consumer, supplier and shipper to facilitate the submission of DSR offers.
The ongoing conflict in Ukraine and consequential reductions in gas supply to Europe, including the recent indefinite shutdown of Nord Stream 1, have prompted serious concerns about security of supply on the continent and in GB this winter. The likelihood that National Grid will need to utilise Gas DSR to mitigate gas deficits is therefore much higher than in previous winter periods. Consequentially, it is seeking to ensure the mechanism is fit for purpose.
As a solution to the potential lack of offers, the review introduced the proposal for ‘options payments’ which would be paid out to shippers whose offers are accepted by NGG regardless of whether it is later exercised during a GDE. In conversations with National Grid, industry stakeholders suggested that given the work required to create an offer, it was appropriate to offer compensation which would incentivise responses to an invitation to offer. In collaboration with energy industry and large manufacturing stakeholders, National Grid ironed out details of how this would work in practice. Following much discussion, a general set of new arrangements were agreed, and it was decided that this should be implemented through a UNC modification.
UNC822
UNC822 Reform of Gas Demand Side Response Arrangements was subsequently raised on 5 September to introduce the options payments mechanism, alongside several other reforms to the wider DSR mechanism.
The new process to be implemented would see a DSR invitation issued at the beginning of each winter period. Shippers could then submit offers from their eligible customers passed though the supplier. These would have to include a minimum daily curtailment of 100,000kWh and set what the options price and exercise price is in p/kWh. It is thought that allowing the customer and shipper to set the price for their offer rather than a flat rate decided by National Grid will encourage competitive offers between customers. Upon acceptance of an offer by NGG, the shipper would receive the agreed options payment from the Central Data Services Provider (CDSP), funded through the balancing neutrality account.
Offers would also specify whether they could be exercised within the required gas day or on the day prior to it. Acceptance of a DSR offer will obligate the relevant customer to post an offer to either the day-ahead or within-day locational DSR Over the Counter Market (OCM) – depending on which it has been specified for – when the market opens. This day-ahead market would be opened upon the issuing of a Margins Notice by National Grid, indicating the start of a GDE. The within-day would be opened upon the issuing of the Gas Balancing Notice (GBN) at the start of GDE Stage 2.
The day-ahead option has been included within this modification as a means of offering those consumers which need a longer lead-time to turn down its gas consumption greater opportunity to submit offers. Although this was welcomed by participants in the review, it has been highlighted that many large industrial manufactures need a least three to five days to turn down production safely. Although the day-ahead option does provide some additional notice, such consumers would still need to begin their reduction prior to the market opening, at which point there is uncertainty over whether their offer would even be exercised.
There had been some discussion on the eligibility of generators to participate in Gas DSR. While it was acknowledged that these gas consumers would be capable of providing a voluntary curtailment service to NGG from a technical standpoint, the costs they would face for the non-delivery of electricity would likely make doing so financially prohibitive. Nevertheless, this gas customer type has not been explicitly excluded.
Based on its estimates of any gas deficit, NGG would determine what volumes of curtailment are required and for how long – this would inform which of the offers submitted to the OCM it chooses to exercise. Those that are selected would then have to reduce consumption at the relevant supply meter point by the agreed amount. They would then receive the exercise payment for each day of curtailment from the CDSP at the rate agreed in the shipper’s offer.
Next steps
Having been granted urgent status, UNC822 was issued for consultation on 8 September with a deadline for responses on 22 September. The final modification report will then be reviewed by the UNC Panel on 28 September who will decide whether to recommend implementation. It is expected that Ofgem will make its decision following the Panel’s advice in as short a time as possible in order to achieve implementation by November 2022. National Grid has suggested that the first invitation to offer under the new process could be issued by the start of December, ahead of the period of highest winter demand, where risk of a GDE is most significant.
