Ofgem has approved the creation of a taskforce to tackle an ongoing issue over the allocation of unidentified gas.
The body will be charged with reducing the extreme volatility in daily allocations that has emerged since the introduction of a new gas settlement system last July.
Explaining the regulator’s thinking in a decision document, programme director for consumers and markets, Rachel Clark, said Ofgem agreed with industry stakeholders that “more needs to be done to identify and address the root causes of unidentified gas volatility”.
She said the regulator shares their frustration that this remains necessary “more than a year after the new arrangements were implemented” and that the formation of a taskforce would “go some way to expedite this work”.
Unidentified gas refers to that which cannot be attributed to metered consumption, for example, due to metering errors and theft.
Prior to the completion of Project Nexus – the programme to replace Xoserve’s IT system for gas settlement and supply point administration – unidentified gas was allocated using a process known as “reconciliation by difference”.
Any gas fed into a local distribution zone (LDZ) that could not be attributed to leakages, gas transporters or daily metered (DM) supply points – including any unidentified gas – would initially be allocated to non-daily metered (NDM) supply points.
Allocations were gradually adjusted as meter readings were submitted for larger NDM supply points but there was no individual reconciliation for smaller NDM supply points. They were therefore left to foot the bill the missing gas.
The new gas settlement system for the first time allowed for the reconciliation of all types of supply points. Alongside its introduction, changes were made to the process for allocating unidentified gas.
Rather than being lumped in with all demand from NDM supply points, unidentified gas became a distinct term. Each day, the amount is estimated using an algorithm that incorporates projections for consumption by NDM supply points.
This volume is spread proportionally across all meters. Adjustments are made as meter readings are submitted over the following months and years, eventually revealing the true figure.
However, the daily allocations have been far higher than expected, averaging 4.65 per cent of total demand since the changes were implemented. Prior to their introduction, the volume of unidentified gas was estimated at 1 to 1.3 per cent,
They have also been hugely volatile, quickly swinging from as much as 25 per cent of total demand to less than zero. The task of forecasting and managing costs has therefore become much more challenging for gas shippers and suppliers.
To resolve the problem, industry parties proposed a series of urgent modifications to the Uniform Network Code (UNC) governing the supply and transportation of gas.
UNC642, UNC642A and UNC643 would all set unidentified gas at a fixed proportion of demand and introduce a further variable to cover any remaining unallocated gas.
UNC642 and UNC643 would both revert gas allocation to the pre-Nexus reconciliation by different process. UNC643 would also backdate the change, unwinding all gas allocation since the introduction of the current arrangements.
However, the proposals were rejected by the UNC panel at a meeting in February, and then by Ofgem last month.
The regulator said the source of the issue is not the gas allocation arrangements themselves, but the inaccuracy of the demand projections which inform the daily estimates of unidentified gas.
Numerous other modifications have also been put forward, including UNC658 submitted by Total. This would allow the central data services provider (CDSP), Xoserve, to assign the necessary resources to the creation of a new task force to further investigate the causes of and solutions to the problem.
The UNC panel approved the modification last month. Ofgem too has now given its blessing.
Clark reiterated Ofgem’s concerns that some shippers may pass on higher unidentified gas costs to consumers in the short term but fail to return any refunds if reconciliation later reveals them to be “artificially high”. This would leave them with a “windfall gain”.
“We therefore fully support the intention of the proposal, not only to provide the CDSP with a target of reducing the volatility and scale of unidentified gas, but to develop a robust predictive model for daily unidentified gas that can be used by all parties,” she added.
Xoserve has separately requested the resources to create an unidentified gas taskforce through a proposed change to its data services contract.
Clark said Ofgem had approved UNC658 despite the risk of duplication in terms of the process of creating a taskforce as “any concerns about administrative efficiency are outweighed by the expected beneficial impacts”.
You can read Utility Week’s analysis of the unidentified gas issue here.