Over a year ago, and around a decade after it was initially conceived, Xoserve switched on the successor to its ageing IT system for gas settlement and supply point administration.
The replacement scheme, known as Project Nexus, meant that for the first time meter reads from all types of supply points could be fed into the gas settlement system – no matter their size or how often they were read.
Accordingly, reforms were made to the relevant industry arrangements to allow for this to happen. These included an overhaul to the process for allocating what’s known as unidentified gas: that which cannot be attributed to metered consumption, for example because of meter error or theft.
However, the new system has had some unintended consequences that are causing major headaches for shippers and suppliers.
Old versus new
Prior to the completion of Project Nexus, gas was allocated using a top-down procedure known as “reconciliation by difference”. Under this model, any gas fed into a local distribution zone (LDZ) that could not be attributed to leakages (“shrinkage”), gas transporters or daily metered (DM) supply points – including any unidentified gas – would initially be allocated to non-daily metered (NDM) supply points.
Over time, allocations were adjusted as meter readings were submitted for larger NDM supply points. However, there was no individual reconciliation for smaller NDM supply points. Although efforts were made to spread the costs of unidentified gas across the market in recent years, generally speaking this meant the smaller NDM supply points ended up picking up the tab.
Now, with the ability to reconcile all supply points, the procedure has changed. Rather than being grouped together with all gas allocation to NDM supply points, unidentified gas has become 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, gradually revealing the true figure.
But these new arrangements have not had a smooth landing. Notably, the amount of unidentified gas is far higher than expected.
Before the changes, the volume of unidentified gas was estimated at 1 to 1.3 per cent of total demand. The Joint Office of Gas Transporters (the body that administers the Uniform Network Code (UNC) governing the supply and transportation of gas) says the figure has since averaged 4.65 per cent.
Worse, the daily estimate has fluctuated wildly, from as much as 25 per cent of total demand to less than zero. The task of forecasting and managing costs has become much more difficult as a result.
In an effort to resolve the issue, industry parties proposed three code modifications: UNC642, UNC642A and UNC643.
Both UNC642 and UNC643 sought to revert to the pre-Nexus reconciliation by difference settlement process. The former was proposed by Corona Energy and the latter by Orsted. Unidentified gas would be set at a fixed level, starting at 1.1 per cent in the first year, and would be allocated proportionally to all meters.
A new variable of “settlement error” would be introduced to account for otherwise unallocated gas. The settlement error would be spread among all unreconciled supply points unless a reconciliation target was met. At this point, the remaining balance would be spread market-wide across all meters.
UNC643 additionally sought to backdate the change, unwinding all unidentified gas allocation since the introduction of the current arrangements.
UNC642A, proposed by Eon, would maintain the current bottom-up settlement procedure. But like the others it would also set unidentified gas at a fixed level. Any remaining unallocated gas would be accounted for through a new “balancing quantity” variable. This would be apportioned to all supply points other than those with mandatory daily meter reads.
Ofgem says no
However, the urgently tabled proposals were all turned down by the UNC panel at a meeting in February. And then, earlier this month, Ofgem said it too was minded to reject the modifications.
While acknowledging the problems the new arrangements have caused for shippers and suppliers, interim director for consumers and markets, Rob Salter-Church, wrote in an open letter that “none of the proposals would reduce the overall volume and volatility of unidentified gas or provide greater certainty to the market as a whole”.
Although one of the effects of the new arrangements has been to redistribute the allocation of unidentified gas from smaller NDM supply points to the rest of the market, he accepted that the modifications were not merely an attempt to reverse this. He noted that some industry parties would “prefer the certainty of a fixed allocation of unidentified gas, even if that certainty came at a premium”.
But he also said the new arrangements are working according to their intended purpose, namely to allocate unidentified gas more fairly across supply points and encourage the industry to take action to reduce theft and metering errors.
He argued it would be premature to conclude they were “inherently flawed”, saying the problems that have emerged are partly the result of other industry arrangements that are “not currently operating to a reasonable standard”.
A welcome decision
Victoria MacGregor, director of energy at Citizens Advice, tells Utility Week the Ofgem decision is “positive news”. She says there is “no evidence these proposed modifications were in the interest of consumers”.
“Existing estimates for unidentified gas are volatile, which isn’t good for industry,” she adds. “Small improvements to gas settlement could be made and we support the UNC’s forthcoming work to address this.
“But trying to shift costs back on to consumers and small-scale energy users was not a fair approach.”
Sallyann Blackett, head of volume forecasting at Eon, agrees. She says going back to the pre-Nexus world would amount to “throwing the baby out with the bath water”, wasting years of industry work and millions of pounds of investment.
Eon may have submitted one of the modifications that Ofgem rejected, but she is not disappointed by the regulator’s decision. Blackett says it was proposed only as an alternative to the other, more retrograde, options.
The old way of doing things did unfairly burden smaller supply points with the costs of unidentified gas, she argues, and the true scale of the problem did need to be exposed to push the industry to crack down on theft and improve the accuracy of meter reads. The changes were, and remain, necessary.
The root of the problem
Blackett says Ofgem has rightly identified the real cause of the problem as the way in which unidentified gas is estimated, and in particular, the projections for NDM demand that underpin the calculations.
The methodology for projecting NDM demand is not new. It was used before under the old system. But its flaws went largely unnoticed when unidentified gas was loaded on to smaller supply points and lumped together with the rest of their demand. Project Nexus has exposed these problems and made them “massively visible”, says Blackett.
She says the methodology underestimates the amount of demand from NDM supply points “across the board”, meaning the supposed amount of unidentified gas is higher than it should be.
At the same time, Blackett believes anybody hoping it will return to the pre-Nexus figure of around 1 per cent will be disappointed. She expects reconciliation to eventually reveal the correct figure to be around 3 to 4 per cent, not much lower than the current average.
Her concerns are focused less on the long-run average and more on the day-to-day volatility. She says the root of the problem is weather, or more specifically, how the NDM demand projections respond to different weather conditions. To estimate the daily demand for a supply point, its yearly consumption is first divided by the number of days in the year to give a daily average.
This is then scaled up or down according to an annual load profile (ALP). A further scaling is applied using a daily adjustment factor (DAF) representing the sensitivity of the supply point to weather, and a weather correction factor, representing the conditions on that day. Supply points are assigned to a customer profile called an end user category, each with an accompanying ALP and DAF.
Blackett says the customer profiles group too many different supply points together, failing to distinguish crucial differences in their responses to weather.
Some small commercial customers, for example, are in the same category as residential customers, despite having a much more muted response to cold snaps.
Blackett says the result is that “when it’s cold the allocation doesn’t go up enough and when its warm it doesn’t go down enough”.
She cites as evidence the estimates of unidentified gas over recent months: “Unidentified gas was massively positive in February and March when we had the really cold period, and last month when it was warm it was quite negative.”
Accordingly, Eon and others have proposed a raft of additional code modifications to try and stop this happening. UNC644 (Eon) would create multiple new end user categories by splitting apart some of the existing ones, while UNC659 (Eon) would enhance the composite weather variable.
Several of the modifications attempt to address the lack of adequate information needed to establish accurate customer profiles and scaling factors.
And Ofgem also has its eye on the issue. One of the proposed remedies in its minded-to decision was an increase in the size of the data samples used to formulate these profiles.
Changing course
Cornwall Insight senior analyst Steven Britton believes these modifications move in the right direction. “All of these are going to increase the accuracy. They’re going to provide much more information to work with,” he says. “The only thing that is regrettable is that they couldn’t have been done sooner.”
Britton says the modifications Ofgem rejected were raised in haste, although the urgency was understandable: “We have a lot more information now. The issue is understood a lot better”.
Although some shippers would still like to return to the old way of doing things, most accept they have lost the battle and are getting on board with the new approach to resolving the issue.
Britton says the new modifications should reduce the volatility in the daily estimates for unidentified gas, the main thorn in the side of shippers and suppliers.
But, like Blackett, he says the industry should not labour under the illusion that these changes are a sure-fire way of returning the overall volume to the pre-Nexus level. It needs to start looking at theft.
“I think that’s what Ofgem was also wary about, because the theft part does not get discussed a lot in the industry,” he says.
On a separate note, he adds the regulator is also concerned about shippers passing on increased costs to suppliers, and hence consumers.
“What it is really worried about is that shippers will pass on these costs in the short term, and then in the long term, as costs flow back to them through the rolling reconciliation process, they will not then pass those credits on to customers as they did the costs, resulting in them having made a windfall,” he explains.
The longer it takes to reduce the volatility in unidentified gas estimates, the bigger this problem will become.
Speeding things up
It should be reassuring, then, that yet more proposals have been made to try and expedite progress.
UNC658 (Total) would provide Xoserve with the resources to investigate the unidentified gas issue and come up with solutions. Xoserve has itself asked for this to happen through a change to its data services contract.
They are warmly welcomed by Blackett: “Hopefully, giving Xoserve some money and saying ‘get in some smart cookies to do some modelling and work out what this needs to look like’ will make things change faster.”
She says Eon, as indicated by the number of code modifications it has submitted, has been doing a lot of heavy lifting up until this point, describing the process as “phenomenally frustrating” and “a hard slog”.
Xoserve, she believes, is much better placed to examine the issue. Eon’s modelling has either been based on aggregated data that is not sufficiently granular, or data from its own portfolio which, while large, may not be representative. Xoserve will have access to a much deeper pool of information.
Britton again agrees: “It’s one those things where you think, why didn’t the industry think of that six months ago”.
After exhibiting something of a kneejerk reaction, the industry now appears to be heading down the right path.
The new arrangements may have had bumpy landing, but turning back the clock to the pre-Nexus days is not the answer. It’s certainly hard to imagine Ofgem ever giving its blessing to such a reversal, given its long-running efforts to improve the accuracy of billing and metering.
The race is now on to improve the demand projections, so the industry can put an end to the volatility which has caused so much trouble as soon as possible. Only then it will be finally able to turn its attention to reducing the huge amount of gas that goes missing from the networks every day, ultimately at a cost to consumers.