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SO Incentives Stakeholder Workshop

Monday 21st January Jo Faulkner – Balancing Services Manager

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In this session

 BSUoS and incentives  SO Incentives journey  How we have improved the current target setting methodologies

Constraints Energy

 Advantages of a BSIS cost target incentive arrangement  Our concerns on Ofgem’s cost disallowance/discretionary reward consultation

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Contribution to BSUoS

• 2011/12

Response Reserve Constraints Other services SO Internal Costs Residual Energy Balancing SO Loss

• 100

100 200 300 400 500 600 700 800 900 1000 2011/12 Contribution to BSUoS (£m) NETSQSS Standards Outages Contracted Services / Availability Market Length Generation Topology Wholesale/BM Prices

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Journey to current incentive scheme 2013 -

Pre Apr 2011:

• Forecast target
• Market volatility
• Windfall gains &

losses Drivers for change:

• Focus on SO control
• Multi year scheme

Learn the lessons from 2011-13:

• Continue to move

forward

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Methodologies and Relationships Actual Data Forecast Data Relationships Cost Target

Methodology

Accuracy

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Steps already taken to enhance the constraint methodology

 Consultation carried out in July 2012 based on learning from scheme to date:

Increased accuracy of a number of inputs

Use actual data where we have limited control/forecasting capability e.g. generator availability and interconnector flows Allow for removal of erroneous data

Correct identified issues with the model itself

Accurate Inputs Appropriate model settings Accurate and focussed cost target

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Impact of the methodology amendments Forecast Target Outturn

Based solely upon forecast data, including forecasts for those ex post inputs Based on a combination of forecast inputs (ex ante) and real data inputs (ex post) as we move through the scheme – known at scheme end Actual cost of operating the system – compared against the target to determine National Grid’s performance

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Constraint Cost Methodology

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Iain McIntosh – Future Requirements Manager

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Further constraint methodology enhancements identified

 Better representation of GB Transmission Network  Ability to identify and directly map any constraint boundary into the model  Improved wind modelling – including explicit modelling

• f embedded wind

 Improved hydro and pumped storage modelling  Visualisation capability

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Original constraint model

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Enhanced constraint model

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Wind representation

 Phase 1 model assumed generic load factor across GB  Due to connection points of wind, increasingly localised constraints occur. Difficult to capture with SYS boundary definitions  Therefore, even if wind is put into model ex-post, cost allocation is not necessarily accurate  Forecast wind profiles reflect “typical year”

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Enhanced wind representation

 Wind output can be modelled against actual transmission or GSP connection point  Embedded wind modelled

• explicitly. Where no metered
• utput exists, modelled with

reference to most geographically proximate meteorological station  Localised boundaries can now be

• modelled. High sensitivity

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Energy Cost Methodology

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Matt Magill – Trading and Assessment Manager

The 2011/13 Model

Cummulative Scheme to date Target cost and outturn costs £- £200 £400 £600 £800 £1,000 £1,200

Apr- 11 May- 11 Jun- 11 Jul- 11 Aug- 11 Sep- 11 Oct- 11 Nov- 11 Dec- 11 Jan- 12 Feb- 12 Mar- 12 Apr- 12 May- 12 Jun- 12 Jul- 12 Aug- 12 Sep- 12 Oct- 12 Nov- 12 Dec- 12

('000s)

• 5%

0% 5% 10% 15% 20% 25% Scheme to date Outturn Costs Scheme to date Target Costs Scheme to date deviation from target as percentage

The 2011/13 Model

 The theory behind the model is still the most applicable for development - statistical analysis of past behaviours to determine future outcomes  The 2011/13 model was built in excel and required large amount of resource to apply and audit any changes  Model development was challenging and resulted in:

Model relationships that were not fully developed Some Ex-Ante inputs were inappropriate

Changes we have made for 2013

• nwards

 We have developed a new modelling architecture

A new inputs database that sources all the input data, creates auditable files and allows multiple selection and choices to be made Allows for rapid development of flexible component design including more volume, price and cost models Also allows for rapid development of input selections Improved, auditable and repeatable back testing

 The new modelling architecture gives us the opportunity to create more robust auditable models

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Model Development Timeline

Further Model Development phase starts New Architecture complete with 11/13 model baseline Complete Calibration of Constraint Model Constraints Energy New Network Topology Optimise and refresh with latest data Parallel run for previous months

Jan Feb Mar Apr May

Further Model Development finalised Energy Model Parallel Run Continuing calibration Un- constrained Model Constraint Model Parallel Run Parallel run for Previous months

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BSIS vs Cost Disallowance

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Katharine Clench – SO Incentives Development

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Benefits of target based incentives

Incentives

Align our interests to those

• f consumers

Fair balance of risk and reward (upside & downside in equal measure) Objective framework within which to make decisions Encourage and reward innovation Align SO and TO incentives

…..

= consumer value

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Our concerns with cost disallowance

Proposed limit on disallowance is disproportionate:

• Circa £90m cap

Insufficient detail and clarity as to how disallowance may occur:

• Trigger for Ofgem investigation
• Issue of hindsight

Introduces risk and uncertainty to system operation  Create inefficiencies rather than reduce them – foster a more cautious approach to balancing

 More actions managed through the Balancing Mechanism rather than through contracting ahead of time

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Key Messages

 A cost target approach is required to maintain our current contracting activities and encourage further innovation  Our view is that the quality of the inputs is vital to creating an accurate and robust cost target  The 2011-13 scheme has enabled us to understand where improvements need to be focused on inputs and methodologies  We should maintain momentum in this area rather than turn to developing a whole new approach to incentivisation  Incentives should be designed such that they continue to deliver benefits to consumers