Gas networks have a high up-front cost that needs to be recovered from the users of the network. Charges that are levied on users can have a significant impact on their business, with consequences for their behaviour in the market and wider gas market dynamics.
If reforms to the charging regime are required for legal reasons, how can this be done to avoid disruption and negative economic consequences for the gas market?
With the implementation of the European Gas Tariff Network Code, Britain’s prevailing arrangements for charging users of the gas transmission network had to change. Industry stakeholders developed 11 proposals to amend the current gas transmission charging methodology.
Ofgem wished to carry out an impact assessment of the proposed amendments of the gas transmission charging methodology, and to verify their compliance with the Tariff Network Code. It asked Baringa to undertake quantitative and qualitative economic analysis of a number of tariff methodology options to inform its impact assessment and ultimate decision.
Baringa’s role was that of an economic advisor to Ofgem, assessing the impact of the different charging options on the gas market and its different participants, and advising Ofgem on the broader impacts of reform.
We liaised with the gas industry to provide a high-level review of the existing tariff model, using feedback received to inform our assessment of tariff methodology options. We then built an integrated gas tariff and gas market modelling suite to undertake a full quantitative impact assessment of the different charging options.
Our modelling assessed the impact of each tariff methodology option on wholesale gas market transactions and on prices paid by different types of users in different regions. Our final report for Ofgem summarised the quantitative assessment and provided qualitative insights on wider issues such as the effect of tariffs on investment and closure decisions for owners of power plants, interconnectors and storage facilities.
Outcomes and impact
Baringa provided a qualitative and quantitative assessment of the different proposed amendments of the gas transmission charging methodology to inform Ofgem’s policy decisions. It enabled Ofgem to have a much clearer view of the potential consequences of different regulatory choices, both in terms of wider market dynamics, and impacts on individual system users.
Our report summarised the outputs of a complex modelling exercise in a clear and concise manner. It was published on Ofgem’s website following the publication of Ofgem’s decision on the proposed amendments.