The Consultation Document has made a number
of specific suggestions for changes to NETA that may assist small
and renewable generators. This annex examines each in turn.
This is the key issue within NETA. Although
price spreads have reduced over time they are still very high
and the modifications that have been proposed to date are unlikely
to be able to reduce them to an acceptable levels. As has been
noted in Annex I, it is a practical impossibility to create prices
that are fully reflective of costs. However, the situation is
made significantly worse by having dual price cash out. Although
the principle of cost reflective imbalance charges is both important
and laudable, no one has yet come up with a practical means of
achieving it. This is a fundamental problem with the NETA concept.
Annex A has discussed in some detail why the
NETA system reinforces the competitive advantage of large players.
Effective consolidation would provide welcome relief to small
players, but will still involve costs that leave small players
disadvantaged. Indeed, the relative negotiating strength of the
consolidator and the party wishing to purchase the consolidation
services would suggest that the majority of the commercial benefit
created by consolidation would be captured by the consolidator.
Thus, although effective consolidation would
be helpful, it does not go nearly far enough.
Ex-post trading is a significant aid to ensuring
that the imbalance charges paid by individual parties more closely
reflect the actual costs incurred by NGC in balancing the system
for energy reasons. Essentially, parties with offsetting imbalances
would be able to take credit for the degree of the offset. This
would have the potential to reduce the imbalances of individual
parties by as much as or more than the introduction of effective
consolidation and would be available to large as well as small
players. This may be seen as a substitute for consolidation. However,
it would not provide the same administrative savings that might
potentially be provided by consolidation. Ex-post trading has
the added advantage that it would remove the significant financial
problem that has been created by parties' errors in notifying
their contractual position. There is no reason to believe that
ex-post trading would create any significant disincentive to trading
out of imbalance prior to gate closure.
Ex-post trading should certainly be pursued.
The Consultation Document states "this
would also go against one of the core principles of NETA which
is to incentivise participants to contract bilaterally in advance
of gate closure, in order to minimise the actions which the system
operator must take to manage the system." This logic is fundamentally
flawed. Offsetting balances have no impact on the requirement
for NGC to take action to balance the system. Further, there will
be many occasions when it is more economic for NGC to take balancing
actions than for individual parties to do so.
In a system with a single cash out price, parties
would be incentivised to balance to the point where it is both
sensible and economic so to do. Parties would undertake this balancing
because of the significant risks that would be inherent in relying
on the imbalance price to settle an imbalance. For example, if
the system is fundamentally long, any party maintaining a significantly
long position could be cashed out at very disadvantageous prices.
Since most individual parties do not have the information to forecast
whether the system will be long or short, particularly close to
real time, the potential for gaining through arbitraging individual
positions against system positions is limited. If parties of sufficient
size have the information required for such arbitrage to be effective,
then powers exist under both licences and competition law to control
the adverse effects of gaming.
A single cash out price would create a more
efficient market and would remove significant elements of the
competitive disadvantage of small players within NETA and, therefore,
should be pursued. However, the method of calculating that cash
out price will require careful consideration.
The provision of a deadband for balancing is
a necessary protection for small players because of the penal
level of price spread created by the dual cash out in conjunction
with Balancing Mechanism prices that fundamentally do not reflect
costs. However, the modification is targeted at ameliorating the
symptoms rather than addressing the root causes and in the long-term
may simply encourage large players to disaggregate their portfolios
and hence remove all parties from balancing. Although such a result
would have the same effect of introducing a cost reflective single
cash out price, it would be more efficient administratively to
introduce a single cash out price based on sound principles. A
modification that provides a deadband would be a helpful short-term
stopgap while single cash out pricing, ex-post trading, effective
consolidation and revised methods of calculating the imbalance
price are put in place. However, the Panel has considered a modification
that would provide a small deadband and rejected it because it
proved impossible to see a workable threshold level.
There should be a presumption against treating
any party or class of parties more advantageously than any other.
This proposal should not be pursued. In any event, other changes
such as a single cash out price, ex-post trading and effective
consolidation should significantly reduce the value of the revenue
surplus. Indeed, the surplus may frequently be negative once a
single cash out price is in place.