Regulation of natural gas pipeline transportation and storage

Ownership and infrastructure

Describe in general the ownership of natural gas pipeline transportation, and storage infrastructure.

Offshore

All offshore gas pipelines in the UK are in private ownership. Ownership of an offshore pipeline is commonly linked to ownership of the producing assets and the connected receiving terminal. An example of this is the 1,660km Langeled pipeline, which delivers Norwegian gas to the Easington terminal. It is owned by Gassled, a joint venture owned by Petoro AS, Sval Energi AS, CapeOmega, Silex Gas Norway AS, and Equinor Energy AS and others that hold interests in the producing fields in Norwegian waters.

The two gas interconnectors connecting the UK to the continent are also in private ownership. The Bacton–Zeebrugge (Belgium) pipeline is owned by Interconnector UK, a joint venture made up of Fluxys UK Limited and Snam International BV. The Bacton-Balgzand (Netherlands) pipeline is owned by BBL, a joint venture between Gasunie BBL BV, Uniper Ruhrgas BBL BV and Fluxys BBL BV, subsidiaries of Gasunie, E.On and Fluxys respectively. The interconnector linking Scotland and Northern Ireland is owned by Premier Transmission Limited, a mutual company, and the interconnector to the Republic of Ireland (RoI) is owned by Gas Networks Ireland, the RoI state-owned gas company.

 

Onshore

The onshore gas pipeline network comprises a 7,600km high pressure (85 bar) NTS, which transports gas to 40 power stations and 13 lower-pressure local distribution zones systems (LDZs). The LDZs are grouped into eight regional DNs, each composed of one or two LDZs.

Until 2005, the entire onshore pipeline network was owned and operated by National Grid Gas (NGG), formerly known as Transco, and originally part of British Gas. NGG is a privately owned regulated utility that is now part of National Grid plc following a merger in 2002 with the owner and operator of the electricity transmission system in England and Wales.

On 1 June 2005, NGG sold four of the DNs to independent private operators – Scotland and South of England (SGN), Wales and West of England (Wales and West Utilities) and North of England (Northern Gas Networks), while retaining ownership of the NTS and the four other DNs (London, North-west England, West Midlands and East of England).

However, in late 2016, NGG announced the planned disposal of a majority stake in its distribution business, National Grid Gas Distribution Limited to a consortium backed by Macquarie, the Australian investment bank, and China Investment Corporation, China’s sovereign wealth fund. The sale process was completed in early 2017 and the distribution business was renamed Cadent Gas Limited.

 

Storage

There are a number of gas storage facilities in the UK, which vary in size and deliverability. All facilities are in private ownership. The only long-range facility was Rough (a depleted offshore gas field), owned and operated by Centrica, but this is no longer operational and the remaining cushion gas has now been extracted. There are medium- and short-range facilities at Hornsea (SSE), Humbly Grove (Humbly Grove Energy), Aldbrough (SSE/Equinor), Holehouse Farm (EDF), Hatfield Moor (Scottish Power), Hill Top Farm (EDF), Stublach (Storenergy) and Holford (E.ON).

Department for Business, Energy and Industrial Strategy (BEIS) figures for 1 November 2019 give total UK storage capacity as 1.49 billion cubic metres (bcm), down 70 per cent since the closure of Rough. However, there is approximately a further 5 bcm of potential capacity in projects with planning permission, the largest of which is the 1.5 bcm Gateway project.

Regulatory framework

Describe the statutory and regulatory framework and any relevant authorisations applicable to the construction, ownership, operation and interconnection of natural gas transportation pipelines, and storage.

Regulation of onshore gas markets (transportation, storage and distribution)

The Office of Gas and Electricity Markets (Ofgem), which carries out the work of the Gas and Electricity Markets Authority (GEMA), the independent energy regulator, is responsible for regulation of gas markets in Britain. GEMA takes decisions on a range of matters, including price controls and licence enforcement (for onshore gas operations), and determines strategy to achieve its objective of protecting the interests of consumers in relation to gas conveyed through pipes, wherever appropriate, by promoting effective competition between persons engaged in, or in commercial activities connected with, the shipping, transportation or supply of gas.

Decisions of Ofgem can be challenged in the same manner as decisions of any other UK public and statutory body. The most frequent form of challenge is by judicial review, a process that challenges the basis by which a decision has been reached (with a view to the decision being declared unlawful). In certain cases, such as where a decision to modify the conditions of a licence is disputed, an appeal lies from Ofgem to the Competition and Markets Authority (CMA) rather than to the administrative courts. In such cases, the grounds on which the decision may be overturned are a blend of standard judicial review criteria (expressed in statutory form (eg, ‘the decision was wrong in law’)) and elements of what could be termed an appeal on the merits of the decision (eg, failure to give appropriate weight to particular regulatory objectives to which Ofgem is required to have regard).

In Northern Ireland, regulation of the gas market is carried out by the Northern Ireland Authority for Utility Regulation.

 

Offshore

In relation to offshore pipelines, under the Petroleum Act, a Pipeline Works Authorisation (PWA) issued by the Oil and Gas Authority (OGA) is required for the construction and use of any offshore oil and gas pipeline. While the PWA is the principal consent, it is underpinned by a comprehensive environmental regime that imposes additional requirements.

Following the implementation of Offshore Safety Directive 2013/30/EU (OSD), Offshore Installations (Offshore Safety Directive) (Safety Case, etc) Regulations 2015 (SCR 2015), Offshore Installations (Prevention of Fire and Explosion and Emergency Response) Regulations 1995, Offshore Installation and Pipeline Works (Management and Administration) Regulations 1995 and Pipelines Safety Regulations 1996 (PSR) establish the framework of duties for offshore pipeline operators and the interface between the pipeline and installation operator.

The PSR apply to all pipelines in Great Britain, territorial waters and the UK Continental Shelf. The PSR also apply to apparatus and works associated with pipelines including valves and valve chambers connecting pipelines to plant, offshore installations or wells, structures supporting a pipeline, apparatus for facilitating the flow of fluid or for treating or cooling fluid to flow through a pipeline, apparatus for the supply of energy or the transmission of information for the operation of the pipeline and apparatus for the cathodic protection of a pipeline. The PSR impose obligations on ‘operators’ in relation to the design, safety systems, construction, installation, maintenance and decommissioning of pipelines. The ‘operator’, in relation to a pipeline, is the person who is to have or has control over the conveyance of fluid or any mixture of fluids in the pipeline, or where this person is not known, the person who commissions the design and construction of the pipeline. When a pipeline is no longer used, or not for the time being used, the ‘operator’ is the person last having control over the conveyance of fluid or any mixture of fluids in it.

Pipelines also fall within the SCR 2015, which define installation to include any part of a pipeline connected to an offshore installation as is within 500 metres of any part of its main structure, and any apparatus or works that are situated on its main structure or wholly or partly within 500 metres of any part of its main structure and associated with a pipe or system of pipes connected to any part of that installation. Production and non-production installation under SCR 2015 also include pipelines. The SCR 2015 does not require a safety case for offshore pipelines, but the installation safety case does need to address risks arising from pipelines. In particular, the safety case will need to include details of how the SCR 2015 duty holder will ensure that no fluid is conveyed in a pipeline unless safe operating limits have been established and that a pipeline is not operated beyond its safe operating limits, or how the SCR 2015 duty holder has cooperated or will cooperate with the pipeline operator to ensure compliance with specified parts of the PSR (if the SCR 2015 duty holder is not the pipeline operator).

Most offshore environmental requirements are imposed by bespoke secondary legislation, which is specific to the oil and gas industry. Key obligations include the requirement at various stages in offshore exploration and production to carry out an environmental impact assessment, obligations on operators to prepare oil pollution emergency plans, the prohibition of discharges or combustion activities except in accordance with conditions set in offshore permits and the regulation of carbon emissions.

 

Onshore

In relation to onshore pipelines, a Pipeline Construction Authorisation must be obtained for onshore oil and gas pipelines (except those of gas transporters) that are more than 10 miles in length (the Pipe-lines Act 1962). Such applications may be subject to environmental impact assessment by virtue of the Pipe-line Works (Environmental Impact Assessment) Regulations 2000. Since the enactment of the Planning Act 2008, such pipelines are considered to be nationally significant infrastructure projects and, as such, the application for consent under the Pipe-lines Act 1962 must be made to the National Infrastructure Directorate of the Planning Inspectorate under the Planning Act 2008. Pipelines that are 40km or less are considered to be local pipelines, requiring planning consent from the local authority.

The conveyance of natural gas through pipelines to domestic and other customers is dealt with under the Gas Safety (Management) Regulations 1996, which require gas transporters to prepare a safety case for approval by the HSE.

The regulatory regime for gas is founded in the Gas Act, the principal UK legislation governing onshore gas operations. The Gas Act prohibits certain gas activities in GB unless the person or company carrying out those activities is licensed to do so, or benefits from an exemption (the position in Northern Ireland is similar). The prohibited activities are (broadly):

  • conveying gas through pipelines to premises (or certain other pipeline systems) other than a gas interconnector. A person licensed to convey gas through pipelines is a gas transporter;
  • supplying to premises gas that has been conveyed through pipes. A person licensed to supply gas is a gas supplier;
  • arranging with a gas transporter for the conveyance of gas in a pipeline system. A person licensed to make arrangements with a gas transporter is a gas shipper;
  • participating in the operation of an interconnector, an interconnector being a pipeline system situated in GB for conveying gas between GB and another country; and
  • providing a smart meter communication service, a smart meter being a gas meter that enables information to be sent or received using an external electronic communications networks.

 

Licences to carry out these activities are granted subject to conditions. The conditions of the licences are the principal tool by which Ofgem regulates the activities of licence holders. Overall, the regulatory regime comprises the Gas Act (and certain other primary legislation), regulations issued under the Gas Act, licence conditions and a number of codes and subsidiary documents that exist pursuant to licence conditions (including the Uniform Network Code (UNC)).

The UK regime complies with the requirements of the European regulations and directives on the internal gas market.

 

Gas transporter

A gas transporter owns and operates a pipeline system in GB that conveys gas from one point of the pipeline system to another. A gas transporter is prohibited from holding a gas shipper’s licence or a gas supplier’s licence. NGG and each of the distribution network (DN) operators are gas transporters, holding gas transporter licences. NGG is licensed as operator of the NTS. Each gas transporter is responsible under its licence for ensuring that its pipeline system has adequate capacity to meet the firm demand that is connected to it. Gas transporters’ tariffs are regulated by Ofgem.

As NTS operator, NGG is responsible for the physical balancing of the GB pipeline system. Broadly, NGG is required to ensure, on a daily basis, that the quantities of gas put onto the GB pipeline system by gas shippers match the quantities of gas taken off the GB pipeline system. However, this does not impose on NGG any obligation as to the availability of gas for delivery to the system – in the case of a shortfall in gas supplies, the system is kept in balance by load shedding under prescribed emergency arrangements. The arrangements for this balancing mechanism are set out in the UNC.

 

Gas shipper

The role of a gas shipper is to contract with the gas transporters for transportation of gas on their pipeline systems. The gas shipper is effectively required by its licence to comply with the network code for the relevant gas transporter across whose network it will be arranging for gas to be conveyed. In practice, if a gas shipper wishes to ship gas across the GB pipeline system, it will need to comply with the UNC.

Gas shippers typically contract with upstream parties, such as offshore producers, LNG importers and interconnector shippers, to purchase gas at the point at which gas is delivered into the GB pipeline system. An upstream party may act as gas shipper itself provided that it holds a shipper’s licence.

In terms of the offtake of gas from the GB pipeline system, in principle a gas shipper will on-sell the gas to a licensed gas supplier for supply to the consumer (see below). In practice, many gas suppliers also act as gas shipper (holding both types of licence) so that no transaction for the sale and purchase of gas is required prior to the supply of the gas to the consumer. A person who engages in gas trading as described below will need to be licensed as a gas shipper.

 

Gas supplier

A gas supplier contracts with a customer to supply gas offtaken from the GB pipeline system to the customer’s premises. Customers include power generators, large-scale industrial users and domestic customers. Competition in supply exists at all levels of the GB market; all consumers are free to contract with a gas supplier of their own choice. Until recently, there had, for some years, been no price controls applicable to gas suppliers; the level of supply tariffs was not regulated. However, following an investigation by the Competition and Markets Authority (CMA) (initiated by Ofgem) into the supply of electricity and gas (2014 to 2016), a price cap was put in place in respect of customers supplied through ‘pre-payment’ meters. Subsequently, the government introduced legislation requiring Ofgem to impose a price cap on suppliers’ ‘standard variable tariffs’, which less-active customers typically find themselves paying. Ofgem, now chaired by Professor Martin Cave, the one member of the panel that conducted the CMA investigation to vote for a general price cap in 2016, completed the process of setting the cap, against a range of statutory objectives, in November 2018.

As noted above, in principle the supplier will also contract with a gas shipper to arrange for the gas to be conveyed across the pipeline system to the premises. In practice, gas suppliers normally also hold a gas shipper licence. The distinction in GB between gas shipping and gas supply is important. The gas shipper’s role is a wholesale role, and it is required to contract with a gas transporter to have gas transported through the transporter’s pipeline system. Gas suppliers have a retail role (which is reflected in the consumer-protection conditions of their licences). They do not contract with gas transporters; instead, they contract with a gas shipper for this purpose. The gas supply activity is regulated and requires a Gas Act licence, whether the supply is for industrial, commercial or residential use.

 

Interconnectors

An interconnector operator operates an interconnector that connects one country to another (eg, the Bacton–Zeebrugge interconnector between GB and Belgium).

Each interconnector has an interconnection agreement with National Grid NTS governing the operation of the interconnection point. It is a requirement of the EU Codes that there is an interconnection agreement at each interconnection point. Different rules for booking capacity, nominations and allocations apply at the interconnection points, for example, capacity is booked on the European capacity booking platform, PRISMA. These rules can be found in the European Interconnection Document section of the UNC.

 

Storage

Different regulatory regimes apply to the development of onshore and offshore gas storage projects. In relation to the offshore storage of gas, the Energy Act 2008 introduced a new framework that allowed for the grant by the OGA of a licence to store gas offshore. Prior to this, offshore storage had been permissible. However, the new legislation clarified the law and vested in the Crown Estate the exclusive right to store gas (including carbon dioxide) offshore. As a result, a new offshore gas storage project will require both a gas storage licence and a lease from the Crown Estate. In relation to the onshore storage of gas, the Planning Act 2008 makes it a requirement that such projects have been authorised by a development consent order granted by the relevant Secretary of State if the working capacity of the facility is expected to increase by at least 43 million standard cubic metres, or the maximum flow rate of the facility is expected to increase by at least 4.5 million standard cubic metres per day. Facilities that do not meet these thresholds will remain the jurisdiction of the local planning authorities.

 

Licensing

A person wishing to carry out a licensable activity must apply for a licence to do so. This application will be made to Ofgem. Ofgem is responsible for granting licences under the Gas Act, enforcing the conditions of the licence and proposing modifications to it. Its enforcement functions are twofold. First, it may enforce the conditions of a licence by imposing an enforcement order requiring the licensee in breach to remedy the breach and take other appropriate actions. Second, it may also impose a financial penalty of up to 10 per cent of the licensee’s turnover. Ofgem also has competition law functions to take action for a breach of the Competition Act 1998 and European competition law. It exercises these competition powers concurrently with the CMA.

 

Exceptions and exemptions

The Gas Act sets out some exceptions from the requirement to hold a licence. None of these applies to a gas shipper. BEIS is responsible for granting exemptions from the requirement to hold a licence. BEIS may grant class exemptions or individual exemptions. It is very rare for BEIS to grant an individual exemption, and a strong case would need to be put giving robust and compelling reasons why an individual exemption should be granted. BEIS has granted some class exemptions. These are set out in statutory instruments made by the Secretary of State (SoS).

 

Licence conditions

All Gas Act licences are granted subject to conditions. The conditions impose a variety of obligations on licence holders, such as:

  • obligations to provide information to Ofgem;
  • obligations in relation to regulatory accounts;
  • obligations as to cross-subsidy between different businesses, and non-discrimination between classes of user or customer;
  • price controls for price-regulated activities (network ownership and operation);
  • obligations to establish and maintain codes and other documents that underpin the operation of the GB market; and
  • consumer-protection obligations.

 

The conditions broadly divide into standard conditions (which apply in all licences of the relevant class) and special conditions (which apply only to a particular licence holder). The Gas Act sets out the framework under which licence conditions can be modified. Broadly speaking, Ofgem can modify licence conditions provided Ofgem gives notice to each relevant licence holder, BEIS, the HSE and Citizens Advice agencies, these stakeholders are properly consulted (with BEIS able to reject modifications outright) and Ofgem provides reasons for its decision. Ofgem’s decision is subject to appeal to the CMA.

Most energy-related proposals in England and Wales (and their territorial waters) will require an application for development consent, will need to comply with planning policy (see question 3) and will be subject to environmental impact assessment. Depending on the size of infrastructure proposed, such consent will be determined either by a local level municipal body (the local planning authority) or the National Infrastructure Directorate within the Planning Inspectorate, an executive agency of the government. The National Infrastructure Directorate took over the functions of the Infrastructure Planning Commission under the terms of the Localism Act 2011. The aim of this change was to reintroduce democratic accountability to the decision-making process in respect of NSIPs, with decisions in respect of development consent being taken by the relevant secretary of state on advice from the Planning Inspectorate.

 

Environmental and safety regulation

In addition to the licensing requirements under the Gas Act regime referred to above, the construction and operation of pipelines is regulated under a range of environmental and safety legislation. This area of law gives rise to legal requirements for safety case documents to be prepared, risk assessments to be carried out, operational permits relating to construction works and prescribed processes to be obtained (eg, gas processing activities or the generation of waste materials), and wide-ranging duties relating to the operation and maintenance of pipelines. The principal pipelines safety legislation is the Pipelines Safety Regulations 1996. In relation to environmental regulation, gas transportation activities are subject to a range of operational duties and potential liabilities in the event of an accident.

Land rights

How does a company obtain the land rights to construct a natural gas transportation or storage facility? Is the method for obtaining land rights to construct natural gas distribution network infrastructure broadly similar?

Offshore

The laying of offshore pipelines is governed by the Petroleum Act. It is illegal to construct or use a controlled pipeline (broadly, a pipeline in the sea adjacent to the UK or within any designated area under the Continental Shelf Act 1964) in the absence of an authorisation issued by the OGA. In relation to a new storage facility, the developer must obtain a lease of the seabed from the Crown Estate (the body that manages the Crown’s property rights).

 

Onshore

The Pipe-Lines Act 1962 (mostly relevant only for existing pipelines) and the Planning Act 2008 contain authorisation regimes for pipelines on land. They also give the SoS powers to make a compulsory purchase order to facilitate the construction of a pipeline. The authorisation regime does not apply to all onshore pipelines (specifically excluded are pipelines constructed by gas transporters); however, the laying of gas pipes by a gas transporter, in qualified circumstances, is subject to general development consent. In addition, the SoS may grant a compulsory purchase order for the benefit of a gas transporter under powers contained in the Gas Act.

 

Storage

There is no specific legislation in relation to onshore storage facilities; the developer would need to secure land rights through direct negotiation with the landowner.

Access

How is access to the natural gas transportation system and storage facilities arranged? How are tolls and tariffs established?

Offshore

Access to offshore pipelines (and onshore reception terminals) is governed by an Infrastructure Code of Practice adopted in 2017 (the ICoP) (replacing an earlier code published in 2004). The aim of the ICoP is to facilitate access to offshore infrastructure, particularly where required to support development of small marginal fields.

The ICoP establishes a framework for the negotiation of access terms and tariffs. The ICoP does not prescribe terms or tariffs, and the parties are free to agree these having regard to certain principles set out in the ICoP. The ICoP principles require the parties to provide each other with adequate information during the negotiation process, for infrastructure owners to provide access in a transparent and non-discriminatory manner, for the parties to agree fair and reasonable tariffs and for the parties to publish key agreed commercial provisions once terms are agreed (including the agreed tariff). In addition, the principles require the parties to settle disputes by referral to the SoS.

Under the ICoP, infrastructure owners are required to publish details of available capacity. A potential user can then ask the owner for outline commercial terms and an indicative tariff, and the user must then supply information about its capacity requirements. This should allow meaningful negotiations to start, with the aim of reaching agreement within six months.

Though the ICoP is a voluntary arrangement and, therefore, not binding, it applies to all offshore infrastructure owners, those parties holding existing capacity rights and potential users. In the event agreement is not reached, an application may be made to the OGA to exercise powers under the Energy Act 2011 to grant access. When considering an application, the OGA must take into account:

  • capacity that is or can reasonably be made available in the pipeline or at the facility;
  • any incompatibilities of technical specification that cannot reasonably be overcome;
  • difficulties that cannot reasonably be overcome and that could prejudice the efficient, current and planned future production of petroleum;
  • the reasonable needs of the owner and any associate of the owner for the conveying and processing of petroleum;
  • the interests of all users and operators of the pipeline or facility;
  • the need to maintain security and regularity of supplies of petroleum; and
  • the number of parties involved in the dispute.

 

The government has published guidance on how applications will be considered. To date, instances of this have been very rare as, in general, parties negotiating access terms prefer to find their own solution rather than having terms imposed on them by the SoS.

 

Onshore

Access to onshore pipelines is governed by the Gas Act. Here, the requirement is for the owner of the pipeline network to negotiate with potential users on the basis of its published commercial terms and tariffs. In the event agreement cannot be reached, an application may be made to Ofgem to resolve the dispute. Where Ofgem is satisfied that granting access will not prejudice the efficient operation of the pipeline or the transportation of gas under existing contractual commitments, it may specify access terms and a tariff and require the pipeline owner to enter into an agreement setting out such terms with the user by a specified date. In specifying terms, Ofgem must give due consideration to the cost to the pipeline owner of operating the pipeline and setting the tariff at a level that allows the owner to recover an appropriate return on the capital value of the pipeline.

 

Storage

The current requirements for third-party access to storage facilities are set out in the Gas Act. These requirements reflect the Second EU Gas Directive and the accompanying GB legislation, the Gas (Third Party Access) Regulations 2004 (the TPA Regulations). The negotiated third-party access (TPA) requirements apply to those facilities for which access is economically necessary to secure an efficient market for storage services. Currently, the only GB facility affected by the TPA Regulations is the Hornsea (SSE) facility. The main provisions governing access require storage operators not to discriminate between parties in giving access to the facility; negotiations for access are to be conducted in good faith by the storage operator; and storage operators to publish the contractual terms for access on an annual basis.

An exemption is available from the TPA requirements where Ofgem is satisfied that use of the facility by other users is not necessary for the operation of an economically efficient gas market or where certain specific requirements are met, including where the facility will increase the UK’s security of supply and the owner is a person other than a gas transporter.

In September 2009, the Third Internal Energy Market Package came into force and, since March 2011, GB storage operators have been obligated to comply with the relevant provisions of the Third EU Gas Directive and Gas Regulation as transposed into GB legislation. In relation to access to gas storage facilities, storage operators must follow new requirements, including:

  • additional provisions to prevent discrimination in respect of TPA storage facilities;
  • the unbundling of storage operators from vertically integrated companies;
  • increased transparency and information provision; and
  • enhanced monitoring and enforcement powers for Ofgem.
Interconnection and expansion

Can customers, other natural gas suppliers or an authority require a pipeline or storage facilities owner or operator to expand its facilities to accommodate new customers? If so, who bears the costs of interconnection or expansion?

Offshore

In relation to controlled pipelines, the Petroleum Act gives the OGA powers to require alteration of the route of a new pipeline and the modification of the capacity of an existing pipeline. Where the capacity increase (or new connection) is in response to a request from a user, the OGA can require the user to compensate the pipeline owner for the costs incurred in modifying the pipeline.

 

Onshore

Under the Gas Act, a similar arrangement exists in relation to pipelines operated by a gas transporter. On application for a connection or increase in capacity, Ofgem can require the gas transporter to make the connection or increase the capacity. To the extent the associated costs are not recoverable elsewhere, Ofgem can require the user to compensate the gas transporter.

 

Storage

There are no equivalent provisions to those noted above regarding storage facilities.

Processing

Describe any statutory and regulatory requirements applicable to the processing of natural gas to extract liquids and to prepare it for pipeline transportation.

There are no requirements under either the Petroleum Act or the Gas Act specifying statutory or regulatory requirements in relation to the processing of natural gas to extract liquids.

The Gas Safety (Management) Regulations 1996 (GSMR), which came into force in 1996, impose requirements on the composition and pressure of gas and in respect of gas escapes. The GSMR ensure no person can transport gas in a pipeline network unless a safety case has been prepared and accepted by the HSE. Various specific gas-processing activities are regulated under the Environmental Permitting (England and Wales) Regulations 2016, so any such activities that are necessary as part of a gas storage operation would require a permit under that regime.

Contracts

Describe the contractual regime for transportation and storage.

TransportationNetwork Codes and the UNC

The UNC contains the contractual framework for onshore gas transportation in GB. It establishes a common set of rules, which ensure that competition can be facilitated on level terms.

Each gas transporter is required by a condition in its licence to establish transportation arrangements (ie, arrangements that enable gas shippers to use that transporter’s pipeline system) and to have in place a network code (an individual network code) that sets out those transportation arrangements. The transportation arrangements (and network codes) are required to meet certain objectives set out in the licence condition (such as ensuring effective competition between gas shippers and gas suppliers). Thus, NGG and each of the DN operators are required to have a network code. A gas transporter may only contract with gas shippers on the terms of its network code.

To maintain consistency of terms for use of different pipeline systems, the gas transporters are also required by their licences to establish collectively a uniform network code. Each of the individual network codes must incorporate the UNC. In practice, the UNC contains all of the detailed rules required, and the individual network codes are very short documents (one page only) that simply incorporate the UNC (the term UNC is used to include the individual network codes into which it is incorporated). Prior to the disposal of four DNs in 2005, NGG had a single network code for the whole system. The UNC was introduced at the time of the disposal to deal with the fragmentation of the network in order to maintain a common set of transportation arrangements across different networks owned and operated by different transporters.

The individual network codes are codes, not contracts as such. However, they are given contractual force through framework agreements signed by the gas transporter and the gas shippers who are to be bound by the rules in the UNC. Thus, NGG has signed a framework agreement with all gas shippers in respect of the NTS, as has each of the DN operators with those gas shippers using their network. Each framework agreement contains accession arrangements to allow new gas shippers to sign. Any shipper wishing to ship gas on the NTS or LDZs must sign the relevant framework agreement or agreements, and, thereby, be bound by the UNC. Gas suppliers are not parties to the UNC but are (in effect) represented by their gas shippers.

 

Xoserve and funding, governance and ownership (FGO)

Xoserve was established at the time NGG sold four of its DNs in 2005. It was set up as a ‘Transporters Agency’ in order to provide a centralised approach to data flows between different gas transporters and gas shippers. Its functions include operating UK Link, the IT system that supports the UNC, managing customer switching, billing transportation charges, and managing and updating the supply point register. Xoserve is jointly owned and controlled by the gas transporters.

In October 2013, Ofgem reviewed Xoserve’s role and funding in the context of future gas industry changes, and determined a more fully cooperative governance model should be established (the funding, governance and ownership or FGO Decision).

The main consequence of the FGO Decision was that, from 1 April 2017, gas transporters and gas shippers were required to jointly participate in Xoserve’s governance and fund its activities. From 1 June 2017, this also included all independent gas transporters (ie, those operating small networks serving residential or industrial estates). However, there has been no change to Xoserve’s legal ownership arrangements. The gas transporters remain Xoserve’s legal owners but the new governance arrangements mean Xoserve must respond to the needs of all its customers (ie, gas shippers as well as gas transporters) and operate as a ‘not for profit’ business, with its customers as its ‘economic’ owners.

Gas shippers now have a greater say over the governance and operations of Xoserve, and nominate ‘gas shipper’ directors to the Xoserve board. They are also responsible (along with gas transporters) for directly funding Xoserve’s costs in delivering UNC-related services.

 

Scope of the UNC

Under the UNC, NGG (as operator of the NTS) is known as National Grid NTS, the operators of the LDZs are called DN operators, and National Grid NTS and the DN operators are referred to collectively as trans­porters. The users of the systems are referred to as users. Gas shippers are users. The term ‘user’ also includes the DN operators as users of the NTS (NTS exit capacity from the NTS to an LDZ is held by the relevant DN operator). The NTS and each LDZ is a system; the term ‘total system’ refers to the NTS and all LDZs taken together.

The UNC defines rights and obligations for all users of the total system. It creates contractual rights between each transporter and the users of its system, and between NGG as operator and the DN operators as users of the NTS. The UNC does not create rights and obligations as between gas shippers.

 

Structure of UNC

The UNC comprises a number of separate parts:

  • the Transportation Principal Document, setting out the transportation arrangements between transporters and users;
  • the Offtake Arrangements Document, setting out technical and operational arrangements between transporters governing the interfaces between their systems;
  • the European Interconnection Document, setting out provisions relating to interconnection points that differ from, or are additional to, the provisions of the Transportation Principal Document in respect of other entry and exit points (including in respect to capacity, nominations and allocation);
  • the Independent Gas Transporters Document, setting out provisions relating to the connections between an LDZ operated by a DN and a system operated by an independent gas transporter;
  • the Modification Rules, setting out procedures for the modification of the UNC;
  • the General Terms, setting out common legal boilerplate provisions applicable to all parts of the UNC; and
  • the Transition Document, containing rules of a temporary nature.

 

Of these parts, the Transportation Principal Document contains most of the rules applicable to gas shippers.

 

Governance of the UNC

Under their gas transporters licences, the transporters are required to establish joint governance arrangements, including a joint office. The governance procedures of the UNC are operated by the Joint Office of Gas Transporters. The most important function of the Joint Office is to manage the UNC modification procedures.

 

Modification

The UNC is non-negotiable, but it can change over time to reflect industry and regulatory developments. The gas transporters licence contains a condition requiring the transporters to establish and operate procedures for the modification of the UNC. These procedures are contained in the Modification Rules, which form part of the UNC.

 

Overview of the UNC – Transportation Principal Document

The UNC Transportation Principal Document includes the following main operational areas:

  • the entry and exit capacity regime (see below);
  • energy balancing (see below);
  • entry and exit requirements: the requirements for physical deliveries and offtakes, including gas specification, flow restrictions, flow profile notifications, and liabilities of the transporter for failure to accept delivery of gas or make gas available for offtake;
  • supply point administration: the processes that support competition in retail supply, including procedures for managing the database of supply points (individual consumers’ premises) and for customer switching;
  • interruption: related to exit capacity, the rules under which exit points can be designated as interruptible and subject to interruption for the purposes of managing transportation constraints in a system;
  • metering; and
  • maintenance and operational planning.

 

Entry and exit capacity regime

The UNC classifies the various kinds of points at which gas can enter and exit the NTS and LDZs, including NTS entry points and NTS exit points. The UNC generally operates on the basis of separate NTS entry and exit capacity (rather than point-to-point rights). Users must hold NTS entry capacity to deliver gas to the NTS at an NTS entry point, and NTS exit capacity in order to offtake gas from the NTS at an NTS offtake point. NTS entry capacity is released and allocated by NGG in a variety of timescales (ranging from 15 years to daily) through auction mechanisms. NGG can also buy back NTS entry capacity through similar auction mechanisms. The price controls in NGG’s licence conditions provide it with incentives to optimise the amount of NTS entry capacity that is made available.

The UNC approach to NTS exit capacity is broadly the same as for NTS entry capacity. This approach distinguishes between two kinds of exit capacity: flat capacity (for a given daily offtake quantity) and flexibility capacity (allowing a within-day profile of offtake). The auction-based approach for exit capacity was introduced in 2009 and replaced the use of interruption rights for managing NTS transportation constraints.

 

Energy balancing

The energy balancing arrangements include the daily balancing rules (see below) under which daily imbalance charges are calculated for each user. They also include provisions for:

  • users to nominate gas flows at entry points and at exit points (or groups of exit points) each day, and the payment by users of scheduling charges where their nominations are inaccurate;
  • the estimation of demand at exit points at which the meters are not read daily (on the basis of demand profiling algorithms);
  • the reconciliation of estimated demand at non-daily read exit points when periodic meter readings are obtained, and other reconciliations, and the cash-out of the reconciliation quantities; and
  • energy balancing neutrality, under which the NGG (as the counterparty to the energy balancing cash-out transactions) is kept neutral to the overall net energy balancing charges, subject to certain incentives imposed on NGG .

 

Daily gas balancing

The gas balancing regime under the UNC operates on a daily basis, by reference to the gas day, which starts at 5am, and on the basis of the energy content (in kWh) of gas rather than volume. The gas balancing regime comprises arrangements under which the NGG can take measures to keep the system in physical balance over the gas day; and arrangements that provide for incentives for gas shippers (as users) to balance the quantities of gas they deliver to and offtake from the system each gas day.

There is no obligation on a user to balance its deliveries and offtakes on a gas day. However, the balancing regime provides an incentive to do so. The intensity of the incentive depends on how tight supply and demand are on the gas day. For each user, a daily imbalance is calculated. The daily imbalance is the difference between the quantities of gas delivered to and offtake from the system by the user on the gas day. The daily imbalance is cashed-out each day. Cash-out is characterised as a transaction between NGG and the user by which a quantity of gas equal to the daily imbalance is sold and purchased between the user and NGG. Where the daily imbalance is positive, the user’s position is long (in other words, it has delivered more gas to the system than it took on the gas day) and the imbalance quantity is sold by the user to NGG. Conversely where the daily imbalance is negative, the user’s position is short (in other words, it has delivered less gas to the system than it took on the gas day), and the imbalance quantity is purchased by the user from the NGG. The price at which the imbalance is cashed-out is derived from the balancing actions taken by NGG on the gas day (see below).

 

National balancing point (NBP)

The daily imbalance can be calculated in the way set out above because of the entry and exit capacity regime. Where gas is delivered to the system at an NTS entry point, the user will pay the cost of the NTS entry capacity required to be held for such delivery. The gas is then ‘entry-paid’. The cost (of NTS exit capacity) required to offtake the gas from the system does not depend on where the gas entered the system. In other words, gas that enters the system at any entry point is homogenous in value with gas delivered at any other entry point. For this reason, a single gas balance can be calculated in respect of gas delivered to, and taken from, the system, irrespective of the actual entry points and exit points of delivery and offtake. There is, therefore, conceptually a ‘national balancing point’ to which all gas entering the system can be treated as delivered, and from which all gas exiting the system can be treated as taken. The NBP is purely conceptual – it is a virtual and not a physical point.

 

Trade nominations – NBP trading

As well as delivering gas to the system and system entry points, and taking gas to system exit points, users are entitled to trade entitlements to gas within the system. Such trades are made between two users by submitting trade nominations to NGG. The trade nomination submitted by one of the two users is an acquiring trade nomination, and the trade nomination submitted by the other user is a disposing trade nomination. The two trade nominations must be for an equal quantity of gas.

Trade nominations are reflected in the calculation of a user’s daily imbalance. The quantity under an acquiring trade nomination is credited to the user, and the quantity under a disposing trade nomination is debited from the user. Thus, the full equation for a user’s daily imbalance is:

  • aggregate quantities delivered by the user to the system at system entry points; plus
  • aggregate quantities under acquiring trade nominations submitted by the user; minus
  • aggregate quantities offtaken by the user from the system at system exit points; plus
  • aggregate quantities under disposing trade nominations submitted by the user.

 

Users can, therefore, contract to buy and sell gas and perform those contracts by submitting trade nominations. The quantity of gas subject to an acquiring trade nomination is treated (in the imbalance calculation) as equivalent to gas that has been delivered to the system at a system entry point, and is therefore entry paid. Thus, trade nominations can be considered as transactions in gas at the NBP. As indicated above, this is conceptual only.

 

NGG balancing actions

NGG is responsible for maintaining the physical balance of the system each gas day. NGG is permitted to take a variety of actions for this purpose, including buying and selling gas (to increase or decrease the quantities of gas coming onto or leaving the system). For these purposes, NGG can itself make NBP trades with users and submit trade nominations (although no imbalance is calculated for NGG itself).

NGG can trade gas through the on-the-day commodity market (OCM), which is a day-ahead and within-day gas trading market run by an independent market operator, ICE Endex. The market has its own market rules, which shippers must sign up to if they wish to participate in the market. NGG participates in this market for the purposes of buying and selling balancing gas. The market is an anonymous, screen-based, fully cleared trading platform for day-ahead and within-day gas trading. Once a trade on the OCM is accepted, ICE will submit details of the trade to NGG by making the appropriate trade nominations in accordance with the network code. NGG can also trade gas (for NBP delivery) by transactions off the OCM, such as over-the-counter (OTC) trades and trades on other trading platforms. NGG’s use of balancing actions, and net revenues earned (as system operator) from balancing actions, is controlled by conditions in its licence. It is also required to report and publish certain details of the quantities and prices of the trades it enters into for balancing purposes.

 

Cash-out prices

The cash-out price for a user’s daily imbalance on a gas day is derived from the balancing actions taken by NGG for that gas day. For this purpose, the UNC provides for the calculation of three different prices:

  • the system average price (SAP) is the weighted average price of all balancing actions taken by NGG for a gas day;
  • the system marginal buy price (SMBP) is the price of the highest-priced balancing action taken by NGG for the gas day for the purchase of gas (that is, for an acquiring trade nomination by NGG).; and
  • the SMSP is the price of the lowest-priced balancing action taken by NGG NTS for the gas day for the sale of gas (that is, for a disposing trade nomination by NGG NTS).

 

The cash-out price payable by a user in respect of its daily imbalance is:

  • where the daily imbalance is positive (in other words, the user’s position is long), the system marginal sell price; and
  • where the daily imbalance is negative (in other words, the user’s position is short), the system marginal buy price.

 

In effect, the cash-out regime is based on the assumption that the user’s imbalance was the marginal imbalance on the system, causing NGG to take the most expensive balancing action that would remedy that imbalance. In principle, the cash-out price will be less attractive to the user than a market price contracted for in advance, and so the user has an incentive to avoid the cash-out price by minimising its imbalance.

 

Switching

The UNC contains rules that facilitate the switching by customers between gas suppliers. Where this happens, there may need to be a corresponding change in gas shipper depending on the arrangements existing between gas suppliers and gas shippers for shipping gas across the NTS and DN systems. Under the UNC, it is the gas shipper who is treated as offtaking gas from the system, and for each exit point there must be a 'registered' gas shipper.

At the moment, these rules are self-standing in the UNC. However as part of Ofgem's Faster Switching Programme, the rules for switching by customers will soon be governed by a new Retail Energy Code, which will cover both gas and electricity. As a result, the switching rules in UNC are being changed to reflect the new role of the Central Switching Provider under the new code and to accommodate the much shorter timescales for giving effect to a customer switch. For the time being, the old rules will continue to apply to exit points connected to the NTS.

 

Interconnectors

The interconnector licence requires the licensee to submit a charging methodology to Ofgem for approval in respect of access to its interconnector. The charges and the application of the charging methodology must be objective, transparent, non-discriminatory and published.

 

Storage

Each of the different storage operators publishes storage terms, usually in the form of a standard storage contract (SSC). In most cases the terms offered are based on the SSC prepared for Rough and Hornsea at the time of the separation of British Gas’s transportation and storage businesses in 1999.

The key features of the SSC are as follows:

  • the SSC is a bilateral agreement between the storage operator and the user. The terms of the SSC between the storage operator and different users are identical and this facilitates the trading of capacity and gas in store between users;
  • storage capacity comprises deliverability (the rate at which gas can be withdrawn), space (the entitlement to have gas stored in the facility) and injectability (the rate at which gas can be injected). In most cases capacity is sold in ‘bundled’ units (ie, each unit comprises a fixed element of deliverability, space and injectability) (though some SSCs support trading on an ‘unbundled’ basis);
  • storage users are entitled to use their firm capacity rights for the term of the SSC subject to the storage operator’s maintenance and other outage rights. Capacity may also be constrained where the quantity of gas in store affects the operation of the facility (eg, high inventory levels reduce injection rights). Interruptible capacity may also be available when storage users are not using their firm capacity rights in full, or where the storage operator is able to create additional capacity where users are nominating in a different direction (ie, by netting off injections and withdrawals); and
  • storage users pay storage charges on a monthly basis in arrears; the charges comprising a capacity and commodity element.