Addressee:
Office of Energy Regulation P.O. Box 16326
2500 BH The Hague The Netherlands And
Office of Gas and Electricity Markets 9 Millbank
London SW1P3GE
BritNed Development Limited Oude Oeverstraat 120 NL-6811 JZ Arnhem The Netherlands Telephone: +31 26 202 01 30 Fax: +31 26 202 01 39 Website:www.britned.com Date 5 January 2011 Dear Sirs/Madam
In compliance with the Exemption decision of the BritNed Interconnector adopted in application of Article 6(1)(b) of the Council Regulation (EC) No. 139/2004 we attach a final version of the BritNed Access Rules which sets out rules related to but not limited to the allocation of interconnector capacity, the use of interconnctor capacity and the provision of information relating to the BritNed Interconnector. We also attach a letter demonstrating how BritNed is compliant with the Congestion Management Guidelines.
We make this submission in order that formal approval can be given by both
Regulators. If you require further information then please don’t hesitate to contact us. As you know we have been in contact with potential customers and have seeked their views. The feedback we have received has proved to be extremely useful. We have considered the feedback and amended the BritNed Access Rules to cater for most of our potential customers’ requests. In your letter dated 26 May 2010 you raised four key points which we have subsequently discussed with you and can summarise and confirm below how we have addressed these key points; Firmness of Capacity for Medium Term Auctions
Explicit Auctions:
If medium-term capacity is curtailed after Nomination then all Participants will be compensated with the hourly day-ahead price spread up to caps set out in the BritNed Access Rules. BritNed will apply a level of firmness similar to the IFE rules between France and Spain where the financial firmness mechanism contains two caps. These caps are a means to reduce the level of risk for the interconnector owner whilst providing the interconnector customers with price spread compensation: − Risk/reward balance between BritNed and its interconnector customers
It is important to note that BritNed will face higher exposure in the event of a capacity shortage by making explicit capacity financially firm after nomination. The impact on BritNed of paying for example the day-ahead price spread, rather than the auction price, will depend on a) the outage rate and b) the average difference between day-ahead spread and auction price. It is likely to be a net cost to BritNed, on the basis that the auction price will probably be lower on average than the day-ahead spread. It is also an increased risk to BritNed, regardless of whether the difference is positive or negative on average, because it breaks the equivalence between what BritNed is paid in the auction and what BritNed pays out in the event of an outage. This risk increases in case the intraday and imbalance price spreads are used as a compensation mechanism as the correlation between the initial auction price and these spreads are considered to be small compared to the correlation with the day-ahead price spread.
Another reason to apply caps on financial firmness compensation based on day-ahead price spreads is that there is currently not an ideal option for a day-day-ahead reference price in the GB market.
− Customers are well placed to manage part of this risk
Our customers have stated to us that they are able to reflect our firmness
proposal in their auction bidding strategies and to be in a position to manage the firmness risk as they have extensive experience/ trading capability to deal with potential capacity shortage situations.
We have set out below how financial firmness including caps could mitigate part of BritNed’s financial exposure, whilst providing our customers with full financial firmness for the majority of the hours and a balanced risk sharing for the minority of the hours; a proposal that we believe is acceptable to our customers and can be valued by them appropriately in their auction bidding strategies and
appreciates BritNed’s status as a merchant interconnector owner. .
Reductions in Capacity Units and Interconnector Capacity Entitlements
This has been previously discussed so that customers will be reimbursed 100% of the initial auction price before nomination.
Reductions in Nominations
Our aim is for Capacity Units to be as financially firm as reasonably possible after nomination. The compensation will be the product of the market price spread times the curtailed units where both a cap will be applied on the maximum market spread that will be compensated and the total amount of the compensations.
closure, and real time. The maximum capacity shortage period is therefore 38.5 hours (14.5 hours day D and 24 hours day D-1).
The first cap applies to the Day-Ahead Market Spread and is different for each direction:
17.9 € / MWh for a Nomination from the Netherlands to Great Britain 11.4 € / MWh for a Nomination from Great Britain to the Netherlands.
The second cap applies to the total monthly amount of compensations. This cap is defined for each month as the sum of:
The revenue from Medium Term Auctions with a Product Duration less than or equal to a month in both directions raised in this particular Month;
Whereas, the revenue from Medium Term Auctions with a Product Duration longer than a month shall be allocated in part to that month e.g. a twelfth of the revenues raised at Annual Auction in both directions.
If this monthly amount is reached, it will be shared on a pro-rata basis between the Participants deserving compensations in that month according to their compensation amount. This sharing will be done after taking into account the cap on the Day– Ahead Market Spread.
Implicit Auctions:
Capacity allocated via the daily implicit auction is physically firm. We believe that with the current proposals on firmness for medium-term explicit nominations and the UIoSI mechanism for unused explicit capacity units a market based solution is in place for all auction time scales.
UIoSI Mechanism
There is a clear preference for UIoSI for unused medium-term capacity units from potential customers and we have made changes to our Access Rules to this effect. We have considered this very carefully and recognising the need to deliver a
proposal which will stand the test of time we have carefully analysed BritNed’s exposure to produce a solution for all.
The main reason for BritNed to consider a cap on the compensation under the UIoSI mechanism for unused medium-term capacity units is BritNed's increased exposure resulting from the firmness risk on explicit rights being transferred from our
customers to BritNed in the event capacity has successfully been resold under the UIoSI provisions. This is because BritNed needs to guarantee physical firmness for all capacity that is resold through the implicit auction that was bought by the
customers as a financially firm product.
the implicit auction would BritNed propose to cap the maximum day-ahead market spread to be paid out (equal to the cap for firmness (as referred to above) as unused explicit capacity rights should not receive higher compensation than explicit
nominations).
If a daily implicit auction is cancelled compensation for unused medium-term units will be based on the marginal price derived from the fallback daily explicit auction. In the case of capacity not being utilised after the daily (only in case of fallback) or intraday auction, a UIoLI mechanism will apply.
Reserve Pricing
The main reason for reserve pricing was to allow BritNed a level of financial certainty at the start of commercial operations. The Exemption recognises BritNed as a
Merchant Interconnector which means that the risk of investment lies entirely with the investors and the revenues determined only by the sales of its interconnector
capacity.
BritNed reserves the right to use a reserve price but it is envisaged that it may be used at the early stage of operations but is something that is more than likely to be removed as BritNed gets further operational experience.
From a transparency perspective the reserve price itself will be published to both Regulators before the start of the bidding period of an auction. The reserve price will then be published on BritNed’s website after the auction has closed.
Review of Access Rules
BritNed fully appreciates that its Access Rules will need to be reviewed in the future not only to comply with European legislation but to provide an ever improving set of Rules which reflects the ever changing needs of our customers. BritNed is also very keen to work with our customers, Regulators and other TSOs to develop and
produce a first class set of pan European Access Rules which will benefit all such parties.
We therefore have agreed to review certain Rules within 6 months of operation with a full review at the start of Q3 2012. In addition BritNed will continue to liaise with its customers to listen and understand their needs and where agreed amend the Rules where necessary at anytime in addition to the dates set out in the BritNed Access Rules.
Closing remarks
BritNed has worked collectively with the Regulators and our customers to put together this robust submission. We have examined data (where we can) and considered all comments to deliver a full and final submission which (1) delivers maximum benefit to our customers, (2) complies with EU legislation and (3) pushes, to the limit the risk exposure faced by BritNed.
Please be assured that BritNed will continue to work with the Regulators and
potential customers to work in a coordinated and transparent manner for many years to come.
Damian Bach General Counsel
