Steve Mulinganie, Regulatory Manager at Gazprom Energy
Why and how did the way UIG is calculated change?
On 1st June 2017, Xoserve’s IT systems for gas settlement and supply point administration were replaced as part of Project Nexus, changing the way UIG is calculated. This increased the industry’s ability to track UIG on an ongoing basis and attribute it proportionately to shippers. In turn, consumers have faced increased risk premiums and pass-through costs due to increased levels and volatility of unidentified gas.
Previously, UIG was determined by an independent expert who calculated an energy value which was set in advance and then recovered from the market. This meant both the scale and volatility was predictable.
Project Nexus’ new IT systems introduced the ability to determine UIG across all supply points. This allows UIG to be estimated on a daily basis using a formula that subtracts leakage (shrinkage), daily (actual) and non-daily (estimated) meter readings from the amount of gas recorded as entering the network. UIG is then spread across all meters using factors set by the industry experts. Importantly as actual meter readings are received, adjustments are made to the allocation, meaning prices are constantly changing.
It’s important to understand that this effectively creates both permanent UIG and temporary UIG as a result of estimation. If the estimation process is inaccurate then the value of UIG will be subject to correction.
What impact has been felt?
While in theory the new system should be fairer, it has resulted in far higher than expected levels of UIG, averaging 4.65 per cent of total gas on the grid. In contrast, prior to the changes, the volume of unidentified gas was estimated to be between 1 and 1.3 per cent. These levels have become increasingly volatile, quickly swinging from as much as 25 per cent of the total demand to less than zero. This has become a particular issue during periods of peak demand such as the colder winter months.
How has the market responded?
Since these changes came into force, the industry has put forward proposals for Ofgem to revert to the pre-Project Nexus arrangement, which Ofgem has since rejected. Following this, last year, Ofgem approved the creation of a taskforce that aims to tackle the ongoing issues around the allocation of UIG. Ofgem hopes the new taskforce will help the industry to identify and address the root causes of the unexpected volatility.
What does the future hold?
The ongoing rollout of smart and advanced meters, has the potential to support the more accurate allocation of UIG. Being able to provide more accurate readings allows the market to gain a greater understanding of the causes of UIG and be less reliant on estimation.
Proposals are still being presented to industry bodies within the market for review and the energy industry continues to work to find a solution to the issue. The energy market is a fast moving, ever evolving industry and 2019 is a new year, which can only mean continued changes, constant developments and new regulations. Businesses should stay abreast of any developments and contact their energy suppliers if they feel as though they are adversely affected.