We are looking for feedback about our new website.

NTS shrinkage

The NTS shrinkage scheme incentivises minimising energy costs associated with operation of the network. As shrinkage provider we are responsible for managing the end-to-end service of forecasting, accounting for, procuring, and supplying energy to satisfy the daily NTS shrinkage components.

NTS shrinkage energy (gas and electricity) is bought by the gas transmission system operator. NTS shrinkage is procured for three components:

  • Compressor Fuel Usage is the energy used to run compressors to manage pressures within the gas transmission system. This can either be gas or electricity, depending on the power source for the specific compressor.

  • Calorific Value Shrinkage is gas which cannot be billed due to application of the Gas (Calculation of Thermal Energy) Regulations 1996 (amended 1997).

  • Unaccounted for Gas is the remaining quantity of gas which is unallocated after taking into account all measured inputs and outputs from the system.

Data on the volumes we have procured for NTS shrinkage can be found under NTS Actual and NTS Procurement in the Data Item Explorer.

The scheme

The shrinkage incentive scheme is currently in place from 01 April 2013 until 31 March 2021 to minimise overall costs it incurs in its role as NTS shrinkage Provider. The incentive scheme measures the NTS shrinkage costs incurred against a target. This target is principally determined by multiplying forecast and actual volumes by benchmark energy procurement prices.

National Grid forecasts the baseline volume target the year before according to the Ofgem approved NTS shrinkage methodology which determines how to forecast: Compressor Fuel Usage for gas and electricity, Unaccounted for Gas and CV shrinkage. The short-term ('Prompt') volume target is based on the difference between forecast and outturn volumes. Benchmark target prices are determined for forwards and prompt procurement.

The scheme is designed to minimise risks associated with volume forecasting and, therefore, reduce windfall gains and losses over the eight-year period.

The sharing factor (the slope of the incentive graph) of the incentive has been increased compared to recent years to align with sharing factors contained with the RIIO-T1 price control. Thus, the sharing factor is now at 45%. The maximum profit we can earn from the incentive is £7million (where costs are £15.5million or more below target) whilst the maximum amount we can lose is also set at £7million (where costs are £15.5million above the target).

Operational performance

NTS shrinkage is incentivised to minimise the cost of gas and electricity procurement for shrinkage components and operate the compressor fleet efficiently. This is expected to remain a significant energy purchase. In 11/12 incentive costs were £95.67m.

Energy is procured through a trading strategy based upon a mixture of forward and prompt procurement to spread price risk. This remains our stakeholders' preferred approach. You can find out how much we traded for NTS shrinkage in the last quarter by downloading our Supporting Information document. We also release data related to the amount of Unaccounted for Gas, which we report.

Methodology statement

As it is not possible to set a target volume for the baseline (forecast) level of shrinkage for each of the eight years of the scheme at the outset, we produce a NTS Shrinkage Incentive Methodology Statement. This outlines the methods and principles which we use to calculate the forecast volume targets for gas and electricity procurement and also adjustments to the target to reflect volume efficiencies achieved. We also publish quarterly volumes determined in line with the methodology.

Review

In accordance with Special Condition 3D National Grid Gas Transmission (NGGT) has undertaken a review of the extent that the Shrinkage Incentive Methodology Statement is delivering against the key principles of:

  • Ensuring cost minimisation for customers

  • Delivering appropriate cost risk management

  • Incentivising reductions in volumes where NGGT is able to influence.

The associated review documentation and updated statement for 2017/18 formula year are provided below: