Locational Trades - Good Value?

On the 18th of January 2023, the Gas System Operator (SO) requested Locational Sells to mitigate a potential constraint at the Milford Haven Entry terminal. In response, Shippers posted Locational trades on the OCM, and the SO accepted trades totalling around 3.2mcm. These trades were executed mid way through the gas day and the Terminal saw a subsequent reduction in flow rates of approximately 8mcm/day, equivalent to around 4mcm over the entire day:

Due to these Sell actions and prevailing system conditions, the system was forecast to end the day short and the SO took locational Buys to address the shortfall. In total, the SO took Locational Buy trades totalling approximately 1.76mcm. Following these actions, PCLP suggested that the System was forecast to end the day long, and the SO stopped taking further actions. (In fact the System did end the day short by about 3.6mcm.)

The following table shows a summary of the Locational trades executed by the SO during the day:

Locational Trades undertaken to resolve a constraint are not included in the System Marginal Price calculation. The System Average Price (SAP) ended the day at 155.39 p/therm.

The costs of locational trades to resolve a network constraint, are smeared back to Shippers who hold entry capacity, via the entry capacity neutrality mechanism and are not included in balance neutrality mechanism. The SO is incentivised to minimise the cost of network constraint via a capacity constraint incentive scheme. (Part of the suite of SO operating incentives.)

Despite this, the SO executed Locational Sells and Buys which were at a significant differential to prevailing NBP prices. Using the final SAP price as an estimate for market price on this day, the economic cost (SAP-Trade price differential) for the Locational sells and buys was approximately ￡1.14million pounds in total. (see above table)

The Locational Sell prices at Milford Haven may have reflected other economic costs. Shippers at this terminal may have incurred contractual penalties for delays in offloading the LNG cargoes in addition to the value of the booked entry capacity. However, given that secondary locational Buys were requested at every other entry point in the UK (and many of the NTS exit zones too), it seems surprising that these actions incurred a significant economic cost too.

The SO and OFGEM need to encourage liquidity in the Locational market, and/or understand why the Locational Trade Prices seem to be significantly out of the money. Locational trades are rarely taken by the SO and maybe Shippers need to be encouraged to participate, thereby increasing competition in this market.

It is also not obvious what discretion the SO has in executing the secondary constraint actions on the day, as it only took 1.76mcm of Locational Buys to offset the 3.19mcm of Locational Sells. The System Management Principles Statement is not specific and neither is the Network code from what I can tell. Ultimately, the consumer foots the bill for the cost of network constraints, regardless of which neutrality pot these trades end up in. Its time to review the current mechanism and make sure locational trades are value for money. (For example, why is it necessary to take any secondary locational actions, maybe these should all be transacted in the NBP market, which is more liquid.)