Gas transportation charges explained

With the latest gas transportation charges recently coming into effect, we've put together a guide to understand the charges, how they’re calculated and what they mean for your business energy.

The distribution and transmission charges that cover the cost of transporting gas make up around 34% of your business gas bill. That's why staying up to date with the process of calculating these charges is important when managing a business’ energy costs.

What are gas transportation charges?

The rates that determine gas transportation charges generally change twice a year in April and October. You might have noticed a difference between wholesale gas prices and the total cost of gas. That's where other charges such as gas transportation come in. Different companies manage and maintain the pipes that transport gas to the meter with the associated costs passed on via suppliers.

How is gas transported to your business?

As a business energy supplier, we represent one part of the process of transporting gas to your business. The entire journey looks like this:

• After natural gas arrives in the UK, either at a gas terminal, through an interconnector pipeline or on an LNG ship, it enters the National Transmission System (NTS) which is owned by the National Grid who set the relevant Transmission Transportation charges for the NTS.
• The gas then flows through the NTS and enters a Local Distribution Zones (LDZs) located across the country. These zones are owned and managed by four different Transportation companies, who set the relevant Distribution Transportation charges for each area by region.
  Here are the different companies which manage each zone:
  Cadent Gas – East of England, North London, North West, West Midlands
  Northern Gas Networks Limited – Northern
  SGN – Scotland, Southern
  Wales & West Utilities Limited – Wales, West
• The gas is then transported by these companies to different Exit Zones in the region before it arrives at the meter points which supply your business.

Note: There are a small number of very large sites that are supplied directly from the NTS. These are known as unique sites and are only subject to Transmission Transportation charges as they only use the NTS.

What are gas transportation charges made up of?

Ofgem, the government regulator for gas and electricity markets in Great Britain, approves a base revenue that all gas transporters are allowed to recover during a five-year price control period.

This total allowed revenue is broken down into annual allowed revenues, which are then used to calculate annual transportation charges levied on Shippers.

There are six different charges covering transmission and distribution, which are as follows:

Transmission charges

1. Exit Capacity (ECN): This charge differs by Exit Zone, which means it can be higher in some areas and lower in others. Exit Capacity is charged using pence per peak day per kWh.
2. Exit Commodity (NCO): Exit Commodity charges are a flat charge across the industry and are calculated using pence per kWh.

Distribution charges

1. 3. System Capacity (ZCA): System Capacity charges relate to the cost of maintaining, repairing and operating distribution networks. They are charged using pence per peak day per kWh.
   4. Customer Capacity (CCA): This charge relates to emergency gas services and other customer-related overheads. It’s charged using pence per peak day per kWh.
   5. System Commodity (ZCO): System Commodity charges relate to the actual flow of gas through the Gas Distribution Network. They are charged using pence per kWh.
   6. Fixed Customer Charge (CFI): This charge is only levied on customers with an annual quantity (AQ) between 73,200 and 732,000kWh to cover overheads and emergency gas services. They are charged using pence per day.

What factors affect transportation charges?

Sometimes, fluctuations in seasonal demand and the state of the UK economy can cause gas transportation charges to change e.g. the recent pandemic has led to a reduction in non-domestic demand. These factors can cause under or over recovery in allowed revenue vs. actual revenue.

By this, we mean there's a surplus or a deficit, which is generally passed through into the following year. This is one of the reasons why one may experience a subsequent change in transportation charges.

What do gas transportation charges mean for customers?

First of all, it’s important to remember that gas transportation costs only really affect pass-through gas customers. So, how does all of this affect your bill as a customer?

To cover the cost of gas transportation, we include these charges in your daily standing charge and gas unit rate. If relevant when the National Grid (NTS) and the Distribution companies change their gas transportation charges, the changes are reflected in the rates we charge you.

As previously noted, these rates are adjusted normally twice a year in April and October. For those on pass-through contracts, we'll let you know in advance when changes are due to take place and what the new rates are. For customers on a fixed contract, your rates will not change.

Appealing Ofgem's price control

In December 2020, as part of the RIIO-2 price control decision, Ofgem made changes to the amount energy companies can charge their customers for the period between 1 April 2021 to 31 March 2026.

Since then, nine energy network companies have been granted permission from the Competition and Markets Authority (CMA) to appeal against Ofgem's price control. Their appeal centres on the allowed return on investment, along with the way Ofgem calculated the costs the companies would spend on maintaining and investing in their networks over the next five years.

The appeal will be progressed over the summer and a decision by the CMA is expected later in 2021.