PUC introduces dynamic regulation to promote the use of the Inčukalns gas storage facility and announces a consultation on the tariff calculation methodology

Natural Gas

The Public Utilities Commission (PUC) has announced a consultation on the proposed tariff calculation methodology, according to which new natural gas storage service tariffs will be calculated. Changes in the tariff calculation methodology provide for the introduction of dynamic regulation to promote the use of the Inčukalns underground gas storage facility.

Līga Kurevska, the Director of the PUC Energy Department, explains: “The introduction of dynamic regulation for the storage facility – regulations on the use of the storage facility and tariff calculation methodology – is a strategically important step towards changes in the long-term use of the Inčukalns gas storage facility. Dynamic storage regulation takes into account market conditions for both high and low demand for natural gas, including in response to changes in the price of natural gas. In this injection season, we have seen a high demand for natural gas storage services, which, considering the new regulation and the successful launch of the Baltic regional natural gas market in January this year, we also expect in the next storage cycles.”

The new tariff calculation approach in the calculation of natural gas storage service tariffs provides for the use of the “revenue cap” approach already incorporated in the tariff calculation methodologies of other sectors. The “revenue cap” approach has already been incorporated in the methodologies for calculating tariffs for electricity distribution and transmission service and natural gas transmission system and distribution system service. The approval of the methodology for calculation of natural gas storage system service tariffs will be the final step in the development of a common tariff calculation approach in the electricity and natural gas sectors.

The developed proposed methodology envisages to determine stable allowed revenues for the entire regulatory period (2-5 years), which may change due to external, independent reasons, such as fluctuations of natural gas prices or inflation, or if the merchant incurs reasonable unforeseen costs due to changes in regulatory enactments or emergencies. PUC considers that such a methodological approach to setting tariffs is the most appropriate in the dynamic environment of the sector and will be able to ensure the predictability of tariffs during the regulatory period.

According to the proposed methodology, the tariff for the basic storage capacity booking product - the bundled capacity product – will be determined on the basis of the planned revenues (allowed revenues attributed to the tariff period). The tariff for the two-year bundled capacity product and the interruptible capacity product tariff shall be determined by taking into account the tariff for the bundled capacity product and the relevant coefficients substantiated by the system operator.

In addition, the stock transfer product has been developed, the aim of which is to ensure the sustainability of the Inčukalns gas storage facility by promoting compliance with the duration of use of the capacity booking products. The tariff for the two-year bundled capacity product of the previous year shall be used to determine the tariff for the stock transfer product, to which an appropriate justified coefficient of the system operator shall be applied.

In addition, taking into account the recommendations of the Organization for Economic Co-operation and Development (OECD) and the State Audit Office, the proposed methodology incorporates elements of incentive regulation, promoting more efficient operation of the storage system operator.

The consultation document is available on the PUC website. Please send proposals and comments on the proposed consultation document to sprk@sprk.gov.lv by 7 September 2020.