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TAR NC Implementation Document – Second Edition September 2017
FIXED PAYABLE PRICE
Responsibility: fixed payable price approach for existing capacity under a price
cap regime is subject to consultation per Article 26(1) by TSO/NRA, as NRA
decides; subject to decision by NRA
General
The TAR NC has included a fixed payable price approach mainly as an incentive for
network users to purchase long-term capacity. A fixed payable price approach
improves price certainty, provides some certainty and stability for the TSO on future
contracted capacity, and improves the signals for potential system development
requirements.
Nevertheless, the fixed payable price approach may also have some drawbacks.
A TSO can risk under-recovery if its costs change but its income does not, given the
fixed payable price contracts. On the other hand, floating payable price contracts
can risk cross-subsidisation. Also, improving the investment climate may not be
relevant for TSOs that do not require significant investment in a declining market.
Benefits for network users
Price certainty from long-term capacity contracts:
The fixed payable price approach
improves network users’ opportunity to manage their margin risk in conjunction with
long-term supply contracts. Price certainty may prompt network users to commit to
contract for capacity over a longer period.
Incremental aspect:
A fixed payable price may be a more appropriate option for
incremental capacity, where network users may need predictability before bidding
for sufficient long-term capacities to justify a project economically, known as passing
the economic test.
Benefits for TSOs
Income stability from long-term capacity contracts:
As explained above, a fixed
payable price approach encourages more long-term capacity bookings, and
therefore provides increased certainty of TSO income, especially in a price cap
regulatory regime.
Incremental aspect:
Projected reserve prices affect the economic test for incremen-
tal capacity. A fixed payable price approach makes the economic test a more robust
process, by facilitating projections of future reserve prices, which permits bidders to
determine more accurately the present value of binding commitments. Under a
floating payable price approach, the present value of binding commitments can only
be a rough estimate, and estimation uncertainty increases with each subsequent
year forecast. Estimation uncertainty may not present a significant issue in regulato-
ry regimes that guarantee the revenues corresponding to an incremental project.
However, in regimes with highly volatile estimated reserve prices, the fixed payable
price approach helps to foster long-term commitments by network users, facilitating
long-term investment.
ARTICLE 24(B)