Compressed Natural Gas for transport – Regulatory Issues

DOCUMENT TYPE: REFERENCE: DATE PUBLISHED: RESPONSES TO:

Information Paper D/15/050 March 25th 2015 [email protected]

The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin 24. www.cer.ie

CER – Information Page In recent times there has been significant interest in the use of compressed natural gas (CNG) as a transport fuel. This paper considers some of the work that the CER will be engaging in over the coming months to clarify the CER’s role in CNG supply for transport. The paper provides a brief introduction to the scale of CNG use in Europe before going on to identify four areas that the CER will be working on in the coming months.

Target Audience: This paper is for the attention of potential CNG suppliers and their customers, members of the public, the energy industry and all other interested parties. Related Documents:   

CER Supply License CER Suppliers Handbook GNI Connections Policy

The CER intends to publish all submissions received. Respondents who do not wish part of their submission to be published should mark this area clearly and separately or enclose it in an Appendix, stating the rationale for not publishing this part of their comments.

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Table of Contents

1.0 Introduction .................................................................................................................... 4 1.1 Purpose of this paper .................................................................................................. 4 1.2 Responding to this paper ............................................................................................ 4 2.0 Background .................................................................................................................... 5 3.0 Private and public CNG refuelling scenarios................................................................... 8 4.0 CNG connections – a regulated activity? ........................................................................ 9 5.0 Licencing Arrangements ................................................................................................10 6.0 Gas Safety at CNG supply points ..................................................................................12 6.1 Current arrangements ................................................................................................12 6.2 Future arrangements .................................................................................................12 7.0 Customer Protection role in CNG supply .......................................................................13 8.0 Conclusion and next steps ............................................................................................14

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1.0 Introduction

1.1 Purpose of this paper The purpose of this paper is to set out a number of regulatory issues raised by the development of compressed natural gas as a transport fuel in Ireland. The paper outlines, at a high level, four issues which the CER will be considering over the coming months, namely, -

whether the construction of a CNG connection by Gas Networks Ireland should be a regulated or unregulated activity; - the potential supply licencing arrangements for suppliers of CNG in public settings - the extent of CER’s safety role in CNG supply; and - the CER’s role in customer protection.

1.2 Responding to this paper Responses to this paper should be in the format of email, post or fax and marked for the attention of: Barry Hussey The Commission for Energy Regulation Belgard Square North Tallaght Dublin 24 [email protected]

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2.0 Background

This paper concerns natural gas supplied to a site, compressed for later use in vehicular transport. Natural gas is put to many uses by end users, used as a raw material in processes, as a fuel in power generation and for space heating, the use of natural gas as a transport fuel is considered an additional use. In the normal course of events the CER does not concern itself with the ultimate use of the natural gas, e.g. whether for power-gen or space heating, However, this paper considers such matters in the case of CNG for transport. Compressed Natural Gas (CNG) is widely used across Europe for transport purposes. There are over 1.7 million natural gas vehicles in Europe, primarily in consumer vehicles (light duty transport). Italy is the foremost user of natural gas for transport, with 57% of the total European share. There have been significant increases in the number of natural gas vehicles in recent years, and this growth has been more focused on mass-transport and heavy-duty transport (haulage). Since 2007, Finland has increased their number of NG vehicles by 633% to 1,172; Holland by 613% to 5,201 and Austria by 460% to 7,065. In the UK, 89% of gas vehicles are in heavy-duty transport use. At present there are only a handful of natural gas vehicles in Ireland. Natural gas as a transport fuel has a number of advantages over other fossil fuels including reduced tail-pipe emissions, reduced greenhouse gas emissions, lower particulate emissions, reduced noise and lower fuel cost. CNG may also be a pathway to renewable transport where biomethane is purchased for transport use. For clarity, CNG is natural gas that is compressed to between 200 and 250 bar gauge. The gas is not treated or altered, just compressed to allow a greater amount of energy value to be contained in a smaller space (i.e. the tanks on a natural gas vehicle). Were the gas not compressed to such a high pressure, the range of the vehicle would be greatly curtailed. The recently approved Alternative Fuels Infrastructure Directive (Directive 2010/94/EU) requires Member States to ensure that a sufficient number of publicly accessible refuelling points are available, with maximum distances of 150 km, to allow the circulation of CNG vehicles Union-wide by 31 December 2020 at the latest. This will require a minimum number of CNG refuelling stations to be set up, likely along the Irish motorway network. Before such refuelling stations can be put in place, the regulatory regime for the supply of natural gas for transport must be clarified. The 2015 Budget1 indicated that the excise rate for Natural Gas and Biogas as a propellant will be set at the current EU Minimum rate (€2.60 per GJ) and this rate will be held for a 1

http://www.budget.gov.ie/Budgets/2015/Documents/2%20Summary%20of%202015%20Budget%20M easures%2014%20Oct%2000.09.pdf

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period of eight years. At the EU minimum, this equates to €0.0098 per kWh or approximately €0.11 per diesel litre equivalent (excise duty). This rate of excise duty puts CNG in a competitive position vis-à-vis diesel as it compares with excise duty of €0.479 per litre of diesel, or €0.587 per litre of petrol. The Government’s decision on this matter places an added degree of urgency on the CER’s clarification of the regulatory framework to be in effect for CNG supply to allow prospective users to benefit from as much of the eight year duty freeze as possible. The Agency for the Cooperation of European Regulators (ACER) recently published a report on new developments in the gas supply chain, prepared on their behalf by Kantor Management Consultants2. The Report states that CNG-use in transport is likely to develop across the EU over the coming years as a result of Member States’ requirement for availability of alternative fuels for transport, reduced emissions versus other fossil fuels and the currently available positive price differential between natural gas and oil-linked transport fuels. The report also states that the widespread adoption of CNG as a transport fuel is highly dependent on the creation of a sufficient network of filling stations and would also be impacted by favourable taxation regime for natural gas. The ACER report considers a number of the regulatory issues that are raised in this paper and outlines how NRAs around the EU and further afield have approached them in different ways. Barriers to the development of the industry are also considered in some detail. The report makes a number of recommendations to overcome a some of these identified barriers. For example, the report suggests that, while Directive 73/2009/EU states that the sale of natural gas to wholesale or final customers is an activity of supply (and therefore requires a licence in some Member States, including Ireland), some Member States do not consider supply of CNG for transport in a public setting a licensable activity. In the UK and Germany for example, the licensable supply activity relates exclusively to supply to premises through pipes, while in others, such as Greece, the Licensing Code explicitly excludes gas filling stations from requiring a licence. The report also describes practice in Vermont in the United States, whereby CNG supply in a public setting for transport use is not a regulated activity on a number of grounds. Firstly, CNG suppliers do not have a permanent physical connection to the customer and therefore does not have the characteristics of a natural monopoly. Furthermore, the supply of CNG is not considered an economic monopoly service as CNG competes with other fuel supply options (propane, diesel) and potential also with other suppliers of CNG, thus allowing fuel and supplier switching. The report also notes that the services of suppliers of other competing fuels are not regulated.

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Regulatory implications of new developments in the gas supply chain, a Report by Kantor on behalf of ACER, 2014

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Despite some potential perceived benefits to prospective CNG suppliers of the CER not licencing the activity, the CER’s statutory requirements under the Gas (Interim) (Regulation) Act 2002, leads to the requirement that CNG suppliers shall hold a supply licence. The paper examines first the scope of the assessment – whether private and public refuelling stations receive the same regulatory treatment; the paper then considers a number of issues raised by the CER’s statutory requirements in respect of natural gas.

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3.0 Private and public CNG refuelling scenarios The CER is aware of a number of private firms who are engaging with GNI in assessing the viability of CNG use for their fleet’s fuel needs. Should one of these firms choose to convert their fleet to CNG, it is likely that they would opt for a private refuelling option. In this instance their refuelling equipment would be on-site and sized specifically to the fleet requirements. Moreover, the refuelling equipment would be solely accessible by the fleet operator. 3.1 Private refuelling scenario In this instance, the CER does not see a difference between an installation such as this and any other connection to an industrial or commercial premises. The basis for this view is that the premises will have a supplier, and that the gas is supplied to the site for the use of a specific final customer. This customer may use the gas for space heating, for production or may use the gas in their own vehicles. This arrangement is in line with existing networksupplier-customer relationships and is addressed by the regulatory regime as is. The sole area for consideration in this scenario relates to the treatment of the connection cost. The treatment of the cost of connection is considered in Section 4. 3.2 Public refuelling scenario Where the CNG refuelling equipment is in a public setting, such as at a service station, a number of regulatory issues arise which necessitate the CER’s consideration; namely in relation to the treatment of the connection cost and service provided by GNI and the treatment of any GNI costs (Section 4); licencing (Section 5), gas safety (Section 6), and customer protection (Section 7).

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4.0 CNG connections – a regulated activity? In a recent submission on possible changes to the Connections Policy published on January 30th 2015, GNI have proposed that the full cost of a CNG connection, including compressors and buffer tank be part of the connection cost. GNI also propose that petrol forecourts with a CNG supply be treated as institutional customers (appraised over a 20 year period). In addition, GNI propose that private CNG connections would be assessed over the standard, seven year period. The CER will issue a separate decision on this matter in the coming months in light of responses to the consultation on changes to the GNI Connection Policy. The key question relating to the installation of CNG connections by GNI is whether this activity should be an economically regulated or unregulated activity. If the installation of CNG equipment is deemed to be a commercial and contestable activity, the CER may choose not to regulate the cost of the connection, and thus, the price of a connection will be set by market forces. In this instance, the equipment installed by GNI would not be covered by the CER-approved GNI Connections Policy and such equipment may not be added to GNI’s regulated asset base. A potential layout of a CNG supply forecourt is shown below. The CER’s current understanding is that there is no barrier to other bodies installing CNG compression equipment, all safety consents being in place. On this basis, the CER’s initial view is that GNI would not be providing a regulated monopoly service when installing CNG equipment, and therefore this equipment would not normally be added to GNI’s regulated asset base. As stated, the CER will issue a decision on this issue in the context of the recent proposals on amendments to the GNI Connections Policy, set out in CER\15\018 and CER\15\018a.

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5.0 Licencing Arrangements The legislation underpinning the CER’s regulation of the natural gas market provides for the CER to licence natural gas undertakings. The legislation provides a list of activities that require a licence which includes the supply of natural gas. Section 2 of the 2002 Gas (Interim) (Regulation) Act defines supply in relation to natural gas as, ‘the delivery or sale of natural gas, including liquefied natural gas, to customers and includes shipping’. Under Section 16.1 of the 2002 Act, the CER ‘may grant or refuse to grant to a person a licence to undertake in the State all or any of the following activities – a) the supply of natural gas…’. Section 16.2 of the Act states, ‘a person who undertakes any of the activities mentioned in subsection 1 without a natural gas licence in respect of the activity is guilty of an offence and shall be liable on summary conviction to a fine not exceeding €3,000 or to imprisonment for a term not exceeding three months’. Under this legislation, the CER may grant a supply licence to an undertaking who intends to supply natural gas to final customers where it is content that an applicant meets certain any eligibility criteria set out by the CER. On this basis, the CER must now consider the appropriate approach to the licencing of CNG suppliers. As outlined in Section 3, the CER’s initial view is that if an entity is selling natural gas in a public setting for use by third parties, then this deemed to be a supply activity, as foreseen in the Gas (Interim) (Regulation) Act, 2002. On this basis, the requirement for a licence arises. In light of this, the appropriateness of the existing generic natural gas supply licence for CNG suppliers must be considered. As noted in the Introduction, practice in a number of EU countries3 and elsewhere, is that CNG supply is sometimes not treated as regulated supply activity and legislation could be changed to reflect this. The proposals outlined here are on the basis that the existing legislation remains unchanged. The gas supply licence was written in the context of regulating suppliers of fixed premises. There is flexibility in the licence to allow for certain Conditions to be deactivated where the CER is assured the supplier does not intend to supply certain categories of final customer. Condition 3.3 states, ‘where the Licensee does not intend to supply certain classes of final customers, the Licensee may request derogations from obligations arising from Conditions in this Licence… which pertain specifically to those final classes of customers’.

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Regulatory implications of new developments in the gas supply chain, a Report by Kantor on behalf of ACER, 2014

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As the licence was written for the purpose of regulating suppliers of fixed premises, the licence contains a number of Conditions that are, in whole or in part, potentially not relevant to the activity of supplying CNG in a forecourt scenario. Based on Condition 3.3, the CER proposes to use the flexibility inherent in the existing supply licence to provide CNG suppliers with a number of derogations from Conditions or parts thereof, to ensure that the sector is effectively regulated but to avoid raising any unnecessary barriers to entry to the CNG supply sector. While an alternative approach could be to create a new category of licence, the CER’s view at this time is that the issuing of derogations in respect of a number of parts of the existing licence, is preferable to creating additional licence categories. This approach ensures a degree of consistency between the treatment of applications for supply of fixed customers (at a premises) and for supply of CNG customers. The CER is issuing a consultation (CER\15\051) in tandem with this information note on a proposed approach to the licencing of CNG suppliers on the basis set out here.

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6.0 Gas Safety at CNG supply points 6.1 Current arrangements Natural gas undertakings which are licensed by the CER must currently comply with the LPG and Natural Gas Safety Framework together with CER guidelines to assist with the development of safety cases. These documents are available on the CER’s website4. Licenced entities must have an acceptable safety case in place to cover their activities and must keep this safety case up to date. Parties applying for a licence must include a safety case as part of their application. The CER will review this safety case and the licence will only be granted if the safety case is accepted by the CER. These arrangements apply to all licensed natural gas undertakings.

6.2 Future arrangements It is intended that the Gas Safety Framework and the guidelines referenced above will be reviewed during 2015. This review, which will take the form of a public consultation, will cover all aspects of those documents, and any safety related comments regarding CNG can be addressed through that process. Should a licensee begin to undertake work in this area prior to the completion of the CER’s consultation on the LPG and Natural Gas Safety Framework, they will be regulated under the existing regime.

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The current version of the LPG and natural gas regulatory framework is available here.

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7.0 Customer Protection role in CNG supply Under Regulation 7.1 of SI 463 of 2011, the CER has a statutory responsibility to protect energy customers and provide a dispute resolution service to final customers of all energy undertakings. Based on this, a question arises as to whether the CER may be required to provide a dispute resolution service for customers of public CNG suppliers. It should also be noted that under Regulation 7.2(c) of the same S.I., the CER “shall not provide a dispute resolution service where the complaint relates to a matter that does not concern the functions or objectives of the Commission”. In 2012, the CER published the Electricity and Natural Gas Supplier Handbook (CER\12\081) which sets out the obligations of suppliers in their dealings with final customers. Under these obligations, suppliers are required to design and implement codes of practice on a number of customer related areas, including – disconnections, vulnerable customers, billing etc. Were the CER to provide a customer complaint settlement role, in its current format, the Supplier’s Handbook and Codes of Practice do not cater for CNG suppliers and their customers. To inform a decision on the most appropriate process for dealing with customer complaints in the context of CNG supply in public settings, should such a service be required, the CER will consider this matter in Q4 of 2015 as part of a review of the Supplier Handbook. This review will be held after a decision is reached on the CER’s licencing approach as decisions on the CER’s customer protection role are contingent on the outcome of the licencing question (as per Section 5 of this document).

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8.0 Conclusion and next steps As stated, the CER has begun and will be holding a number of consultations on issues relevant to CNG supply in private and public settings over the coming months. The CER envisages that the series of consultations and decisions will be completed by the end of 2015.

For further information contact: [email protected] or Barry Hussey Commission for Energy Regulation The Exchange Belgard Square North Tallaght, Dublin 24

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