Mod 452 Update

1. Mod 452 Update 9th September 2013

2. Agenda • Follow up from August 28th workgroup • PARCA Security and termination options • PARCA window timeline • PARCA triggered Ad-hoc QSEC • Summary of potential licence changes and rationale • Next steps

3. Background At the August 28th mod 452 workgroup we discussed some alternative draft business rules with you that covered: • Security • Requirement for consistent PARCA security regardless of whether PARCA Phase 2 works are required • Termination cost for PARCA Applicant • Inclusion of a PARCA Window • Provides a focal point for customers considering a PARCA • Inclusion of an Ad-hoc QSEC • Provides opportunity for unsold Entry capacity to be competed for prior to its potential reservation under a PARCA • Rationale for change was accepted but further refinement should be considered on certain aspects Thank you for your feedback 3

4. Security - Key principles • Security is linked to capacity value • allows a consistent approach regardless of how the reserved capacity will be delivered • Security required is consistent with existing UNC provisions • principles already established and familiar • The security value should not be so high as to become a barrier to entry but not so low to become insignificant • Feedback from August 28th workgroup: • Securitising 100% of capacity value is too high • Capacity pricing is subject to geographical differences which could lead to the value of security being different for similar sized projects

5. Calculation of Security Amount: Option 1 • Feedback from previous discussions is that ramping up to 100% of total indicative capacity value is too high • Previous option used max capacity quantity for a period of 4 years on exit to determine the security value and capacity requested over a 32 quarter period for entry. • Alternative is to reduce requirement to 1 year of indicative capacity value • Similar to existing UNC capacity security provisions (UNC section V – rolling 12 month security value) • Reducing the requirement to 1 year also allows the calculation to be simplified

6. Option 1: Security amount calculation Exit: Total PARCA Security Amount (£) = (PARCAExind / 100) x Qex x 365 Where: PARCAExind = the indicative NTS Exit Capacity price (p/kWh/Day) for the maximum Capacity requested at the relevant NTS Exit Point Qex = the maximum amount of Exit Capacity to be Reserved by the PARCA Applicant (kWh/Day) as specified in the Phase 1 PARCA Works Report Entry: Total PARCA Security Amount (£) = (PARCAEnind / 100) x Qen x 365 Where: PARCAEnind = the indicative NTS Entry Capacity clearing price (p/kWh/Day) for the Capacity requested in the relevant quarter at the relevant NTS Entry Point Qen = the maximum amount of Entry Capacity to be Reserved by the PARCA Applicant (kWh/Day) in any one quarter

7. Examples: Option 1 • Two sets of examples using the calculations of one year’s capacity • Entry based on 30GWh • Exit based on 50GWh • Two examples for each using one low and one high capacity price • Security phased over four years

8. Calculation of Security Amount – option 2 • Concerns over geographical capacity pricing differences vocalised at previous workgroup • Security value could be derived from an average or weighted average capacity charge • The following table illustrates typical average and weighted average capacity prices based upon different calculations:

9. Examples: Option 2 • Two sets of examples using the calculations of one year’s capacity • Entry based on 30GWh • Exit based on 50GWh • Using the two examples of weighted averages capacity prices • Security phased over four years

10. Examples: Comparison of Option 1 and 2

11. Summary of options • Not intended to be exhaustive • NG initial view is that option 1 is favourable

12. Security Amount – Phasing • The Security Amount phasing required to be put in place the PARCA Applicant will be over a maximum of four years and will be based on the following cumulative profile: • Year1 = 25% x Security Amount • Year2 = 50% x Security Amount • Year3 = 75% x Security Amount • Year4 = 100% x Security Amount Where • Year1 = the financial year (1 April to 31 March) in which Phase 2 is initialised

13. Security Amount – Phasing • Security will only be required up to Capacity Allocation. • Should Phase 2 complete earlier than four years then only the amount up to that year of completion will be required • E.g. if Allocation of capacity took place in Year 3, then at that point in time the security will equal 75% and the additional amount for Year 4 will not be required. • If Phase 2 goes beyond four years the security will remain at 100% of the security amount until allocation • Upon Capacity Allocation the existing UNC security requirements are applied (as detailed under UNC TDP section V)

14. Security Amount – Providing Cover (updated) • PARCA Applicants will be required to post annual security to cover the phased Security Amount • August 28th feedback – termination should take into account the day, not the year, termination occurs. • In the event of PARCA termination, a termination amount will be invoiced to the PARCA party • To take into account the effective day of the PARCA termination e.g. if PARCA phase 2 began on January 1st 2015 and PARCA terminates 31st January, the no. of days = 31 • Termination Amount = min of ((security amount / 1461*) x no. of days) or security amount *1461 = 4 years in days

15. Funding (no change) • Where investment is required this would follow the existing RIIO-T1 revenue driver timescales • 20% of the value of the Revenue Driver in Year T-2 • 80% of the value of the Revenue Driver in Year T-1 • To implement this would require some licence changes to ensure: • That there is minimal impact on Industry charges overall • National Grid’s Allowed Revenue can be amended to be kept neutral in the event of a Termination

16. PARCA window – further thoughts • Concerns raised at August 28th workgroup that the PARCA phase 1 output will be delayed and can this impact be minimised? • e.g. consider closing the PARCA window if no PARCA requests are received within a determined period • We agree that closing the window early if no further PARCA requests is beneficial • We consider 20 business days from the opening of the PARCA window allows sufficient time for a PARCA application to be submitted • allows at least a further 20 business days to agree the PARCA. • the window closes where no PARCA applications are received within 20 business days from the window opening • If PARCA applications are received within 20 business days, the window will close on the earlier of all PARCAs received within the window being agreed, or 40 business days.

17. PARCA Phase 1 Activities – original proposal(PARCA Window and Ad-hoc QSEC Auction Timeline) 10 Business Days 40 Business Days PARCA Phase 1 NG NTS publishes info to other Users and opens the PARCA Window NG NTS publishes notice that the PARCA window is now closed and confirms the number of PARCAs requested within the window Phase 1 Outputs issued to all PARCA Signatories 28 Calendar Days (approx 20 Business Days) QSEC Auction (up to 10 Days) Up to 10 Business Days 10 Business Days NG NTS invite Users to participate in an Ad-hoc QSEC Auction QSEC Auction Opens QSEC Auction Closes Allocation

18. PARCA Phase 1 Activities – revised proposal (PARCA window can close after 20 Business days if no requests received) 10 Business Days 20 Business Days 20 Business Days PARCA Phase 1 NG NTS publishes info to other Users and opens the PARCA Window NG NTS publishes notice that the PARCA window is now closed as no-one has approached us to sign a PARCA NG NTS publishes notice that the PARCA window is now closed and confirms the number of PARCAs requested within the window Phase 1 Outputs issued to all PARCA Signatories 28 Calendar Days (approx 20 Business Days) QSEC Auction (up to 10 Days) 10 Business Days Up to 10 Business Days NG NTS invite Users to participate in an Ad-hoc QSEC Auction QSEC Auction Opens QSEC Auction Closes Allocation

19. Ad-Hoc QSEC • No further changes proposed from previous discussions • No introduction of an ad-hoc retainer process at this time • ad-hoc QSECs aspect of the current regime • January retainers are valid for 12 months

20. PARCA (Mod 452) – Licence Change Requirements

21. Background There is a strong link between the Gas Transmission regulatory and commercial frameworks The change to the release of incremental capacity through the introduction of a PARCA currently being progressed by UNC Modification 452 also requires Licence changes There are a number of changes that we are proposing are made to the Licence to complement the PARCA modification Some of the changes are essential in order for the PARCA modification to work. Others are not essential but the full benefits of the PARCA modification would not be realised without them Others are Licence tidy ups timescales

22. Summary of changes

23. Next steps Customer Seminar Workgroup Report Ofgem decision on Mod Panel decision on Mod Panel decision on Consultation Consultation Period Working drafts of documents issued Licence Change Consultation Period NG NTS & Ofgem undertake formal Licence Drafting Ofgem Direct Changes to Licence 56 day period of appeal of proposed Licence changes Methodology Statements Consultation Period NG NTS request Ofgem consent for a derogation on Licence condition for independent examination of methodology statement changes Ofgem period of approval NG NTS consider responses & make necessary updates NG NTS request Ofgem consent for a derogation on Licence conditionfor independent examination of Generic Revenue Driver Methodology changes Generic Revenue Driver Methodology Statement Consultation Period NG NTS consider responses & make necessary updates Ofgem period of approval

24. Modification 0452 - Next steps • Revised mod and legal text at further workgroup (to be scheduled) • Final workgroup report at October workgroup