Aligning the connections and capacity processes

1. Aligning the connections and capacity processes 27th June 2012

2. Purpose of today • Mixed feedback - some want detail, some want to understand the end to end process at a high level Objectives of today • Get everyone to the same level of understanding by going through the end to end process • Reach a consensus on understanding/agreeing the problem • A plan for developing a solution with the industry ….. Additionally all to share ideas

3. Agenda • Set out the problem as we see it • Interactive session on a typical project with differing impacts, including mod 373 interactions • Overview of the existing “PCA” contract • Potential Modification overview (as previously discussed) – “Splitting the Auctions” • Interactions with Mod 376 • A potential alternative approach – “Planning and Advanced Reservation of Capacity Agreement (PARCA)” • Agree a way forward

4. So what are the problems we needto address? • Progression of Customer projects • The current lead times (38 and 42 months) are not sufficient when a Development Consent Order (DCO) is needed for NTS reinforcement • Lack of timely information for the customer • The misalignment of lead times may mean a User commits to capacity that is not certain to be physically available • Project Funding • Under the current framework the Planning Act changes will result in significant work and expenses being incurred prior to a formal User Commitment being secured. Do you agree that something needs to change?

5. Consequences of no change • What are the consequences of no change? • Lack of certainty that our customers need to progress their projects • Lack of User commitment underpinning pre construction and planning activities may result in inefficient industry funded works • Drives uncertainty of capacity delivery where investment is required and therefore the User’s ability to flow • Likely increased level of costs (e.g. constraint management costs) to Users & End consumers due to obligation to make capacity available to lead times that may not be achievable.

6. Our current position (1) • National Grid NTS will release capacity as early as possible to try and meet the customer’s requirements • If reinforcement is not required or if the customer requirement could be fully satisfied by substitution, we anticipate being able to release early where such release is valued by our customers • We will look to contracting solutions as an alternative to build if possible • A new capacity product (i.e. Long-Term Non-Firm) could help “bridge the gap” • A stable need case is needed where a Development Consent Order (i.e. submission to the Planning Inspectorate) is required • Hence an understanding of the available levels of unsold capacity and/or substitution is needed for all parties ahead of submitting a planning application.

7. Our current position (2) • We would expect a customer to approach NG, and potentially agree to a bi lateral contract where: • The customer believes that their capacity requirement is in excess of the unsold quantities at the relevant point • The customer believes that there is a risk that the unsold quantities may not be sufficient to meet their requirements • A bi lateral agreement would give certainty • To include “drop-out clauses” & ramp up of User Commitment • Alternatively User may decide not to enter the bi lateral agreement & bid in an auction or application window. Release would then be dependant on whether substitution is available or where National Grid NTS is prepared to release “non-obligated” • Whatever we put in place will not prevent a User from applying for Enduring Annual NTS Exit (Flat) Capacity from any month (as introduced through Mod 376)

8. Worked example • The example to be discussed is a typical project where a submission to the Planning Inspectorate is required • Some projects will take less time • Some projects may take longer

9. Pre-Capacity Agreement (PCA) We have introduced a new contract to ensure timely progression of activities where reinforcement is required. Under such a scenario a PCA would be signed by NGG and customer: • Covers activities up to submission of a Development Consent Order • Four different stages of activity • 1a – need case and technical options • 1b – strategic options • 2 – preferred route corridor • 3 – Environmental Impact Assessment • User commitment ramps up in line with each stage • Currently cost pass through but we proposed in our RIIO-T1 business plan this would be funded through our allowed revenue (stage one revenue driver) • Customer able to ‘drop out’ in between stages Could be used in conjunction with (or used to facilitate) ‘stop-gap’ long term non-firm product

10. What is the problem a potential MOD could solve? • The problem: • How to provide guaranteed capacity rights to a User underwriting work? • How to provide certainty of capacity availability over and above obligated levels? • A potential answer: • “Incremental” NTS Capacity is only made available to signatories of a bi-lateral agreement • One potential solution would be to hold separate “baseline” and “incremental” auctions / applications

11. What are the options? • A mod is likely to be required irrespective of the solution but there are a number of options: • A mod based on “splitting the Auctions” • A bi-lateral contract based approach to reserve and commit to capacity – potentially requiring supporting modifications • Any others ?

12. Potential MOD solution “splitting the auctions” • We covered the straw man in detail through the 1st of May workgroup session: http://www.gasgovernance.co.uk/sites/default/files/developingcapconnectionmay2012.pdf In summary: • “Incremental” NTS Capacity only guaranteed to be released where a bi lateral agreement (PCA) has been agreed by National Grid NTS and a developer/User. • “Incremental” NTS Capacity is made available through the ad-hoc QSEC and ad-hoc Enduring Annual NTS Exit (Flat) Capacity processes only and only to a PCA signatory. • Unsold NTS Capacity would be made available as it is today • Unsold NTS Capacity would need to be committed to by the PCA signatory through the current auction / application mechanisms or alternatively a reservation process could be incorporated

13. Potential MOD solution cntd • In order for National Grid NTS and the customer to align projects and for National Grid NTS to fully determine when and how Incremental NTS Capacity is to be delivered a PCAmust be agreed • We recognise that the exit regime allows developers to reserve Enduring NTS Exit (Flat) Capacity through the ARCA process • We believe the flexibility of ARCAs should remain and as such the ARCA provisions could be incorporated into the PCA for developers • Feedback: • The reason for change is not clear • A pre defined solution appears to be in place • Users don’t place much importance on whether capacity is “incremental” • Does the potential solution impinge upon Mod 376 benefits?

14. No change to Mod 376 principles

15. An alternative approach….. We could widen the ‘ARCA’ (advanced reservation of capacity) principles currently applicable to non-UNC parties in exit The high level principle would be that capacity is reserved following the signature of a bi-lateral contract whilst planning activities are undertaken The ‘demonstration date’ concept would be retained, whereby the contract can be terminated and the capacity no longer reserved if the project does not progress Formal user commitment would be made at a defined point following receipt of a Development Consent Order 15

16. Planning and Advanced Reservation of Capacity Agreement (PARCA) Planning and Advanced Reservation of Capacity Agreement Pre-Capacity Agreement 1a – need case and technical options 1b – strategic options 2 – Preferred route corridor 3 – Environmental Impact Assessment Advanced Reservation of Capacity Agreement Capacity reserved from signature Demonstration dates and information Termination where project doesn’t progress Our alternative approach utilises a bi-lateral contract which incorporates the principles of the existing PCA and ARCA contracts Signature of the contract would not be mandatory to signal incremental capacity – but provides certainty of overall timeline for both parties and is likely to lead to a more efficient timeline overall because of this 16

17. How it could work Part 1a of the PCA works takes around 6 months to complete and identifies whether there is existing capability in the system and therefore whether the rest of the PCA activities (1b to 3) are required If there is no existing capability in the system then a PARCA contract could be used to: • Underpin the work needed to investigate build and non build options to provide that capacity • Reserve capacity whilst these activities are undertaken • Provide ‘drop out’ points which allows the customer to terminate and capacity to be returned to market if they decide not to progress their project Could be utilised in conjunction with (or used to facilitate) ‘stop-gap’ long term non-firm product 17

18. Interaction with Mod 373 Kick off PARCA anytime here 6 months 9 months 3 months 12 months 15 months Day 0 Provide Offer Accept Offer Mod 373 Connex Process Connection Application Provide Offer Accept Offer Conceptual Design Study Optimal PARCA signature date Optimal PARCA signature date Conceptual Design Study Feasibility Study Simple Connection Complex Connection The initial part 1a work could be carried out in parallel or sequentially with the Mod 373 timeline It would be the customer’s choice of when to start the 1a phase, but we believe there is an ‘optimal’ point This optimal point ensures that the customer receives a connection offer and need case/technical options report to consider together 18

19. Further development required… We have been looking at this option as a result of the feedback that the ‘split auction’ approach is potentially too complex Our thinking is therefore not as far developed as the split auction option There are a number of questions to be discussed for example: • Should this allow reservation of unsold only (where no incremental required)? • Is an ‘open season’ approach required to let market know when a PARCA is about to be signed? • Interaction with Europe? But in general, we believe this option has merit 19

20. Way forward • Monthly workgroup as part of Transmission workgroup • propose to begin on 5th of July – initially cover outstanding actions • Is monthly sufficient? • A lot of material to cover so which areas to focus on first?