Delivering Connections and Capacity RIIO-T1 and associated commercial changes - Summary

1. Delivering Connections and CapacityRIIO-T1 and associated commercial changes - Summary June 7th 2012

2. Background 31st May 2012 - we submitted our SO External Incentives business plan to Ofgem. As part of this submission we included some updated information in relation to our proposals in the areas of constraint management and capacity / connection delivery.  This updated information has now been published on our Talking Networks website: http://www.talkingnetworkstx.com/gastransmissionplan/our-business-plan.aspx Our full SO Incentives business plan will be published within the next couple of weeks.

3. Background - cntd • Both a physical connection and commercial capacity rights are required to physically input gas to, or offtake gas from, the NTS • These are currently acquired through separate processes, which are not aligned • Stakeholders asked us to look to align the connections and capacity processes • Implications of the Planning Act (2008) (“the Planning Act”) need to be considered

4. The Planning Act The Planning Act formalises the process to acquire a Development Consent Order Whilst certainty is increased, the overall timeline to deliver infrastructure is lengthened and costs are incurred earlier in the process The existing obligated lead timesdo not align with the Planning Act

5. High level principles It is imperative that new or expansions to existing projects, including those sites with planning consent already granted, are brought to market in a timely manner to aid UK diversity and security of supply and energy decarbonisation NGG and customer project processes should, where ever possible, start and finish together, working hand-in-hand throughout We must work with the Planning Act requirements and get customers connected – without exposing NTS Users and ultimately end consumers to considerable constraint costs

6. The RIIO-T1 price control review provides a vehicle to address this… • Appropriate funding • Obligated lead times • Capacity and connection Incentives • But associated changes to the commercial regime are required... • We propose that signature of a bi-lateral Pre-Capacity Application (PCA) contract is mandatory for all customers wanting to signal incremental capacity • Provides clarity of all process steps and deliverables, along with first gas date worked to by both parties • Provides transparency of capacity delivery timeframes • Incorporates phased user commitment • Defined drop out points, linked to revenue allowances • Preserves credit arrangements • Defines and funds activities prior to formal capacity signal • For transitional projects – those already with planning consent – we will be discussing requirements on a one-to-one basis

7. Other potential changes to the commercial framework are being explored… Stakeholders have told us they want surety that the person underwriting works through the PCA contract will be allocated the relevant incremental capacity This requires a UNC modification to control who is applying for that incremental capacity We have been working on a draft modification for development and to facilitate discussion through the Transmission Workgroup We would welcome thoughts / comments / alternates We are working to a principle of minimal change where possible and so will preserve recent proposed changes such as UNC modification proposals 373 and 376

8. Implementing RIIO-T1 on 1 April 2013 • Any related UNC modification proposal is highly unlikely to be in place before the start of the RIIO-T1 period (April 2013) • Neither the current obligated lead times nor proposed shorter obligated lead times can be left as they are without any change due to the impact of the Planning Act and the potential for constraint costs being incurred and passed to end consumers • We have proposed two alternative solutions to manage the constraint management risk associated with incremental capacity in the interim • Permits allowance • Methodology Statement drafting • In the absence of a UNC modification, these enable the regulatory and commercial frameworks to work together appropriately and manage the exposure to constraint management costs • If stakeholders don’t actually want the surety of the PCA signatory being allocated the relevant incremental capacity, either of these could work as an enduring solution

9. Next steps • Detail of our proposals have been submitted to Ofgem in our March 2012 RIIO-T1 submission and May 2012 External SO Incentives submission – these are available on our website • Our draft UNC modification will continue to be discussed and developed through the Transmission workgroup • We would welcome thoughts / opinions / alternates • Ofgem will decide on their preferred interim solution of a permits allowance, or Methodology Statement changes through the RIIO-T1 process • Initial proposals in July, Final Proposals in December • The Methodology Statement changes will be consulted on in late summer / autumn • We would welcome one-to-ones, invites to industry forums or other interest group meetings to discuss any of the above

10. Contact details Steve Fisher Gas Charging and Access Development Manager steve.r.fisher@nationalgrid.com 01926 653428 Mike Wassell Senior Gas Access Analyst mike.j.wassell@nationalgrid.com 01926 654167