Introduction of Gas Reserve Arrangements

1. Introduction of Gas Reserve Arrangements Mark Bailey Gaz de France ESS

2. Winter 2005/06 • Actual demand below seasonal normal during peak winter months • Demand above seasonal normal • Late November 05 • Middle March 06 • Rough Storage • Unavailable from 16th February 06 • Minimal demand response

3. Demand Side Response - Gaz de France ESS • Response entirely price driven • Reliant on customers who were exposed to short term prices • Limited response from customers who had hedged • Concerns regarding next winter • Buying behaviour may alter to move away from Day Ahead • Customers are much less price responsive to potential opportunities rather than avoiding costs • Our Customers response • 13th March 170,000 therms (P70) • More response on 14th and in the rest of the week

4. Customer’s Response • Why was response higher after 13th March • Day Ahead Prices for 14th onwards much higher than for the 13th • 13th - 59.8p/th vs 14th - 195 p/th • Customers need time to respond • Decide on their own trigger level • Discover the amount of alternate fuel available • Under the present regime there is no incentive to prepare • Without appropriate planning switching may take time

5. Demand Side Response

6. Why do we need gas demand side response? • Prevent progressing into a gas deficit emergency and: • Expands the choice of NGG re residual balancing • Introduces certainty and visibility around deliverable demand reduction • Establishes incentives for customers to actively participate • Supplies may not meet demand due to: • Very cold weather • Supply side failure eg. Storage, Beach, LNG, Interconnector • How much demand side response is needed? • NG Gas 1 in 10 scenario for winter 06/7 requires 50-60mcm demand side response • Relatively low levels of demand response seen so far • 75% volume CCGT, 25% volume from customers

7. Market benefits of demand response certainty • Gives better knowledge of firm customers that may be available to respond • Facilitates economic and efficient operation of the pipeline system • Achieves greater certainty about actual demand reduction deliverable on the day as it gives better knowledge of firm customers that may be available to respond • May allow upward adjustment of GBA trigger level • Customer response avoids passing through problems to electricity market • Diversifies risk away from storage only options – hedges reliability (eg. Rough) • Restore confidence in supply/demand balance which may reduce wholesale market volatility and smooth market prices

8. How did electricity accomplish demand side participation? • Demand Side Ancillary Services were created • Large electricity supply customers began to provide services in competition with generators • Increased competitiveness • Increased volume of response made available • Standing Reserve • Delivered in 20 mins, run for 2 hours • Availability and utilisation payments made. • Frequency Response • Instantaneous trip, load management 30 mins • Availability payments only

9. Demand Side Portfolio • Through our involvement within the I&C supply market, we were able to offer large volumes of MWs to NG • Our total Ancillary Services business brought to NG to date is; • FCDM – 200MW • Standing Reserve – 760MW • This growth is due to customers being incentivised to make load available via guaranteed payments • Energy only payments would not have produced these volumes (see Demand Turndown) • NG are keen to develop further in this area and have been reported to be looking for an additional 250MW in 2006/7

10. Growth of Schemes from Existing and New Participants • Customers initially ‘test’ participation, offering limited volumes • Increased response from existing providers is evident on both schemes; • Stems from participants’ experience and confidence in service provision grows. • Growth in some cases as high as 75% • Companies in similar industries are also encouraged to participate

11. How do we see the scheme working? • Product structure • Quasi-storage - aggregated bundles to mirror storage deliverability (by storage type or facility type) • NGG run a tender process – number of times a year to be agreed • NGG contract with shipper but dispatch customer directly to avoid time delay • Prices structured to best encourage investment in switching fuels by offering an Availability and Utilisation Payment • Customers shouldn’t be limited to contracting with their supplier

12. Cost Recovery Route • Cost Recovery Route • Cost recovery would be targeting on those who have caused the system action to be taken i.e. those who are out of balance • The Availability Payment element will be known immediately NGG decide how many participants there are known • The cost of the flat fee will flow through to SMP buy price • The Utilisation Fee element will be individually agreed between NGG and each participant agreed bilaterally during the economic assessment period of the tender process • The cost of the utilisation fee will feed through to SAP • Non delivery will be discouraged via events of default and associated contractual consequences

13. Summary • It is time for action now ahead of winter 2006/07 • Improved scheme vital to enable demand side response to prevent emergency measures • Incentive on customers to participate • Provide a mechanism to reflect the true value of their services • Follow the lead given by electricity • Increased demand side response would • Increase security of supply • Dampen price spikes