Interactions with the implementation of RIIO-T1

1. Interactions with the implementation of RIIO-T1

2. Interaction with the implementation of RIIO – T1 • It is apparent that the level of development required in this area means that any commercial changes are highly unlikely to be in place before the start of the RIIO-T1 period (April 2013) • Neither the current obligated lead times nor the shorter obligated lead times we proposed in our RIIO-T1 plan can be left as they are without any commercial change due to the impact of the Planning Act and the potential for constraint costs being incurred and passed to end consumers • To manage this interim period, we have proposed two solutions: • Continuation of the existing obligated lead times in the licence with an adjustment to the Permits allowance • Implementation of the proposed RIIO-T1 obligated lead times in the licence in conjunction with capacity release conditions specified in the Methodology Statements

3. Potential Interim Solution #1 Permits allowance • Obligated lead times remain as they are (38 months for exit incremental capacity and 42 months for entry incremental capacity*) • Permit allowance to manage risk associated with the Planning Act implications • One permit allows deferral of 1 GWh/day for a month • Each permit has a value of £5000 • Can be earned for early release (ahead of obligated lead times) • Initial allowance of £39.02m is based on an assessment of risk we think will materialise in the remainder of the rollover year and the first year of RIIO-T1 • This does not cover the whole potential risk so we are proposing that we are able to go overdrawn • Limits on our ability to go overdrawn: • 50% of volume • Financial exposure limited with +£30m / -£10m cap and collar across the period * From a July application window for exit or a March QSEC auction for entry

4. Permit allowance calculation • We have proposed a permits allowance to apply for the remainder of the rollover year and the first year of RIIO-T1 based on: • The projects we believe may apply for incremental capacity within this period with a likelihood factor applied • Information taken from planning status, customer meetings and discussions, TEC (NGET) data • A comparison of the obligated lead time, the date the customer wants the capacity and the time we believe it will take us to deliver • Taking into account the size of the project and whether reinforcement is required and utilising customer information • This would lead to a total allowance of 24,476 permits with a value of £122.38m – which we believe is an unrealistic allowance. • We have therefore proposed an allowance based on the customer’s indicated first gas date instead of the obligated lead time. This leads to an allowance of 7,804 permits across entry and exit with a value of £39.02m.

5. Permits - going overdrawn Need to recognise that Users could bid for capacity from the obligated lead times which would result in a higher level of risk When indicating the use of permits in an auction / application invitation letter we would need to cover the risk associated with what the customer is able to bid for (not what we think they will bid for) and are therefore proposing that we are able to go overdrawn in principle to facilitate this We recognise that there should be limits on our ability to go overdrawn else this could be perceived as creating the ability for us to indicate a worst case lead time for all projects We have therefore proposed a combined approach of a volumetric cap and financial penalty

6. Permits - limits on exposure We have proposed caps and collars of +£30m and -£10m respectively We have proposed an initial allowance of £39.02m which is based on the number of permits required to manage the risk associated with incremental signals we believe will materialise in the rollover year and first year of RIIO-T1 Every permit that is used has a cost of £5,000 so if all the signals we expect materialise, we would not retain any of the initial allowance We have proposed that our downside exposure is limited to reflect the lack of control we have over customer signals differing from previous indications

7. Potential Interim Solution #2 Methodology Statement drafting • Change the obligated lead times in the licence to: • 24 months (from an October capacity allocation) for entry and exit incremental capacity (i.e. where reinforcement has been identified) where a PCA/PARCA contract has been signed and all the relevant steps met • Reasonable endeavours obligation for all other requests • Reflect this in the drafting of the Methodology Statements (IECR & ExCR), adding to the existing conditions for capacity release (e.g. passing the NPV test) • This does not restrict who can bid for, and be allocated, the incremental capacity (as this is determined by UNC) • However, incremental capacity will only be made available at locations where a PCA/PARCA has been signed