Update on Ofgem’s interconnector policy consultation FUI IG, London, 13 th September

1. Update on Ofgem’s interconnector policy consultation FUI IG, London, 13th September

2. Consultation scope & responses • Seeking views on: • proposed models for the allocation of cross border transmission capacity and efficient use of electricity interconnectors • regulation of new investment. • We received 21 responses from interconnector owners, TSOs, energy companies and other organisations

3. Consultation conclusions • Published summary of responses – July • http://www.ofgem.gov.uk/Europe/Documents1/Summary%20of%20Responses%20from%20Electricity%20Interconnector%20policy.pdf • Preparing “next steps” letter – for publication end September • Sets out our next steps in: • Market coupling in the FUI Region • Tackling barriers to market coupling in GB (TNUoS, Firmness, 2 power exchanges) • Developing a new regulatory regime for interconnector investment

4. Market coupling in the FUI Region • Committed to implementation of the “enduring solution” for day ahead market coupling of the FUI to the NW Europe Region • Steps to achieve this: • Britned to implement its “embedded solution” as an interim step • Support for and participation in the NWE TSO and PX projects to develop a common algorithm to support price coupling across the region • GB to implement the enduring solution including both IFA and Britned • In the longer term, through cooperation of NRAs in the FUI region, support extension of market coupling to include SEM (All Ireland market)

5. Tackling barriers to market coupling in GB: TNUoS Charging • Problems highlighted by respondents: • TNUoS charges create a deadband that prevents price convergence in coupled markets • Avoidance of “Triad” charge (demand TNUoS) causes inefficient flows on interconnector • Solution proposed: • National Grid consulted over summer on complete removal of TNUoS charge on Interconnectors • Final conclusions published by National Grid 6th September • Decision by Ofgem Authority expected by end of September • If approved, changes to charging methodology effective 1st October 2010.

6. Tackling barriers to market coupling in GB: Firmness • Share view of many other NRAs that: • Implicit auctions require physical firmness as a prerequisite • Physical and financial firmness should work towards delivering the same outcome • Recognise that Britned will be offering physically firm products • Consistency with CWE’s approach to firmness i.e. financial firmness after nomination of capacity • Contributing to ERGEG work addressing firmness through the framework guideline / network code process – leading to a common European approach

7. Tackling barriers to market coupling in GB:2 power exchanges • Respondent highlighted existence of 2 PXs in GB as a potential barrier to market coupling • We've been considering how market coupling could be implemented in GB.. • Possible solutions, already presented to IG... • We believe it is technically possibly for two Pxs to deliver a single a coupling solution • TSOs, Pxs & IC owners should be part of a clear roadmap, for the implementation of the enduring coupling mechanism

8. LT Coordination • Coordination of LT auctions, key priority for the FUI region. • In our letter we highlight the next steps agreed by FUI IG... Intraday timeframe • The increased amount of intermittent generation expected in GB and SEM markets, places additional value to Intraday timeframe. • Together with the Dutch NRAs, we are co-chairing, on behalf of FUI the Regulator’s group of the NW ID project: ID market coupling solution by 2012. • In parallel, once SEM introduces ID trading, FUI will develop coordinated ID capacity products & work on the implementation of the ID coupling model

9. Developing a new regulatory regime for interconnectors • Given that the preferred EU approach is a regulated model we are developing a regulated investment regime for non-exempt interconnectors, but remain open to the merchant route. • Fully regulated approach would be a significant departure from our current approach, requiring several changes to our regime and longer time to implement. • As respondents highlighted, the Cap and Collar model: • maintains merchant investment whilst safeguarding consumers from taking undue levels of risk. • is a good compromise between the advantages & disadvantages of the merchant and regulated models

10. Developing a new regulatory regime for interconnectors • Project “NEMO”, is our “pilot” project in exploring how cap and collar model could be implemented in GB. • Together with CREG, NG and Elia we aim to establish: • High level principles behind the new regime • Explore options for cap& collar design , satisfying these principles • Implementation mechanisms required to adopt a cap & collar (eg changes in the regimes on both sides) Timeline: • Proposal by the end of 2010 • Possible a joint consultation with CREG in 2011

11. Developing a new regulatory regime for interconnectors • While, NEMO will be our pilot project to develop a regulated regime, we acknowledge that there are other ICs under discussion: e.g. links to France, Ireland, Norway.. • We envisage holding similar discussions with relevant TSOs and regulators to discuss if this approach could be seen as a high level solution for other non-exempt ICs.. • We also remain open to the merchant route.Under FUI workstream on IC investment, we intend to develop a coordinated approach towards exemptions with other regulators...