Initial thoughts on methods to optimise capacity availability between ASEPs

1. Initial thoughts on methods to optimise capacity availability between ASEPs Transmission Workstream, 2nd March 06

2. Content • AMSEC auction results • Options to optimisation capacity availability • Key development areas

3. AMSEC auction results (Winter 2007) BA = Bacton, EA = Easington, HS = Hornsea, SF = St Fergus, TE = Teesside, WF = Wytch Farm

4. Optimisation of Capacity between ASEPs • AMSEC auction results show • Several ASEPs sold out for some periods, often with bids far in excess of available capacity • Limited ability to complete investments to seek to satisfy user requirements within constrained period • Other ASEPs with unsold capacity • Are there methods by which unsold capacity at an ASEP could be “transferred” to other ASEPs to allow optimisation of available capacity?

5. Optimisation methods • Assuming baselines remain fixed, two potential ways in which capacity may be optimised: • Option 1 - Transfer of Unsold Capacity between interacting ASEPs • Option 2 - Transfer of Sold Capacity between interacting ASEPs – “Market Maker”

6. Option 1. Transfer of unsold capacity - Principles • Provide shippers at an ASEP with ability to obtain unsold capacity at other interacting ASEPs • Amount of transfer dependant on “exchange rate” between ASEPs • results in areas of possible transfer e.g. Easington, Hornsea, Aldborough, Theddlethorpe, Bacton, Teesside • Unsold capacity for year ahead after AMSEC auction aggregated into one “pot” • Allocate aggregate unsold capacity to interacting ASEPs based on • unsatisfied bids in AMSEC auction; or • bids placed in new auction held after AMSEC and before RMSEC

7. Option 1. Transfer of unsold capacity - Principles A B C D E F Aggregate Unsold Capacity Unsold Capacity Allocated based on price and volume of bids subject to exchange rates

8. Option 2. Transfer of sold capacity - Principles • After AMSEC auction, issue buy back tender to all ASEPs • include [2] months period for acceptance by National Grid • If any offers, then undertake additional AMSEC type auction • Release non-obligated capacity (within [2] months of receipt of offers) where value of bids exceed cost of required buy back offers, subject to exchange rates

9. Option 2. Transfer of sold capacity - Principles A B C D E F Aggregate Sold Capacity Allocated based on price and volume of bids subject to exchange rates Sold Capacity – Buy back offer

10. Possible Annual Timetable Issue buy back tenders for next gas year Publish allocations Based on principles of option 1 and/or option 2 Feb Mar April May Oct Sept AMSEC Auction Rerun AMSEC Auction for next gas year only Capacity transfers effective • Alternative timetables possible under option 1 : • allocate unsatisfied bids in AMSEC auction for following capacity year using aggregate pot of unsold capacity • If methods implemented this year, timetable would be on transitional basis

11. Key Development Areas • Exchange rate methodology • If capacity transfers do not result in required changes in gas supplies, then additional buy back costs could be incurred • Deal with through buy-back incentive or factor into exchange rate? • Allocation methodology • Dependant on exchange rate methodology • Treatment of costs and revenues • Recovery of TO revenue • Any resulting buy-back costs • Licence obligations • Obligation to offer capacity in at least one clearing allocation auction ……discuss at next Transmission Workstream