PARCA Security and Termination Amounts

1. PARCA Security and Termination Amounts Option for Using a consistent approach under the PARCA Regime Transmission Workgroup 28 August 2013

2. Agenda • Option for applying a consistent methodology for the calculation of security / termination amounts for PARCA Phase 2 • Rationale • Calculation for Entry and Exit • Phasing of Security • Funding • Examples • Funding / Charging impact

3. Why consider a change in the approach? • This option is based on a single revenue driver • Based on RIIO-T1 rules for additional funding allowances • To provide a consistent approach for all Applicants irrespective of whether investment is needed • Divorces costs from security and moving to capacity based calculation • Provides one method of calculation based on capacity • Familiar calculation used in User Commitment

4. Calculation of Security Amount - Entry • Based on User Commitment principles already established • For Entry Total PARCA Security Amount Entry (£) = (PARCAEnind1 / 100 x Qen1) + (PARCAEnind2 /100 x Qen2) + (PARCAEnind3 / 100 x Qen3) + (PARCAEnind4 / 100 x Qen4)……+ (PARCAEnindn / 100 x Qenn) Where: PARCAEnind = the indicative clearing price for each individual quarter for the Quarterly NTS Entry Capacity requested for Quarters 1 to n where n is the last quarter of capacity requested and confirmed by the PARCA Applicant. Qen = total Quarterly NTS Entry Capacity quantity requested in the PARCA for each day for each quarter, for the first quarter up to and including the last quarter, n, for which capacity is requested. n = a maximum of 32 quarters

5. Calculation of Security Amount - Exit • Based on User Commitment principles already established • For Exit Total PARCA Security Amount Exit (£) = PARCAExind / 100 x Qex x (365*4+1) Where: PARCAExind = the indicative NTS Exit Capacity price (p/kWh/Day) for the relevant Enduring Annual NTS Exit (Flat) Capacity at the NTS Exit Point included in the Phase 1 PARCA Works Report. (Note: This price may differ from the actual price determined at a later date and used to calculate actual transportation charges) Qex = the maximum amount of Enduring Annual NTS Exit (Flat) Capacity to be Reserved by the PARCA Applicant (kWh/Day) as specified in the Phase 1 PARCA Works Report

6. Security Amount - Phasing • The Security Amount phasing required to be put in place the PARCA Applicant will be over a maximum of [four] years and will be based on the following cumulative profile: • Year1 = [25%] x Security Amount • Year2 = [50%] x Security Amount • Year3 = [75%] x Security Amount • Year4 = [100%] x Security Amount Where • Year1 = the financial year (1 April to 31 March) in which the PARCA is signed and progression into Phase 2 is confirmed

7. Security Amount - Phasing • Security will only be required up to Capacity Allocation. • Should Phase 2 complete earlier than [four] years then only the amount up to that point will be required as security • E.g. if Allocation of capacity took place in Year 3, then at that point in time the security will equal [75%] and the additional amount for Year 4 will not be required. • If Phase 2 goes beyond [four] years the security will remain at 100% until allocation • Upon Capacity Allocation the requirement to put in place security for Phase 2 will cease and existing UNC requirements are applied

8. Security Amount – Providing Cover • PARCA Applicants will be required to post security to cover the Security Amount • Security can be provided in accordance with existing UNC requirements • In the event of termination, the value of the security amount will be invoiced to the PARCA Applicant • In the event of non payment, security can be used

9. Funding • Where investment is required this would follow the existing RIIO-T1 revenue driver timescales • 20% of the value of the Revenue Driver in Year T-2 • 80% of the value of the Revenue Driver in Year T-1 • To implement this would require some changes to ensure: • That there is minimal impact on Industry charges overall • National Grid’s Allowed Revenue can be amended to be kept neutral in the event of a Termination

10. Termination during Phase 2 - Examples Example 1 - Termination where costs are lower than security

11. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 PARCA requires customer to put in place £7m security per year £5m spent £5m spent NG spends £10m over two years • The Totex Incentive Mechanism (TIM) compares expenditure against allowances and makes an adjustment to allowed revenues. • Considers each year as a £5m overspend as there is no revenue allowance at this stage There is no allowance as this doesn’t get triggered until allocation

12. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 £5m spent £5m spent Customer terminates so must pay a Termination amount equivalent to the security accrued so far

13. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 £5m spent £5m spent Adjustment is made to allowed revenue to pass termination charge through to industry As the PARCA is terminated, NG recovers the efficiently incurred costs, multiplied by the TIM efficiency rate to recognise the amount already received

14. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 £5m spent £5m spent

15. Termination during Phase 2 - Examples Example 2 - Termination where costs are greater than security

16. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 PARCA requires customer to put in place £2.5m security per year £5m spent £5m spent NG spends £10m over two years • The Totex Incentive Mechanism (TIM) compares expenditure against allowances and makes an adjustment to allowed revenues. • Considers each year as a £5m overspend as there is no revenue allowance at this stage There is no allowance as this doesn’t get triggered until allocation

17. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 £5m spent £5m spent Customer terminates so must pay a Termination amount equivalent to the security accrued so far

18. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 £5m spent £5m spent Adjustment is made to allowed revenue to pass termination charge through to industry As the PARCA is terminated, NG recovers the efficiently incurred costs, multiplied by the TIM efficiency rate to recognise the amount already received

19. PARCA Applicant terminates Yr 3 Yr 4 Yr 1 Yr 2 £5m spent £5m spent