Transmission Workgroup 5 January 2012

1. Exit Capacity Substitution: Alternative Definition of Substitutable Capacity for Interconnector Points. Transmission Workgroup 5 January 2012

2. Background • On 31st March 2011 the Authority approved National Grid’s proposed Exit Capacity Substitution methodology statement. • Any unsold baseline capacity may be substituted from one NTS Exit Point to another to enable incremental capacity to be released without investment, (subject to a number of exclusion detailed in the statement). • The approval letter included a requirement to exclude exit capacity at Interconnectors from substitution for 2011, and to identify alternative proposals for defining Substitutable Capacity for these points that are consistent with developing European Regulations. • National Grid has identified a range of options to define “Substitutable Capacity” at interconnectors. Following discussions with Interconnector Operators, National Grid is seeking wider industry views before the inclusion of proposals within the next version of the methodology statement in 2012.

3. European Legislation • The exit capacity substitution methodology has been developed to be consistent with UK legislation and, in particular, the obligations placed on National Grid through its Licence. However, it must also be consistent with European legislation. • The key European obligations for National Grid are found in: • Directive 2009/73/EC dated 13 July 2009 concerning common rules for the internal market in natural gas; and • Article 13 sets out an objective that TSOs shall build sufficient cross-border capacity to integrate European transmission infrastructure accommodating all economically reasonable and technically feasible demands for capacity and taking into account security of gas supply. • Article 40 sets out general objectives for the Authority, including promotion of the development of cross-border transmission capacities to meet demand and enhance the integration of national markets. • Regulation (EC) No 715/2009 dated 13 July 2009 on conditions for access to the natural gas transmission networks. • Article 16 requires that the maximum capacity at all relevant points shall be made available to market participants, taking into account system integrity and efficient network operation. • ACER Framework Guidelines FG-2001-G-001 dated 3 August 2011 on capacity allocation mechanisms: • Sets out how capacity will be offered for sale, including an obligation to bundle available capacity. ENTSO-G will issue the CAM NWC consistent with this in March 2012. • Further proposals have been developed for substitution at Interconnectors to ensure consistency with these obligations.

4. Options The following options define the quantity that will be excluded from exit capacity substitution, i.e. is not Substitutable Capacity. For all options, sold capacity will not be substituted, even if this quantity is higher than the quantity determined from the option.

5. Views • National Grid has discussed these options with the Interconnector Operators at Bacton [I(UK)] and Moffat. • Interconnector (UK) agree with National Grid’s proposal to use the downstream Technical Capacity to define Substitutable Capacity. • Gaslink believe the “maximum flow profile” stated in the Connected Systems Agreement is more appropriate. • Discussions are on-going.

6. Proposal and Next Steps • Subject to further responses from Interconnector Operators, Ofgem and industry participants, National Grid is proposing to amend the definition of Substitutable Capacity in the Exit Capacity Substitution Methodology Statement to exclude any capacity, whether sold or unsold, at interconnector points, up to the published Technical Capacity of the connected system. • Formal consultation on the revised methodology statement is expected to commence late February 2012.