Overview of Marchwood determination

1. Overview of Marchwood determination Mark Feather Associate Director, Ofgem 7 December 2006, Transmission Workstream

2. Background (1) • Marchwood gas fired power station – 860 MW • Marchwood development owned by ESBI and SSE • Requested firm gas supply from the NTS from Oct 08 • NTS proposed network reinforcements for Marchwood • 28km/900mm pipe from Barton Stacey to Lockerley • £43m cost • MPL constructing own connecting pipe: • Marchwood to Lockerley on NTS • 22km/610mm pipe • £24m cost • MPL to own pipeline

3. Map of Marchwood area Existing NTS Pip Existing NTS Pipeline eline NTS Compressor NTS Compressor LNG Facility LNG Facility Aylesbury Aylesbury NTS Junction NTS Junction Didcot Didcot PS PS Chalgrove Chalgrove Wormington Wormington NTS NTS Offtake Offtake Proposed NTS Pipeline Proposed NTS Pipeline Sapperton Sapperton Nuffield Nuffield Proposed NTS Offtake Proposed NTS Offtake Avonmouth Avonmouth Cirencester Cirencester Proposed Connecting Pipeline Seabank Seabank Littleton Drew Littleton Drew Ipsden Ipsden Eastern Grey Eastern Grey Proposed Compressor Mods East East Ilsley ICI ICI Severnside Severnside Illsley Abson Abson AGI on LTS Barton Stacey Pucklechurch Pucklechurch Michelmersh Existing LTS pipeline Winkfield Winkfield Lockerley Lockerley Braishfield Braishfield Ilchester Ilchester Barrington Barrington Marchwood Ottery Ottery St. Mary St. Mary Mappowder Mappowder Buttsash Aylesbeare Aylesbeare Kenn Kenn Coffinswell Fishacre Lyneham Plymouth PS

4. Background (2) • Proposals for development – since 2000 • Various consents already secured: • Generation licence • Consents to construct power station • Pipeline construction authorisation for connecting pipe to NTS • Landowner consents along connecting pipe route • Connection and construction agreement with NGET

5. The dispute (1) • Occurs in transitional offtake period • Release of incremental exit capacity governed by NTS Incremental Exit capacity release methodology (IEXCR) • Marchwood power station requires reinforcement • IEXCR specifies that ARCA required where investment needed • NTS requested 14 year ARCA for payment of full £43m • MPL sought same terms as Langage – 2 year ARCA for 1 years charges

6. The dispute (2) • MPL raised dispute under: • sections 21 and 27A of the Gas Act • Article 25(5) of Gas directive • Focus of dispute on terms of Advanced Reservation of Capacity Agreement (ARCA) • MPL sought same treatment as Langage • MPL also raised connection issues.

7. The process • Dispute raised – late March 2006 • Ofgem initiates process – April 2006 • Submissions received from parties – May 2006 • Oral hearing requested – June 2006 • Oral hearing – August 2006 • Release decision – September 2006

8. The key issue • The level of the ARCA commitment • Principles for determining commitment level • Risk assessment test • Comparisons with Langage • What are the efficient costs of reinforcement?

9. Location of connection point • Initially some issues raised regarding location of connection point for charging purposes • The shallow connection test – set out in Ofgas 1997 document and applied in Langage. • ‘Point of connection for charging purposes is the point where the new connection pipes join the existing main (that is, where the existing system has sufficient capacity to meet the connecting load, disregarding existing loads at that point)’. • Parties agreed at oral hearing that connection point was NTS connection at Lockerley • Connection issues therefore NOT in dispute.

10. The level of commitment required under the ARCA • Discussions and Conclusions • Issue A: Approach to determining the level of financial commitment • Issue B: Assessing the risk associated with the Marchwood load • Issue C: Assessing the efficient costs or reinforcement • DECISION

11. Issue A: Approach to determining the level of financial commitment (1) • Key document – 1997 Ofgas report on ARCAs • Case by Case assessment in transitional offtake period • Langage a relevant comparator – not necessarily a precedent • ARCAs intended to protect NGG from stranded asset risk. • In return the customer obtains firm exit capacity rights. • Commitment beyond 1 year not normally appropriate as code only requires capacity to be booked on annual basis. • Additional commitment may be appropriate if load is riskier than overall portfolio of firm loads.

12. The one year commitment • Why is there a one year commitment? • Inappropriate to impose greater level of commitment on new users whilst existing users roll over existing rights on a monthly basis. • As such, protects parties from risk of undue discrimination. • BUT, greater than one year commitment may be necessary where load poses significant risks (ie risker than overall portfolio of firm loads) • Onus of proof on NGG NTS • Key issue is allocation of risk between users, generality of customers and NGG NTS

13. Enduring offtake • Marchwood decision applicable to transitional offtake arrangements • Enduring offtake framework under consultation • Not appropriate to depart from Ofgas 1997 principles for transitional offtake • If enduring offtake is implemented then Ofgas 1997 principles would no longer apply. • Enduring offtake proposals subject to Authority consideration

14. Case by case: Assessing the risks • Jan 2006 IEXCR letter provided guidance on risk assessment: • Commitments must not discriminate between new and existing users • Commitments should facilitate efficient investment and reduce stranded asset risk • What is the risk profile of the load making the capacity request relative to other present and future loads in the area? • Do the reinforcements benefit other present and future users in the area? • How risky are the other loads that benefit? • Are there other ‘risky’ loads expected to reduce usage in the future and create spare capacity in the area?

15. Issue B: Assessing the risk associated with the Marchwood load • The following factors relevant to determining risk of Marchwood load: • More efficient than existing CCGT plant – less likely to exit the wholesale electricity market. • Proposed power station is favourably located in the SW area for electricity system • May benefit from the EU Emissions Trading Scheme. • 15 year tolling agreement with SSE • Langage a relevant comparator – similarities exist • But, there are factors which may pose a greater risk to consumers: • Government’s Energy Review process; uncertainty over allowances for EU ETS (although this is a concern for all generators); greater gas price volatility.

16. Issue B: Assessing the risks (2) • Ofgem placed in position of assessing risk for customers • Absence of enduring offtake framework makes risk assessment difficult. • Difficult to assess riskiness of load • Difficult to assess whether other users benefit from the reinforcements • Difficult to assess whether other loads in the area may reduce their usage going forward • NGG NTS did not provide bona fide risk assessment and required 100% commitment from Marchwood • Effective NGG NTS risk assessment may have reduced user commitment and likelihood of dispute – failure must be corrected. • BUT, on balance: • Marchwood load is NOT significantly more risky than overall portfolio of firm loads including other firm generating loads • insufficient evidence to suggest that reinforcement of the Marchwood load benefits others

17. Conclusions • NGG NTS should enter into an ARCA for one year’s worth of exit capacity charges. • Going forward we would expect NGG NTS to undertake risk assessments in the transitional offtake period on a case by case basis having regard to the relevant principles. • Need for reform of existing arrangements for securing exit capacity. • Appropriate for the risks associated with transmission reinforcement to be managed by those parties best able to manage them • Efficient costs of reinforcement – not considered in determination…issue for TPCR.

18. Transmission Price Control – Final proposals

19. Offtake – key conclusions • Baselines – minor adjustments to baselines for exit and flat capacity. • Flex baseline – 22 mcm • Revenue drivers – apply for 5 years from contractual delivery - updated upwards to reflect further information received from NGG NTS • Indexation applied to revenue drivers • CLNG incentive targets for 09/10, 10/11 and 11/12 updated – • NGG NTS volume requirements accepted (SE and SW) • Price – minor variation to medium case scenario chosen • No ex-ante funding of gas purchase costs in CLNG incentive • CLNG manager account • Targets: 09/10 - £4.3m, 10/11 - £3.6m, 11/12 - £2.9m.

20. TPCR – Offtake - Key conclusions (2) • Transitional offtake – 15 day incentive retained but with “zero” targets and collar of £-2m. • Enduring offtake – Investment buy back incentive • £36m annual cap +monthly cap of £4m. • Aggregate downside cap across all buy back schemes is £48m. • 365 days of permits at 30 Gwh/day for exit – permits can only be used in advance of long term allocations. • Permits can be cashed out if unused– value set at £3m – pro-rated to number of unused days. • Enduring offtake – non-obligated capacity incentive • £20m cap and 50% sharing factor • Monitoring of conduct under NTS efficient operation licence condition • Enduring offtake – south west interruptibles • Allowance for long term contracting - £3.4m per annum – 50% sharing factor.

21. Other key highlights • Significant capital investment allowances • Adjustment mechanisms flex revenues according to demand • Safety net and output measures • Emphasis on user commitment models • Post tax return – 4.4% • Disallowance of proportion of St Fergus spend

22. Promoting choice and value for all gas and electricity customers