Background to National Grid’s Baseline analysis

1. Background to National Grid’s Baseline analysis 14 August 2007

2. Agenda • Baselines during TPCR 2002 - 2007 • Consultation during the TPCR 2007 – 2012 • Ofgem’s modelling requests • National Grid’s Network Analysis • Ofgem’s Updated and Final Proposals

3. Baselines during TPCR 2002 - 2007 • How were the baselines set? • Baselines set on ‘Maximum Physical Entry Capacity’ (MPEC) methodology • Theoretical maximum through each ASEP • Ignored interactions between ASEPs • Obligations (SO baselines) set at 90% of MPEC • Baselines in aggregate (9755 GWh/d) acknowledged to be in excess of Physical capability of the system • Essentially purely a nodal model (no substitution)

4. Consultation during TPCR 2007 – 2012 • Problems with current arrangements? • High baselines coupled with zero priced capacity on the day discouraged Long-Term Signals and encouraged Short-Term bookings • Problems for new entrants (ASEPs) – not able to secure capacity which was not yet booked at existing entry points • View that current arrangements were not flexible enough to deal with changing demands for capacity • Debate over retention of entry specific baselines or move to more aggregated level? • Should modelling be based on supply substitution or load absorption? • Discussion whether baselines should exceed physical capability of the system (at peak)

5. Load Absorption vs Supply Substitution • Purpose of the modelling was to determine the maximum supply capability at different points on the system • Starting point for any network analysis is that supply equals demand • How do you increase supply, yet keep supply and demand in balance? • Load Absorption: • As supplies are increased at entry points, demands are increased pro-rata to keep supply and demand in balance • Supply Substitution: • As supplies are increased at entry points a corresponding other supply point is reduced (demands kept fixed)

6. Ofgem’s initial modelling request • Network: • Initially for 2 years 2007/8 and 2008/9 • Demand side: central case forecast 1 in 20. • Supply side: • Initially just TBE Auctions + scenario for 2007/08 for all entry points and for 2008/09 for MH and IoG Initially, employ both supply substitution and 50/50 supply substitution/load absorption • Using least favourable node as supply balance • Modelling work produced four sets of data on “baseflows” (which reflected the initial supply scenario) • Also produced “free increments” (reflecting network capability at individual nodes or zones) • Modelling involved around 4 x 26 sets of analysis (104 man days effort)

7. Ofgem’s further modelling request • Network: • Settled on using only 2008/9 • Demand side: central case forecast 1 in 20. • Supply side: • Settled on using three TBE scenarios (Auctions +, Transit UK and Global LNG) using supply substitution • Using least favourable node as supply balance • Modelling work produced three sets of data on “baseflows” (which reflected the initial supply scenario) • Also produced “free increments” (reflecting network capability at individual nodes or zones) • Modelling involved 3 x 21 sets of analysis (58 man days effort)

8. Ofgem’s Initial Proposals • Ofgem’s Initial Proposals (June 2006): • Decided on entry point baselines • Baselines should be set consistent with physical capability of the network (to include planned investments) • NGG NTS to introduce methodology for substituting baselines (in response to auction signals) • Modelling work favoured supply substitution • Proposed baselines were set on average of 3 TBE scenarios of ‘baseflow’ + 90% of ‘free-increments’ • NGG NTS re-iterated that baselines should not exceed physical capability of the system and in their view, Ofgem’s IPs did exactly that • Within response to IP document, NGG NTS outlined its views for modelling network capability and baselines

9. National Grid’s Network Analysis • Based on • 2006 plan ( i.e. on 2005 TBE data) • Central Supply scenario • 2008 Network • Hence included planned investments such as those on East Coast, Trans-Pennine pipeline • Zonal analysis (High case/Low case capabilities) • Taking strong account of network interactions on the system; and • Capacity commitments already sold

10. NTS Entry Zones

11. Zonal Best/Worst Case - Peak day 2008 (mscm/d)

12. Zonal High/Low Capabilities

13. Principles of allocation • No reduction in existing entry capacity commitments allowed • Based on maximum daily quantity booked for winter of 2007; plus • Incremental capacity released at each entry point from 2007 • Any remaining capacity allocated on pro rata basis in proportion to expected peak level of supply • Highlighted interactions between zonal capabilities • If optimise Northern Triangle first, this results in reducing East Coast and West Coast zones below capacity rights already sold • East Coast zone chosen as starting point, hence based on ‘high’ case capability of 4127 GWh/d • Combined with Milford Haven at obligated level (950 GWh/d) • Results in only 1895 GWh/d of capability in Northern Triangle

14. Zonal Proposed Baselines

15. National Grid’s initial proposals for baselines

16. Ofgem’s Updated Proposals • Ofgem’s Updated Proposals (September 2006): • Stated that “baselines should be set at levels consistent with the simultaneous physical accommodation of possible flows under a wide range (although not all possible) scenarios across entry points” • Clarified that baselines will be set such that no baseline is less than the amount of obligated capacity already sold • Proposed reduction of proportion held back for shorter-term auctions to 10% • NGG NTS outlined concerns that not yet seen baselines which meet Ofgem’s stated aims

17. National Grid’s Proposals for all ASEPs

18. Ofgem’s Final Proposals • Ofgem’s Final Proposals (December 2006): • Stated that believed baselines reflected physical capability of the network • Baselines were consistent with the allowances made for NGG NTS in respect of the costs of buying back capacity • National Grid believed FP baselines still carried risk as above its proposed baselines Note that no zonal analysis performed for NW or SW zones