Stuart Forrest, Network Planning Manager, Scotia Gas Networks 19 th October 2010 MOD Review of Industry Charging & Contractual Arrangements in Relation Supply Point Offtake Rates (SHQs) and Supply Point Capacity (SOQs)

2 March Ofgem published decision letter re SGNs’ application to re-open the current Gas Distribution Price Control. Approval granted to adjustment of the interruption incentive allowance to facilitate reinforcement works resulting from UNC Modification Proposal 090 Decision letter raised concerns re the current incentives placed upon Shippers to provide SHQs which are representative of their usage. This UNC Review to consider the issues raised and ultimately to determine whether any modifications are required to the UNC Background

3 Legislative Requirements The Gas Act and the related GT’s Licence conditions require that DN’s operate a safe and economic gas transportation system. Requirements under the Gas Safety (Management) Regulations (GS(M)R) are to set out arrangements for minimising the risk of a gas supply emergency. DN’s must therefore develop appropriate plans for the safe operation and economic development of systems. Network Planning is a key element in the demonstration to OFGEM and the HSE of the design and management processes and its mechanisms to meet regulatory and legislative obligations.

4 Importance of Network Analysis Network analysis is used to simulate the performance of gas supply networks and enables the effects of alterations to those networks to be anticipated. It provides essential information to support business cases for the operation and design of safe, economic and efficient networks. DNs need to be able to demonstrate that it has robust models and processes in place supporting contractual relationships with customers. It is key to the relationship with Ofgem and the HSE in order to provide confidence in DN’s modelling and assist in fulfilling regulatory obligations

5 Areas Affected Network analysis is used for a number of purposes including: To assess the ability of the network to meet licence obligations To identify system modifications where required to ensure the company continues to meet these obligations To support the provision of quotations for new loads To support strategic planning of the supply system To support the company’s mains replacement programme To support optimum pressure management strategies To support day to day operational activities To assist in the development of emergency planning scenarios To determine pressure reduction station capacity.

6 Security of Supply Analysis The objective is that distribution systems are designed to ensure that safe operating pressures are maintained at the system extremities. The design criteria used for the analysis of networks are consistent with that required by IGE/GL/1 When assessing security of supply The DN is effectively entering into agreement with Shippers and has to be sure that contractual obligations can be met. Any reinforcements and enhancements to meet those obligations are both cost effective and sufficiently robust

7 Key Elements With Models The key data in building an accurate model are Pipe information Governor information Gas flow / Demand information Majority of demands – no SHQ. As a result demand based on range of algorithms converting AQ to SHQ DM sites - considered to be ‘exceptional’. Non standard with disproportionate influence on network. Provision requires to be made in models for SHQ contracted figure provided by shipper

8 Impact of Inaccurate SHQs If SHQ quoted is too high Will Sterilise system capacity May result in unnecessary general reinforcement – unnecessary cost to industry May result in unnecessary specific reinforcement – unnecessary cost to customer If SHQ quoted is too low Capacity may not exist to supply demand May result in genuine security of supply issues ie failure If so, likely to affect customers in area Major safety issue

9 Simple System Capacity of network is 100 units Town on end uses 50 units DM customer uses 40 units Town (50) Factory (contracted SHQ 40) Source Capacity 100 units Total Demand = 90 ok

10 Commercial Implication(i) New request for addition 30 units System fails – reinforcement required Town (50) Factory (Contracted SHQ 40) Source Before Capacity 100 units Total Demand = 120 Fails After With reinforcement Revised capacity = 130 ok New Factory (Contracted SHQ 30)

11 Commercial Implication (ii) Same request for addition 30 units Evidence shows actual SHQ for existing factory is overstated and should be 20 units Reinforcement not required - reduces cost to industry and may avoid unnecessary charge to customer Town (50) Factory (Actual SHQ 20) Source Capacity 100 units Total Demand = 100 ok Reinforcement not required New Factory (Contracted SHQ 30)

12 Safety Implication In this case contracted SHQ understated Pipeline capacity = 100 Demand based on contracted SHQ = 90 True Demand = 110 This is a significant safety issue Town (50) Factory (Contracted SHQ 40) (Actual SHQ 60) Source Capacity 100 units Demand Planned For = 90 OK True Demand = 110 Fail

13 Examples Current Contracted SHQ (KWh) Highest Recorded SHQ (KWh) Site A18,4586,8108,804 Site B23,4388,66715,600 Site C40,00023,68222,947 Site D29,29842,70147,241 Site E 11,244 29,46531,524 Site F8,43022,39622,393

14 Profile

15 Summary DNs use network analysis to ensure compliance with legislative and regulatory requirements Robust demand information is key element to accuracy of models Lack of robust demand information can lead to Inefficient investment Unnecessary costs to industry and to individual end users Unsafe situations DM sites can have disproportionate influence on systems – so particularly important that demand data is robust