Background to National Grid’s Baseline analysis 14 August 2007

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

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)

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)

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)

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)

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)

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

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

NTS Entry Zones

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

Zonal High/Low Capabilities

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

Zonal Proposed Baselines

National Grid’s initial proposals for baselines

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

National Grid’s Proposals for all ASEPs

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