Development of Entry Capacity Substitution Bogdan Kowalewicz Transmission Workstream meeting 6 November 2008

Introduction Entry Capacity Substitution obligation obligation introduced as part of TPCR4 fully committed to principle it helps ensure that the size of the system is appropriate to the demands placed on it consumers benefit from appropriate system capacity

Background Changing patterns of supply Declining UKCS production Level of unsold baseline capacity User commitment Responsiveness to signals for incremental capacity Efficient and economic operation of the network

Policy objectives Maximise use of existing Transmission network assets for the benefit of consumers Intention is to avoid both capacity sterilisation and unnecessary infrastructure investment while accommodating changing flow patterns NGG to make informed judgement on how unsold capacity can be put to use in other areas of the network that are signalling investment requirements

Entry capacity substitution aims Ensure substitution minimises costs associated with funded incremental obligated entry capacity Avoids material increases in costs reasonably expected to be incurred by NGG as a result of substitution Facilitate effective competition between shippers and suppliers

Review of Progress Current Position NGG Informal Consultation in August 2008 on methodology following series of workshops over the summer NGG Conclusions Report published September 2008 Ofgem open letter on substitution published in September 2008, prior to QSEC auction

Outcome of informal NGG consultation Most respondents expressed support for the principle of entry capacity substitution; No clear consensus on preferred methodology Concern that application of substitution could have undesirable consequences Need to reconcile NGG’s aims of minimising the costs of funded incremental obligated entry capacity with wider obligations to operate in an efficient and economic manner.

Ofgem’s view Responsive to the concerns expressed Understand the need to remove some of the uncertainty Supportive of the need to explore whether an economic test should be applied Recognise the need for a simple methodology that can be applied in a transparent manner with little scope for challenge or dispute Committed to the principle of user commitment to signal future capacity requirements

Reasons to further develop methodology NGG analysis suggests that, at this time, the timing of the introduction of substitution may have limited impact Allowing time to further develop the methodology will allow a more comprehensive and flexible solution greater consensus reinforce user commitment greater transparency about the risks and effects of substitution

Next steps Further develop the current proposal to take into account the concerns expressed NGG to clarify the risks of substitution (particularly the impact on entry prices) NGG to clarify the costs of restoring baseline capacity where it has been substituted away (including impact on lead times and potential for their reduction)