The Treatment of “Spare / Sterilised” Capacity Draft for discussion purposes only

High Level Policy As part of TPCR three new measures were introduced to ensure that “sterilised / spare” capacity would not be withheld from the wider market: Capacity substitution Trades and transfers Reduction in capacity held back for shorter term auctions – now 10% In addition Ofgem consider that the charging methodology and IECR should take account of these developments The key is now to develop the measures to implement these policies and to ensure they are complementary

Implementation of these policies On the assumption that “baselines” broadly reflect the physical capability of the network, a number of options have been developed to consider how T&T and capacity substitution could be enacted The options try to cover the broad range of possibilities from the very dynamic application to the stable and predictable. The intent is to seek feedback on these options today and to receive any written input until the 31/8. We will then further develop and circulate the favoured options ahead of the workshop on the 12/9.

Range Of Options Option 1: The Fast & Furious Capacity substitution triggered at QSEC (implemented Sept 08) applicable from Y+2 all available capacity subject to substitution no NPV test no limit on exchange rates Trades and transfers embedded in RMSEC & AMSEC, covering M+1 to Y+2

Range Of Options Option 1: The Fast & Furious Option 5: Driving Miss Daisy Capacity substitution undertaken every 5 years as part of TPCR following consulted upon Ofgem methodology Trades and transfers embedded in RMSEC only covering M+1 limit on exchange

Range Of Options Option 1: The Fast & Furious Option 2: Capacity substitution triggered at QSEC (implemented Sept 08) applicable from Y+2 all available capacity subject to substitution lower NPV test limit on exchange rates Trades and transfers embedded in RMSEC & AMSEC, covering M+1 to Y+1 no limit on exchange rates Option 5: Driving Miss Daisy

Range Of Options Option 1: The Fast & Furious Option 3: Capacity substitution triggered at QSEC (implemented Sept 08) applicable from Y+2 only certain capacity subject to substitution lower NPV test limit on exchange rates Trades and transfers embedded in RMSEC & AMSEC, covering M+1 to Y+1 no limit on exchange rates Option 5: Driving Miss Daisy

Only certain capacity available for substitution The key issue seems to be to define “sterilised / spare” capacity. This could be based just on long term bookings or alternative metrics could be considered. For example where there is a degree of long term bookings and short term usage the capacity should not be substituted away as this would not be “sterilised / spare” capacity e.g.: If there are bookings in 2 quarters for four consecutive years at 50% of the existing baseline and flows during the last year have been 90% of the baseline no capacity will be substituted away.

Range Of Options Option 1: The Fast & Furious Option 4: Capacity substitution triggered at QSEC (implemented Sept 08) applicable from Y+4 only certain capacity subject to substitution same NPV test as for incremental limit on exchange rates Trades and transfers embedded in RMSEC & AMSEC, covering M+1 to Y+1 Option 5: Driving Miss Daisy

Open discussion Do the options presented represent the full range of credible possibilities? Are their other aspects that should be developed ahead of the 12 September workshops? What are your initial reactions? Please provide your written comments on the options to National Grid NTS by 31/8.