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

2 Licence Obligations  Ofgem decision to modify Licence – 5 th Sept direction  SpC C8D paragraph 10 provides obligations with respect to Entry Capacity Substitution  Ofgem direction (5 th Sept)  NG required to prepare and submit for approval by the Authority an Entry Capacity Substitution Methodology Statement by 19 th May 2008  NG required to use reasonable endeavours to have an approved Entry Capacity Methodology Substitution Statement by 2 nd June 2008  NG required to use reasonable endeavours to substitute capacity from 2 nd June 2008  As part of Section 38A notice, reconfirmed the 10% held back for shorter term and commitment to keep the limit under review

3 High Level Review of Responses to Informal Consultation Summary  7 responses received  Preference to hold back more than 10%  As stated Ofgem position clarified in Section 38A notice therefore, issue not considered further by NG at this stage for general auctions  However, for substitution the 10% rule may not be applicable  No clear consensus on preferred option for substitutions / transfer & trades – support for Options 1 through to 5.  All responses available on Joint Office website  Next slides consider substitution option 2 in detail and the variant elements of options 3 & 4  Our intention is to review Transfer and Trade comments as part of enduring solution workshops

4 Range Of Substitution Options: Recap Option 5: Driving Miss Daisy undertaken every 5 years as part of TPCR following consulted upon Ofgem methodology Option 1: The Fast & Furious triggered at QSEC (implemented Sept 08) applicable from Y+2 all available capacity subject to substitution no NPV test no limit on exchange rates

5 Range Of Options Option 5: Driving Miss Daisy Option 1: The Fast & Furious Option 2: triggered at QSEC (implemented Sept 08) applicable from Y+2 all available capacity subject to substitution lower NPV test limit on exchange rates

6 Expansion of Option 2: When? Triggered at QSEC (implemented Sept 08) Earliest obligated capacity release date – April 2010 Default incremental capacity release date – April 2012 New ASEPs Separate auctions for specific new ASEPs possible to benefit from substitution before existing ASEPs (through auction in June – Sept 08). Is this acceptable / discriminatory? What? Capacity available to be substituted All unsold obligated capacity at any ASEP except the [10%] held over to other auctions Capacity must not be sold for any quarter after that considered for substitution But what limits should be placed on “one quarter” bookings? (See subsequent slides).

7 Expansion of Option 2 (continued): Capacit y ASEP A Booked capacity Obligated level Consider the one quarter issue

8 Expansion of Option 2 (continued): Capacit y ASEP A ASEP B Booked capacity Requested capacity Obligated level Consider the one quarter issue

9 Expansion of Option 2 (continued): Consider the one quarter issue NB – Substitutions may not be at 1:1 exchange rate. Diagram is intended to indicate process not absolute values. Capacit y ASEP A ASEP B No issue with substitution Period 1 Period 2 Potential substitution

10 Expansion of Option 2 (continued): Consider the one quarter issue Capacit y ASEP A ASEP B Sterilised capacity? Potential substitution For Period 1 should NG: Invest for capacity at ASEP A or ASEP B (is this economic?); or Substitute capacity and be remunerated for increased Buy-Back risk (risk also to Users of non-availability of capacity) Reject the substitution Substitution could be time limited as for transfers (current Licence does not allow). Solution still required for the single quarter. Prohibit / limit single quarter booking, e.g. set a minimum booking. Period 1 Period 2 Revised obligated level (applies from period 2) Revised obligated level (applies from period 2)

11 Expansion of Option 2 (continued): Exchange Rates In previous consultation general consensus to limit Set to avoid excessive capacity destruction – views? Exchange rate of 2:1 is a halving of capacity – is this excessive? NPV Test Existing NPV test to guarantee incremental capacity release Lower NPV test for substitution; does not guarantee release of capacity Suggested minimum qualifying bid: 4 quarters within 2 consecutive years With bid price for all 4 quarters at incremental price step

12 Expansion of Option 2 (continued): Allocation 1 st - Bids for obligated capacity – released in full. 2 nd – Incremental capacity requests meeting existing NPV test – release in full, substitute where possible. 3 rd – Incremental capacity requests meeting lower NPV test – release only if substitution opportunities remain after above 2 stages Bids ranked according to % of NPV, i.e. bid value vs. estimated project value Full bid assessed, not parts Unless full bid allocation, no incremental allocation made

13 Range Of Options Option 5: Driving Miss Daisy 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

14 Only certain capacity available for substitution (from last time)  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.

15 Responses  Generally there appeared to be support for consideration of such an approach  But no concrete ideas forthcoming  At the meeting however it was suggested that it should not be “all or nothing” a sliding scale was proposed  It would be intended that this would sterilise this capacity from substitution for the whole auction period  Initial attempt at this ….

16 Sliding scale on capacity available for substitution Baseline 100 Capacity available for substitution No long term bookings 90% 90% booked for QSEC period 0% 50% booking for 4 Quarters in consecutive years from y+2 Historic (last year) utilisation 50% 50% 75% booking for 4 Quarters in consecutive years from y+2 Historic (last year) utilisation 75% 25%

17 Further developed…  Maximum capacity available for substitutions = [90%] of obligated level – this is term “A”  This is reduced by two factors:  Factor 1: booked capacity as a percentage of obligated level - term “B”, with booked capacity defined as the 4 th highest booked level (quarter) measured over any 2 consecutive years from Y+2 to Y[+17];  Factor 2: Historical usage term C as a percentage of obligated level, historical usage defined as peak flow in the preceding 2 years – only applies if C > B.  Capacity available for substitution term D:  D= Obligated level * (A – B – (C-B)/2) (to be rounded down to nearest 10% increment)

18 Range Of Options Option 5: Driving Miss Daisy Option 1: The Fast & Furious Option 4: 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

19 Summary  We will now produce a report detailing the work undertaken in the 3 workshops and the comments we have received  This should be available in the next 2 weeks  As part of this we will also review and update the proposed timeline