ARODG - 2 An overview of transmission access arrangements Mark Copley & Colin Sausman 1 st and 2 nd February 2007

ARODG 2 Purpose  To take stock of developments in transmission access since the ARODG  To allow parties to air a number of new developments  To consider developments as a package and identify what else users think needs to be done  To consider what role parties think Ofgem/ NGET/ licensees/ industry should play in this process

ARODG 2 Agenda  – Coffee  – Welcome & Introductions  – An overview of the ARODG – Mark Copley  – Developments since the ARODG – Mark Copley  – The Government’s View – Phil Baker  Coffee  – Capacity Trading – Adam Brown  – Lunch  The GB Queue – Mark Copley  – Queue Optimisation – Phil Collins  – Discussion  – Way forward and Close

ARODG - 2 The Access Reform Options Development Group - Overview Mark Copley

ARODG 2 Purpose  Convened in early 2006 to: –consider the enduring applicability of transmission access arrangements. –Highlight the potential problems with these arrangements –Develop a range of options for amending those arrangements.  The Group published its report in May along with a covering letter

ARODG 2 Assessment Framework  Security  Restricted Rights  Unrestricted rights

ARODG 2 Security  Problems –Parties can apply for connection without incurring significant cost –Can create potentially onerous financial burdens, which can be both large and volatile –Creates an uncertain environment for investment in generation –Not the most effective method of focusing transmission investment where it is most needed –Unclear governance arrangements

ARODG 2 Restricted Rights  The period between the completion of a connection to the system and the completion of wider works.  Problems –Does the range of products currently available make best use of available system capacity? Vary compensation, duration, degree of firmness etc –Are there sufficient opportunities for parties that value capacity more highly to obtain it? How can trading be facilitated?

ARODG 2 Unrestricted Rights  The rights which are granted once the transmission system is compliant with security standards  Problems –The reservation of capacity inherent in TEC in its current form. Is this pro competitive and does it allow efficient investment? –Are the transmission licensees incentives to connect generation to the system in a timely manner sufficiently strong?  The Group developed options involving different combinations of rights and obligations. Many included more certainty about the delivery date of capacity.

ARODG 2 Ofgem’s covering letter  Highlighted what we saw as desirable facets of an access regime: –Greater certainty over connection date and level of financial commitment for new generators –Ongoing protection for consumers against stranded assets –Case for changing the level and allocation of security arrangements –Merit in arrangements which enable the strongest projects to identify themselves –Consider developing access products which maximise available capacity and consider how access rights can be reallocated

ARODG - 2 Developments since ARODG Mark Copley

ARODG 2 Interim Generic User Commitment  Introduced in summer 2006  Voluntary alternative to Final Sums  Allows users to choose to fix liabilities, or opt for FSL  Securities ramp up to 10 years worth of TNUoS over 4 years.

ARODG 2 CAP131 – User commitment for new and existing users  Seeks to address several issues raised by ARODG, primarily in the securities building block. –Non-refundable holding fee means holding a connection offer is no longer a costless option –Generic user commitment regime gives certainty over securities. Charges ramp up over a 4 year period to 6 x the TNUoS tariff. –User commitment of 2 years required from existing players, may increase information available to transmission licensees –Greater certainty over delivery. –Clear methodology for determining securities

ARODG 2 CAP143 – Interim TEC  Raised by the SSE to create a new product giving a restricted access right –A generator can purchase a new product, Interim TEC –ITEC gives the same rights as TEC in most cases –BUT, for a given number of periods in the year, NGET can constrain the generator for a fixed price.  ITEC seeks to make better use of the existing system. The details are currently being developed by a CUSC working group.

ARODG 2 CAP142 – TEC Trading  Raised by British Energy to allow trading between existing parties  At working group stage  NGET also developing proposals for trading between existing parties and existing and new parties –But more of that later

ARODG 2 Ofgem’s TPCR  Ofgem provided funding for major transmission enforcements through the TIRG process in  In our recent TPCR we also provided funding for significant amounts of system reinforcement.  In addition, we developed mechanisms which would automatically adjust revenues if more generation connects.  Transmission companies have strong incentives to connect as much generation as possible during the period.

ARODG - 2 Mapping developments to problems Mark Copley

ARODG 2 Problems and Developments - Security Access Building Block ProblemPossible Solution SecurityUnpredictable levels of Securities IGUC & Fixed level of security (CAP131) Volatility of securitiesGeneric scheme independent of others High levels of securitySecurities in aggregate lower under generic regime Risk of inefficient investment User commitment for all Unclear governanceMethodology in CUSC

ARODG 2 Restricted & Unrestricted rights Access Building Block ProblemPossible Solution Restricted RightsLimited range of products CAP143 - ITEC Limited trading opportunities NGET developing proposals Unrestricted rightsReservation of capacity by existing parties None proposed Weak incentives to invest TPCR funding & revenue drivers

ARODG 2 Questions & Discussion points  Have we correctly characterised the problems?  Would recent developments have a positive impact?  Are there any outstanding issues or other issues to address?  If so, how should they be addressed?

ARODG 2 Promoting choice and value for all gas and electricity customers