LDZ Shrinkage - a National Grid Overview Chris Warner Mod 0194/RG 0208 June 2008

Topic areas  LDZ Shrinkage  What is LDZ Shrinkage?  Own Use Gas and Theft of Gas  Leakage  National Leakage Tests  UNC Section N Timeline  Shrinkage Forum  2007/08 Shrinkage Factors  Modification Proposal 0203V  Gas Prices  Shrinkage Allowances (E8)  Environment Emissions Incentive (E9)

LDZ Shrinkage Introduction  What is LDZ Shrinkage?  “For the purposes of the Code shrinkage means gas in a System which is used by the Transporter in connection with the operation of, or which is unaccounted for as offtaken from, a System”  For the purposes of UNC, LDZ Shrinkage comprises of  own use gas: gas used in running compressors, and gas used for preheating  unaccounted for gas: gas lost or unaccounted for by reason of unidentified theft, error in meter correction and leakage, including gas vented in its operation  2007/08 Procurement Context*  1,904 GWh  0.6% LDZ throughput  £26.6m * National Grid Networks only Chart for illustration only, not to scale

What is LDZ Shrinkage? Key Components Total LDZ Shrinkage Own Use Gas 2% of 2007/08 Shrinkage Holder Pre-heatPre-heat Gas Leakage 95% of 2007/08 Shrinkage Distribution Mains and Service Leakage Low PressureMedium Pressure Broken Mains Above Ground Installation Leakage Holder Stations NTS / LTS / <7bar PRS Service Governors PurgingVenting Equipment vented for maintenance Equipment that vents in use Theft of Gas 3% of 2007/08 Shrinkage Transporter responsible Theft Supplier responsible Theft

What is LDZ Shrinkage? UNC Definitions “unaccounted for gas” “own use gas”

Own Use Gas and Theft of Gas Contributes to only 5% of LDZ Shrinkage Requirements  Own Use Gas  Calculated via model as opposed to being measured  Historically no requirement to meter sites  Complex model uses actual telemetered regulator throughput, temperature & pressure data, where available  New updated model first used in 2005/06  Theft of Gas  Negotiated proportion of LDZ Throughput  Instances of Theft assumed to be 0.3% of LDZ throughput, of which 10% of the total theft was transporter responsibility (i.e. 0.03% of LDZ throughput)  Transporters however believe that only 3.1% is transporter responsibility (i.e. 0.01% of LDZ throughput) based on confirmed occurrences of theft from xoserve  Theft upstream of ECV proven to be difficult to identify so currently agreed to be 0.02% of LDZ throughput

Leakage Contributes to 95% of LDZ Shrinkage Requirements  Majority of leakage relates to Low Pressure (81%)  Predefined leakage rates:  11 mains leakage rates and 4 service leakage rates  2002/03 National Leakage Test  Low Pressure Leakage Components:  Mains Asset Statistics  Average System Pressure  Monoethyleneglycol (or MEG!)  Number of Services

National Leakage Tests 2002/03 Advantica test programme  In 1992, British Gas commissioned a programme of leakage tests to quantify the leakage from its distribution system  Leakage rate data used to facilitate Shrinkage Factor Negotiations  Shippers requested disallowance of proposed LDZ Shrinkage Factors in 2001/02 due to out-of-date leakage rate data  Transco commissioned Advantica to carry out a new programme of tests as a result of the disallowance  2002/03 National Leakage Test (NLT) programme  A total of 862 tests were carried out in the period from February 2002 to May 2003, providing 849 usable results  The results of the NLT programme were presented to the Shrinkage Forum in June 2003  Leakage Rates were lower than those determined in the previous 1992 test programme  Concluded to be as a result of Transco’s mains replacement programme, which tended to target poor condition mains  For the Low Pressure system, this resulted in an overall reduction of approximately 31%. For the Medium Pressure system, the overall reduction came out at less than 1%

UNC Section N Timeline Establishment of Gas Year LDZ Shrinkage Volume April, May & early June Analysis carried out to support initial Shrinkage proposals 1 July Submit estimated LDZ Shrinkage / methodology to Users “Initial Proposals” Late June / early July Opportunity to present estimated Shrinkage to Shrinkage Forum 1 September Submit final estimated LDZ Shrinkage / methodology to Users “Final Proposals” 1 July – 1 August Users may submit representations in respect of the estimated Shrinkage 1 – 15 August DNs to consider User representations and may convene meeting if deemed appropriate 1 – 15 September Users may request a disallowance OctJunJulSepAprMayAugNovDecJan 15 September – 1 October Possible Ofgem Determination Process Late September Issue instructions to load new shrinkage requirements into Gemini Gas Year….

Shrinkage Forum Industry Discussion Forum  Provides an opportunity for Transporters to meet interested parties in order to discuss LDZ Shrinkage issues such as:  Shrinkage Factor Proposals  Assessment & Adjustment Report  Joint Office provides administrative support  Chair: Tim Davis chairs the meeting  Secretary: Lorna Dupont is the Secretary

2007/08 Shrinkage Factors April 2007 to March 2008  LDZUNC FactorsLicence Factors  EA0.593% / 0.620% 0.593%  EM0.519% / 0.510% 0.519%  NT0.622% / 0.550% 0.622%  NW0.656% / 0.630% 0.656%  WM0.729% / 0.730% 0.729% N.B.  UNC Factors – Gas Year  Licence Factors – Formula Year

Modification Proposal 0203V Areas being addressed  For the Gas Distribution Networks Price Control, Ofgem fixed a volumetric allowance for Shrinkage for each LDZ, as opposed to ex ante target shrinkage factors (percentages of throughput).  Ofgem concluded that on the basis of evidence available, there is little correlation between shrinkage and throughput for the existing networks  As a result, changes to Section N have been progressed:  to update references to LDZ Shrinkage Factors to reflect LDZ Shrinkage Quantities  make appropriate amendments to the content of industry notification processes, namely current Initial and Final Proposals  effect minor change to the classification of LDZ vented gas, consistent with the operation of the approved Leakage model calculations (vented gas is not burnt and therefore should be classed as unaccounted for gas, not own use gas)  update the sources of information used in the assessment process to include all inputs to the leakage model  System amendments (Gemini / UK Link) being considered and progressed in parallel  Modification currently with Ofgem for determination  Preferred implementation date 1 July 2008

Gas Prices Day-Ahead Price Trend ?

Shrinkage Allowances (E8) Revised Regulatory Regime Introduced  Shrinkage is gas lost from the system through leakage, theft and own use gas  Concluded there was no measurable correlation between shrinkage (leakage) and throughput  2007/08 allowances (volume & price) ‘rolled over’ for first six months to allow UNC modification proposals to be progressed  Revised regime reduces both (weather related) volume risk and price risk 2007/08 Shrinkage Allowance Shrinkage Factors (predefined within licence) multiplied by actual throughput multiplied by Gas Reference Price (3 month ahead price * 3.5% uplift) Shrinkage Allowance Shrinkage Quantities (predefined ‘reducing’ volumes within licence, broadly reflective of BPQ submission) multiplied by Gas Reference Price (Day Ahead Price)

Shrinkage Allowances (E8) Allowed Shrinkage Quantities

Environment Emissions Incentive (E9) Dx mains leakage significant source of greenhouse gas emissions  Additional incentive, over and above mains replacement programme, to reduce leakage based on social cost of carbon  Average of £29.7 per MWh over the period  Cap / Collar at 10% of baseline leakage volumes