Mod 0333: Update of default System Marginal Prices Review Group August 2010 Transmission Workstream 07/10/2010

Contents  Background  Points raised at UNC Panel  Development of Mod  Next Steps

Background  Mod 0333 raised following C27 Licence obligation and Review Group 0291 discussions  2 Main elements of proposal;  Introduce new method for calculating default System Marginal Prices (SMPs)  Calculate and if necessary revise and publish new default SMPs on an annual basis – calculate in Q1 each year, publish by March 1 st, go live with updated prices on 1 st April each year  Output from new methodology is an update of current SMPs to p/kWh from 1 st April 2011

Points raised at UNC Panel 16/09  How does this proposal link with EU requirements?  Article 21 of the Gas Regulation 715/2009: “imbalance charges to be cost-reflective ‘to the extent possible’, whilst providing appropriate incentives on network users to balance their input and off-take of gas. Imbalance charges must also avoid cross-subsidisation between network users, and not hamper new market entry”  ERGEG Draft Pilot Framework Guideline on gas balancing rules: “imbalance charges which are based on the costs of TSOs balancing the system are important to the development of competitive and well functioning gas markets.”  Consider notice periods for changing prices?  Mod states that new prices would be published no later than 1 March for implementation on 1 April  New proposal is to provide 2 months notice i.e. notification by 31 January for implementation 1 April (in line with charging notifications)

Points raised at UNC Panel 16/09  Is this a User Pays Proposal?  Licence Condition C8G provides the option for NG NTS to “log up” charges for Agency costs related specifically to “Energy balancing” changes  Given the complexity of identifying & levying a separate User Pays charge, NTS feels it is appropriate to recover costs via the Licence Condition above  Compressor Cost: Is this published separately from OUG?  Costs used are actual cost of gas (and electricity) used to operate compressors.  Proposal will obligate NTS to publish this info to coincide with annual review  Does this proposal time out on 1st April if it is not implemented?  No. Licence condition is to use reasonable endeavours to update figures by 1/04/2010. If date lapses obligation to update still stands  Further implementation timeline to be discussed post development but may have to consider certain IS release windows to avoid risk to other pending reforms etc

Methodology  What other options did we & Review Group 0291 look at?  Setting default SMPs to 0p/kWh (cashout at SAP)  Updating current Storage Bundled Unit (SBU) based methodology with new storage prices  % SAP  Reflect operational costs incurred  Proposal maintains that SMPs may also be set by Market Balancing Actions (if outside the envelope of the default SMP)  NTS is of the opinion that setting default SMPs using a proxy of operational costs is the correct route because…..

Mod 0333 Methodology  Justification for including a TO element in the methodology?  Mod 0333 uses one of many possible methods to derive a proxy for the costs of accommodating shipper imbalance positions using the following assumptions;  To manage an imbalance without undertaking a Market Balancing Action a TSO requires two things;  Storage Space – i.e. a High Pressure pipeline (with unutilised capability) to store or release the imbalance gas  Compressors to inject or withdraw gas into / out of the above space  The ability to accommodate shipper imbalances through a change in linepack levels is a consequence of under-utilisation of the system at various points along the supply and demand curve.  On the peak day there is little or no ability to accommodate daily imbalances  Away from peak the ability to accommodate daily imbalances varies with supply and demand patterns, maintenance, outages etc

Operational Cost Methodology  Current Mod 0333 methodology  Injection & Withdrawal costs  based on Compressor Fuel costs  Marginal cost = Compressor Cost / (Throughput + Imbalance)  System ‘storage space’ costs  Based on TO allowed revenue less under/over recovery  Pipeline space cost = TO cost / (Throughput + Imbalance)  Is this the best method to reflect the costs of providing this “storage space”?

Area for development  Mod 0333 methodology attempts to derive unit cost (p/kWh) of NTS system to reflect unit cost of space  One alternative National Grid would like to discuss and develop with help from Workstream is using the prevailing average NTS Entry and Exit capacity charges  Why use NTS Entry & Exit capacity charges?  Mod 0333 and these slides include numerous references to pipeline “space” i.e. NTS Capacity  NTS Capacity Charges already seek to derive p/kWh of pipeline capability  Clear, “transparent” and published methodology  Regular thorough review and publication of supporting numbers  Numbers reflect forward looking costs  At least one update per annum  Methodology regularly approved by the Authority

Rough overview of NTS Capacity charging  Charging calculations still based on allowable revenue (the cost of pipeline assets + applicable returns) but split across peak demand  Forecast Entry Cap =TO Allowed Revenue + Exit Cap 1 in 20 Daily Demand x 365

Indicative default SMP using NTS Capacity Charges  Cost of Storage Space (October 2010 figures);  Average NTS Entry Capacity price = p/KWh  Average NTS Exit Capacity price = p/KWh  Cost of injection or withdrawal (09/10 figures)  Compressor Cost / (Throughput + Imbalance) = p/kWh  Possible default SMP = p/kWh  Default applied equally (+ & -) to both sides of SAP

Any further areas for development? OptionDefault SMP Buy (p/kWh) Default SMP Sell (p/kWh) Current defaults Updated current methodology Current Mod 0333 methodology Solely compressor costs Alternative operational cost (NTS Capacity)

Next Steps  Transmission Workstream recommendation on proposed methodology  Amend Modification Proposal 0333 based on Transmission Workstream feedback  Discuss possible new implementation timescales & costs with xoserve  Transmission Workstream November?  UNC Panel November / December?  Submit FMR to Ofgem by December?