Medium-term TEC Trading ARODG Seminars Glasgow & London February 2007

Content  Outline of concept  Key issues  Interaction with other industry codes  Implementation

Aim  To facilitate the transfer of rights to use existing network capacity without increasing costs to industry participants  … to provide opportunities to connect prior to the completion of all works necessary to provide a compliant connection  Trading existing capacity more efficient when none spare  Balance effectiveness with pragmatism  Seeking to work within existing regulatory / market rules Note: Presentation describes the key concepts of a framework not a working model

Key concepts of trading framework An annual process  Trades facilitated using a pre-defined annual process  Staggered process to gather information and prepare exchange rates  Defined timetable  facilitates resource planning for industry participants  designed to provide sufficient time for analysis required  e.g. exchanges rates and possibly zones  provide compatibility with existing industry processes  e.g. transmission outage planning

Key concepts of trading framework What could be traded  Physical capacity  does not provide value to “paper projects”  does not undermine proposals to enhance user commitment  Defined capacity tranches across multiple years  Rights for a finite duration e.g. up to 3 years  limits to which assumptions outside operational timescales hold  Seek to fully unwind trade at the end of the period  TEC would remain with the original party  obligation to pay TNUoS remains with the original party  export rights temporarily be transferred to another user(s)

Key concepts of trading framework Matching donors and recipients  Counterparties matched according rules to promote economically efficient outcomes  recipients on their willingness to acquire rights  donors on the willingness to surrender rights  Capacity prices set by donors  schedule of MWs & prices provided to users that want to trade  exchange rates used to express this information in different zones  Recipients bid for this capacity (adjusted by exchange rate)  One-to-many and many-to-one trades would be facilitated

Key concepts of trading framework Setting the exchange rate  Exchange Rate set to avoid creating additional constraints  but not will not be taking all opportunities to minimise these costs and return the system to compliance with the planning standards  Need to ensure that this is still consistent with duties to be economic and efficient, and to facilitate competition  Trades must be subject to an Exchange Rate that reflects the capability of the transmission system

Key issues Capability of the transmission system  Assumptions made about generation behaviour in planning and operational time frames  Assumptions ensure that total costs remain efficient  for example, Transmission Owners do not build a network that accommodates all generation all of the time  Need to set exchange rates that avoid undermining these assumptions or, failing this, need to understand the range of consequences of this  operational costs

Key issues Competition  Some industry concern that existing generation might  not reduce their TEC when otherwise they would have  is it in the interests of competition e.g. a barrier to entry?  set prices that do not reflect costs / lost generation opportunities  Difficult to preclude by design  But could consider ways to identify possible abuse, if any

Interactions with other codes  Have sought to progress these arrangements to minimise impacts on other codes  Impacts on  CUSC… to give force to the new arrangements  others… may become apparent as detailed designed proceeds  Need to ensure that the introduction of trading remains consistent with wider duties to be efficient and economic  specifically, System Operator incentives and SQSS derogations need to be cognisant of the potential impact of capacity trading

Implementation  If  the industry considers it beneficial (now and in the future)  When  depends on what other access amendment proposals are raised  progress more detailed design  exchange rate issues present the greatest challenge  How  discuss detailed proposal informally before raising amendment  enhance the proposal  provide clarity & definition before working group phase

Conclusions  A flexible trading framework to enable opportunities for earlier transmission access  Seeks to use existing network capability which means exchange rate should reflect this  Still work to do on the detail  Feedback from the industry would be helpful  is it something that would be desirable?  would it be used?