1 Transmission Work Group 1 st November 2012 Gas Security of Supply SCR Proposals Credit Implications for GB Gas Market EBCC Response Summary Mark Cockayne Energy Balancing Credit Manager

2 Energy Balancing Security Market Operator Security Entry to the GB Market Indebtedness Accruals Shipper Default / Failure Neutrality Bank Account DSR/Long Shipper Funding Invoicing Systems EBCC Function Supplier Failure Key Areas of Impact

3 Energy Balancing Security Ofgem’s current proposals may significantly increase the requirement for security. –Current arrangements result in £360M security being provided by Users –Calculations based on VoLL would require security of approximately £10.8 billion High indebtedness will result in numerous Further Security Requests. –Increase in number of cases in default before EBCC –Increased security requirement is maintained for 90 days

4 Market Operator Security Market Operator requires security equal to trade values or trading is not permitted. The value will therefore increase sharply and prohibitively. Shippers unable to trade or trading at lesser values will fall into further deficit and incur larger cash-out charges. Increased requirements for security are also incurred by both the Market Operator and National Grid costs of such are picked up by community.

5 Entry to GB Market Security values and the cost of maintenance are likely to act as a barrier to market entry for smaller Users. Possibility that new entrants will be unable to locate financial institutions with the head room and required credit rating to provide security.

6 Indebtedness Accruals Current Anticipated Balancing Indebtedness (ABI) accrual calculation would delay the EBCC’s ability to act upon short shippers exposure for a period of 10 days after the event. Effectively exposures may be significantly understated during this period. Once exposures for the day in question are included in the ABI Users will also subject to the accrual for a period of 10days. During this period exposures are likely to be significantly overstated and Users may be classed as defaulting Users. Previous attempt to modify the accrual calculation to use more recent data was rejected by Ofgem.

7 Shipper Default / Failure Significantly increased risk of shipper failure due to default. Winter 2005/6 saw prices peak around £2/therm as a consequence Two Users had to be terminated to protect the industry from avoidable financial loss. Shippers who do not balance consistently and new shippers are likely to be at risk, multiple failures are likely to impact the community heavily and may lead to further failures as a result of debt being socialised.

8 Neutrality Bank Account Current banking services are provided via Barclays costs are recovered from the community via neutrality. –£10 million overdraft limit and £50 million within day payment processing limit are currently in place. Historically during sharp price increases the account has exceeded the overdraft facility and demonstrated vast movements of money in short period of time – this can only increase with artificially increased prices. –Increased cost of overdraft –Ability / appetite to underwrite exposures

9 DSR/Long Shipper Funding Reliance on short shipper charges funding long shipper payments and DSR payments, shortfalls ultimately funded via neutrality. Strong likelihood that one or more short shippers will fail. The community will also bear cost of failure via neutrality, which may discourage increased throughput to end a deficit.

10 Invoicing Systems No system capability to target top up charges against short shippers. No system capability to make adjustments to exposure monitoring systems in respect of DSR claims. –Currently impacts on credit remain out of scope of SCR

11 EBCC Function Membership is not at full capacity. Members are shipper representatives and therefore have interests in the market which may exclude them from voting. In a GDE the committee may be rendered ineffective due to the volume of defaults and commercial relationships.

12 Supplier Failure Cost of carrying neutrality charges on larger shippers/suppliers may impact cash flow at large suppliers, resulting in insolvency. Current SoLR arrangements are not fit to deal with large supplier failure. DECC proposal of Special Administration Orders is also unlikely to be effective as the order can only granted after insolvency – the User is likely to be terminated by that time.

13 Summary SCR proposal has significant impact on community credit arrangements. EBCC believe it is likely to perpetuate a GDE or exacerbate User failure across the GB market. Ofgem have been clear that they consider credit arrangements outside the scope of their review.

14 Views on how to take this forward Costs ? Impact ? Timing?