National Grid - Key Challenges Beijing 24 October 2005 Alan Smart Optimisation & Risk Manager UK Transmission

2 National Grid - recent developments UK electricity & gas transmission UK gas distribution US electricity & gas Other activities

3 National Grid Transmission organisation Transmission Thin asset manager model US Northeast Transmission Functional organisation Shared functions Asset Manager Field Force & Delivery Operations Functional organisation Integrated gas and electricity Transmission business UK Transmission Shared functions Asset Manager Field Force & Delivery Operations (SO)

4 UK Generation Mix Coal CCGT Nuclear Oil Pumped Storage Interconnector Hydro Wind Gas Other Other

5 Changing Sources of Supply  Support mechanisms for renewable generation  non fossil fuel obligation and Renewables Obligation Certificates (ROCs)  climate change levy exemption certificates (LECs)  capital grants  Market corrections (reflecting environmental costs into the wholesale market)  EU Emissions Trading Scheme – EU ETS  large combustion plant directive – LPCD  impact on fossil fuel plant and potential for nuclear generation

6 UK Renewable Obligation Renewable ObligationNational Grid ForecastActual

7 Network Investment - Changes to supply  Changing supply patterns in electricity  Ofgem final proposals recognise need to invest in networks to accommodate renewables  £560m of GB "baseline" projects  baseline projects now include upgrade of Anglo- Scottish interconnection Future windfarms

8 Network Investment - Changes to supply Generation plant closures – nuclear, coal & oil Nuclear closure: -2.5GW of Magnox -3.5GW of AGRs Margin in 2013/14: 8% Coal & oil closure: 14.5GW of plant opted out of LCPD Assuming 30% of opt-out capacity closes,margin in 2013/14: 2%

9 Network Investment - Changes to supply Generation capacity additions New CCGT & Wind: 9.5GW contracted CCGT 7.7GW of Wind at full capacity 3.3GW of Wind at DNC margin in 2013/14: CCGT only 11% CCGT & DNC Wind 16% CCGT & TEC Wind 23% 0% 5% 10% 15% 20% 25% 30% 2004/052005/062006/072007/082008/092009/102010/112011/122012/132013/14 Plant Margin CCGT & Full Wind CCGT & Wind at DNC CCGT - No Wind Coal, Oil, Nuclear & existing CCGT

10 Network Investment - Asset Replacement Bulk of electricity existing system was installed from early 1960’s Main plant asset lives are typically years Increasing investment demands: network renewal (given asset life cycle) Age of NGC’s assets

11 Network Reliability - General obligations  General obligations - ‘develop and maintain an efficient, co-ordinated and economical system of electricity transmission’  But -  need to ensure you have defined what is in the public interest  need to ensure obligations on the business enable it to effectively meet the public interest  general obligations are open to interpretation, only form of control if they can be considered to have not been met is Licence Breach  Move towards specific well defined service standards aligned with public interest  align service standards with appropriate incentive schemes e.g. network reliability incentive

12 Network Reliability- Incentives  Scheme went live on 1 January  sliding scale incentive,  potential to earn additional revenue for performance below the target level, small deadband, and a capped loss for performance above the target  for each incentive year, the revenue impact takes place in the following year.  the parameters of the scheme are as follows:

13 Skills pool  Increase needed over the next 5 years in Project Engineers & Site Engineers in order to meet investment programme  Retirement of professional engineers over the next 5 years needs to be offset by planned recruitment and succession management  Low output of appropriate skilled people from UK education systems  perception of engineering and power industry  Need to diversify staff base  increase the representation of women and other minority groups in management teams/field force recruitment  Shrinking supplier base