1. Risk assessment CAP131 Working Group (4) 17 November 2006 Slides updated to reflect: Movement of X=12 to X=12.8 to X=11 closure probability value of overall risk allocation to new and existing parties

2. Content  The risk of unnecessary investment  The allocation of risk between parties  Conversion to years of the investment proxy i.e. X and Y

3. Why consider risk?  Seeking to allocate risk of unnecessary investment between existing generators, new generators, and consumers  Seeking to make user commitment commensurate with risk  Risk needs to consider  the impact of the event  the probability of the event

4. Impact of an event  The reduction of TEC of an existing generator or the termination of a new generator agreement would have the same impact, in terms of stranded asset capital cost per kW  Analysis shows that a multiple of 12.8 times TNUoS tariff approximates to the capital investment cost and therefore the stranded asset capital cost  This figure is reduced by 14% to 11 times TNUoS tariff to take account of re-usable assets

5. Probability of event  Risk of an existing power station closure  Over the last ten years, on average 850MW plant has closed each year  Over the next price control period this would amount to 6% of installed capacity  National Grid is aware of 3% closures that have already been notified  Based on historic evidence, the probability of additional closures over the next price control period is 3%  Risk of a new generator project termination  National Grid forecasts 12GW of new generation will connect in the next PCR period from a contracted background of 24GW  Probability of termination = 50%

6. Historical and Projected Plant Closure

7. Risk Allocation  If we use 11 years Generation TNUoS as the total user commitment required from all parties and apply closure and termination probabilities, can develop scenarios  For new generators  Stranding risk = Pn * X * Gen TNUoS  For existing generators  Stranding risk = Pe * Y * Gen TNUoS  For consumers  Stranding risk = Pn * TNUoS * (11-X) + Pe * TNUoS * (11-Y)

8. Allocating Risk - Results New Generator Existing Generator All Users Risk 50%×X×TNUoS 3%×Y×TNUoS (50%×(11-X)×TNUoS) +(3%×(11-Y)×TNUoS) X=11 Y=0 94% 0% 6% X=5.5 Y=0 47% 0% 53% X=5.5 Y=2 47% 1% 52%

9. Money Secured/ Liability (total 2007-12) New Generator Existing Generator Security X=11 Y=0 £4.1bn £0 X=5.5 Y=0 £2.1bn £0 X=5.5 Y=2 £2.1bn £4.1bn Liability

10. Conclusions  A combination of X=5.5 and Y=2 places ~50% of the stranding risk with the end consumer  Moving 1% of risk to existing generators means a substantial total liability in excess of the £5bn CAPEX plan  This is because the probability of closure is so small; and  The large size of the generation fleet  In other words, all existing generators would cover the small chance of a sudden closure