1. Development of Entry Capacity Substitution
Bogdan Kowalewicz
Transmission Workstream meeting
6 November 2008

2. Introduction Entry Capacity Substitution obligation
obligation introduced as part of TPCR4
fully committed to principle
it helps ensure that the size of the system is appropriate to the demands placed on it
consumers benefit from appropriate system capacity

3. Background Changing patterns of supply Declining UKCS production
Level of unsold baseline capacity
User commitment
Responsiveness to signals for incremental capacity
Efficient and economic operation of the network

4. Policy objectives
Maximise use of existing Transmission network assets for the benefit of consumers
Intention is to avoid both capacity sterilisation and unnecessary infrastructure investment while accommodating changing flow patterns
NGG to make informed judgement on how unsold capacity can be put to use in other areas of the network that are signalling investment requirements

5. Entry capacity substitution aims
Ensure substitution minimises costs associated with funded incremental obligated entry capacity
Avoids material increases in costs reasonably expected to be incurred by NGG as a result of substitution
Facilitate effective competition between shippers and suppliers

6. Review of Progress Current Position
NGG Informal Consultation in August 2008 on methodology following series of workshops over the summer
NGG Conclusions Report published September 2008
Ofgem open letter on substitution published in September 2008, prior to QSEC auction

7. Outcome of informal NGG consultation
Most respondents expressed support for the principle of entry capacity substitution;
No clear consensus on preferred methodology
Concern that application of substitution could have undesirable consequences
Need to reconcile NGG’s aims of minimising the costs of funded incremental obligated entry capacity with wider obligations to operate in an efficient and economic manner.

8. Ofgem’s view Responsive to the concerns expressed
Understand the need to remove some of the uncertainty
Supportive of the need to explore whether an economic test should be applied
Recognise the need for a simple methodology that can be applied in a transparent manner with little scope for challenge or dispute
Committed to the principle of user commitment to signal future capacity requirements

9. Reasons to further develop methodology
NGG analysis suggests that, at this time, the timing of the introduction of substitution may have limited impact
Allowing time to further develop the methodology will
allow a more comprehensive and flexible solution
greater consensus
reinforce user commitment
greater transparency about the risks and effects of substitution

10. Next steps
Further develop the current proposal to take into account the concerns expressed
NGG to clarify the risks of substitution (particularly the impact on entry prices)
NGG to clarify the costs of restoring baseline capacity where it has been substituted away (including impact on lead times and potential for their reduction)