1. Hybrid Option(s) Ritchard Hewitt – August 2010

2. Fundamentals  Parameters – Cost Reflective, Incentive, Value  Cost – What does it cost the service provider to provide the service  Incentive – Promote use or discourage use?  Value – Customer signals requirement before use – Auction

3. Options  Value option  Previous industry meetings have developed a “Value” model  Auction based  Advantages:  Discovers the customers’ value for the product (market responsive)  Disadvantages:  Complexity

4. Incentive option  What behaviour do we want to incentivise?  Current Cashout incentives seek in part to reduce use of day on day linepack service.  NG Incentives directly encourage reduced change in Linepack levels.  SMP prices set by Residual Balancer actions reflect the cost of both the energy bought and the cost of replacing “utilised” but unavailable Linepack flexibility service.  Above incentives therefore could be viewed as being at odds with an objective of maximising the “efficient release” of available linepack flexibility  Incentives are however required to encourage “efficient use” of Linepack flexibility

5. Incentive option ….  Should the shipper incentives vary according to system position or overall shipper imbalance position?, i.e.  Small linepack change / imbalance = moderate (or no?) incentive  Larger linepack change / imbalance = greater incentive  NB – if Balancing Actions taken then Marginal SMPs still apply  Should incentives be different for those who “helped” the system?  Do shipper actions on D-1 affect D balancing actions?.  If yes – then should the D-1 shipper that “contributed” to the need to balance incur a proportion of the costs of addressing the imbalance on D?  If yes – then should the D-1 shipper attribution be the same or different than the D shippers?

6. Incentive option cont…  Advantages  Promotes efficient use of available linepack flexibility  Disadvantages  May discourage use of available linepack flexibility

7. Cost Option  National Grid Transmission (NGT) is a monopoly  Assessment of its service provisions are therefore generally based on “cost reflectivity”.  Linepack flexibility service in its simplest possible form is a function of the cost to put a piece of pipe in the ground divided by the amount of linepack it could generate each day over its useful service life plus the injection and withdrawal costs (compressors)  But what happens on the day that you run out of pipe…?

8. Cost Option  Advantages  Cost reflective  Disadvantages  Not responsive to market conditions

9. Hybrid Option – “Cost + Incentive”  This option seeks to combine part of the Cost Option with the Incentive Option.  This option has a number of areas where it could be “developed” to either include or exclude certain aspects.  These aspects are identified in red text in the slides that follow.  This is a strawman and we are seeking comments on its merits and how it may be developed / improved MBA = Market Balancing Action as defined in the UNC

10. Hybrid Option – “Cost + Incentive”  On “Non - MBA days” the cashout differentials will be set to reflect a “LRMC type” cost of providing the “storage” facility plus the costs of injection or withdrawal  On “MBA days” the cashout differentials will be set by the SRMC type cost to the Transporter of having to arrange for “short notice” access to more “storage” plus injection and withdrawal MBA = Market Balancing Action as defined in the UNC

11. “Non - MBA days”  This day is one where no Market Balancing Actions were completed and there was no Market Balancing Action on the following Gas Day either.  On this day all the Linepack flexibility is provided by the system and therefore the cost proposed is one based on the “average cost” of providing an asset capable of delivering this amount of linepack flexibility and the Opex needed to operate this asset. Lets call this – “Standard flexibility”

12. “MBA Days”  “When use of the service outstrips supply”.  The amount of available Linepack Flexibility varies every day and therefore it is inevitable that on some days demand outstrips supply.  On these days the Linepack level is maintained within an acceptable range by taking Market Balancing Actions (MBAs).  The “cost” of these actions could be considered to be the cost of sourcing and then providing “short notice” linepack flexibility. Lets call this “Dynamic Flexibility”  MBAs also includes that day’s cost of energy and this should perhaps be factored out

13. Strawman  Dynamic Flexibility Charge (DFC)  Pseudo - Short run cost of linepack flexibility  Suggest this is weighted average price of all Market Balancing Actions minus EOD SAP price (other options?)  NB weighted average is calc’d separately for those actions either side of the end of day SAP price

14. Dynamic Flexibility Charge  Other options considered:  Full Marginal Price – not cost reflective?  Day on Day market price change – could go negative, not cost reflective

15. Strawman - example  Day X to Day 1 shippers maintain supplies and demand within acceptable ranges and system pressures are within acceptable limits. No Market Balancing Actions.  Cashout  Short = SAP plus Standard Flexibility Charge  Long = SAP minus Standard Flexibility Charge

16. Strawman  Day 1 through to Day 2 shipper imbalances lead to Market Balancing Actions on Day 2.  Cashout for D2  Short = SMPbuy set by MBAs plus Dynamic Flexibility charge  Long = SMPsell set by MBAs minus Dynamic Flexibility charge  Cashout marginal prices for D1 reset:  Replace Standard Flexibility Charge with Dynamic Flexibility Charge for those shippers who were in the same direction as the system imbalance, or  Replace Standard Flexibility Charge with Dynamic Flexibility Charge for all shippers  Note – SAP for D1 is not changed

17. Day One (non MBA) Day 2 (MBA) Buy System Short Day 3 (MBA) Sell System Long Shipper position ShortLongShortLongShortLong SAP+SFCSAP-SFCSMPb + (WABP - SAP) SAP – (SAP - WASP) SMPb + (WABP- SAP) SAP – (SAP- WASP) SAP+(> SFC or D2 DFC) SAP-SFCAs aboveSAP – (> Day 2 DFC or Day 3 DFC) Day 4 effect

18. Strawman  All revenues from the additional charges to feed into Capacity Neutrality? or  Fed back through Balancing Neutrality (SO activity)  Incentive options:  Incentive on NG Transmission to avoid taking Market Balancing Actions as per now.  Current NGT Linepack incentive removed.  New NGT incentive around the amount of energy cashed out at the Standard Flexibility rate.

19. Strawman  Advantages:  Automatic release of service avoids “auction” option costs and difficulty of establishing amount to release.  Cost reflective and yet dynamic and market based when required  Maintains existing Daily Clearing process  System is cleared daily to future reconciliation's are administered as now avoiding system build costs.  Disadvantages:  Does not facilitate shipper “carrying forward” an imbalance position – System is cleared daily as now.  Complex clearing process  Lack of within day Cashout price discovery

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