1. Ofgem’s Gas SCR – Background on the DSR mechanism Stephen Jarvis 02/07/14

2. On June 16 th 2014 we published our statutory consultation on the Gas SCR: – confirmed our final policy decision on cash-out reform as set out in Feb 2014 – confirmed the decision to proceed with developing a DSR mechanism – set out code changes and shipper, supplier, and transporter licence modifications – consultation closes 16 th July 2014 2 Gas SCR statutory consultation

3. 3 The rationale for proceeding with the development of a DSR mechanism: – there are significant benefits to be had from consumers reducing their demand voluntarily ahead of an emergency in a coordinated and efficient manner – throughout the SCR process, some stakeholders have expressed doubts that such voluntary interruption would emerge of its own accord – a number of stakeholders suggested the development of a centralised mechanism for DSR, run by the system operator – such a mechanism could help provide a route to market for some consumers to offer DSR, and potentially kick-start commercial interruption in the longer-term – in deciding to proceed with this development process we have taken account of analysis we commissioned from two separate consultants, as well as extensive consultation responses and discussions at stakeholder workshops Rationale for DSR

4. 4 The DSR licence condition principles (1-4) AimRelevant “principle” from Licence ConditionReference 1 Shippers will need to submit offers on behalf of consumers “ensure that any party making a Demand Side Response Offer is a party to the Uniform Network Code” 8I.4 (a) 2 The methodology will set out which end consumers are eligible to participate in the DSR mechanism “set out the criteria for determining that particular “DMC” Supply Point Components are “DMC” Supply Point Components in respect of which a party may not make Demand Side Response Offers” 8I.4 (b) 3 The mechanism is intended to avert an emergency. A GDW (gas deficit warning) is the trigger point at which NGG may utilise mechanism “allow the Licensee to accept Demand Side Response Offers only where a Gas Deficit Warning is in place or within Stage 1 of a Gas Deficit Emergency” 8I.4 (c) 4 Exercised DSR bids should be factored into the cash-out price and if it is the highest balancing action it should set the short cash-out price “demonstrate compatibility with existing market arrangements by setting out the manner in which any Demand Side Response Offers accepted by the Licensee are to be treated as Eligible Balancing Actions and included in the System Clearing Contract, System Marginal Buy Price and System Marginal Sell Price” 8I.4 (d)

5. 5 The DSR licence condition principles (5-8) AimRelevant “principle” from Licence ConditionReference 5 The DSR mechanism should provide a route to market for a wider range of consumers than currently access the market “promote, and further facilitate, parties making Demand Side Response Offers to the Licensee through open and transparent market-based arrangements” 8I.4 (e) 6 The DSR mechanism must not foreclose the market for commercial interruption products, or penalise self interruption by consumers “not unduly preclude the emergence of commercial interruption arrangements” 8I.4 (f) 7 The DSR mechanism should be designed to ensure no harm to operation of normal traded markets. Some consideration of the impact on electricity markets may be necessary. “minimise distortions and unintended consequences on existing market arrangements and the principle of parties balancing their own positions in the wholesale gas market” 8I.4 (g) 8 The DSR mechanism must be cost effective to minimise cost to consumers. Therefore NGG must procure DSR in an economic and efficient manner “ensure that Demand Side Response is procured in a manner consistent with the Licensee’s duties under the Act and, in particular, the Licensee’s obligation to operate the pipe-line system to which this licence relates in an efficient, economic and co-ordinated manner” 8I.4 (h)

6. 6 Timelines StageDate Statutory consultation on licence changes and further consultation on code drafting June 2014 Direction to modify licences and section 36C direction to modify the UNCSeptember 2014 NGG to submit DSR methodology to Ofgem for approval1 March 2015 Authority decision on DSR methodology30 May 2015 Implementation of cash-out reformBy Winter 2015/16 Implementation of DSR methodologyWinter 2016/17 The proposed DSR licence condition intends to place an obligation on National Grid to: – develop a draft DSR methodology and submit it to the Authority – run a trial if directed by the Authority to do so – submit to the Authority a report on the outcome of the trial and submit a final version of the Demand Side Response methodology – implement the methodology if directed to do so