Capacity Methodology Statements: Impact of Mod 452

1. Capacity Methodology Statements: Impact of Mod 452 Tx Workgroup Meeting 1st August 2013

2. Background • The NTS Gas Transporter Licence sets obligations on National Grid to produce seven statements setting out various capacity methodologies. We have amalgamated some obligations, such that we have five statements: • ExCR: Exit Capacity Release • ECR: Entry Capacity Release • ExCS: Exit Capacity Substitution and Exit Baseline Revision • ECS: Entry Capacity Substitution • T&T: Entry Capacity Transfer and Entry Capacity Trade • We are seeking to keep the Mod 0452 Methodology Statement changes minimal.

3. Entry and Exit Capacity Substitution • We are not proposing to change any of the fundamental rules of the substitution processes. • The process for substitution analysis (i.e. network analysis) is not affected by the changes proposed in Mod 452. • But there are four key areas of change to the substitution processes being considered.

4. Entry and Exit Capacity Substitution: Specific Changes • Substitutable Capacity will be redefined to exclude capacity reserved (at the time of the analysis) pursuant to a PARCA. • References to ARCAs will be retained on a Transitional basis. • Capacity can be reserved from a donor point for substitution to a recipient. • Substitution proposals are subject to non-veto by the Authority • Proposals currently submitted to the Authority at allocation. • To provide certainty to planning processes, substitution proposals for PARCA’s need to be submitted to the Authority earlier, i.e. prior to reservation.

5. Exit and Entry Capacity Release • Principles • No new PCA and ARCA contracts will be agreed and will be replaced with PARCAs. • Introducing the concept of capacity “reservation”. • Incremental capacity will not normally be released through existing processes (QSEC / July Window). • Substitution will be possible. • Changes will align to the proposed PARCA process e.g. • Application of the NPV test for incremental entry release at the reservation and allocation stages.

6. Exit Capacity Release: Summary of Changes • The ExCR identifies three ways to obtain Enduring Annual NTS Exit (Flat) Capacity • PARCA Process • Annual Window • Ad-Hoc Process • Removal of most references to PCAs and ARCAs. • Existing agreements continue in effect. • Annual Window and Ad-hoc Application largely unaltered • Revenue Drivers only needed for PARCA applications must be agreed and published before progressing to Phase 2. • Inclusion of new NTS Exit Points in the Licence • Currently considering whether this could be changed to an external document so as to take this step out of the critical path.

7. Exit Capacity Release: PARCA Process • Inclusion of references to PARCAs. • Definition, consistent with Mod proposal • Clarification that only with a PARCA will there be certainty of incremental capacity release. • High level description of what a PARCA is, how it is funded, and the rights and obligations created under one, e.g. • National Grid will reserve and allocate capacity • National Grid will identify capacity substitution opportunities • National Grid will publish information on agreed PARCA in advance of (and after) reserving capacity. • Capacity may be reserved from a donor Exit Point pending substitution, (subject to non-veto by the Authority).

8. Exit Capacity Release: Summary of Changes • Annual and Ad-hoc applications • Will be accepted where the application can be satisfied through (or in combination): • Unsold Capacity (including Substitution) • Non-obligated capacity. • Therefore can only be used where a Revenue Driver is not required.

9. Exit Capacity Release: Summary of Changes • User Commitment associated to formal capacity booking • Does not apply to reserved capacity • Does not apply to Reservation Parties, • Is based on the indicative price at the time of allocation (not reservation). • Default lead time • 24 months from the next 1st October after allocation. • Applies to all enduring annual allocation processes although in practice only PARCAs lead to incremental release. • Removal of references to the Permit scheme. • Other potential change: • New chapter on Long Term Non Firm Capacity.

10. Entry Capacity Release: Summary of Changes • The ECR identifies the PARCA as the only way to guarantee the release of Firm Entry Capacity in excess of the prevailing Obligated Entry Capacity level. • Entry and Exit PARCAs follow the same principles. • Capacity is reserved for later allocation (including from donor ASEPs) • March QSEC Auction process is largely unchanged • Bids will be accepted where they can be satisfied through (or in combination): • Unsold capacity (including substitution) • Non-obligated capacity. • Removal of references to the ad-hoc QSEC auction • Other entry capacity auctions: no change.

11. Entry Capacity Release: Specific Changes • Removal of most references to PCAs and ARCAs. • Existing agreements continue in effect. • Inclusion of references to PARCAs. • As described for ExCR • Inclusion of ASEP in Licence • As for ExCR, we are currently considering whether this could be changed to an external document. • Revenue Drivers only needed for PARCA applications and must be agreed and published before progressing to Phase 2. • Other potential change: • New chapter on Long Term Non Firm Capacity.

12. Entry Capacity Release: Specific Changes • User Commitment / NPV Test • The NPV test will be carried out at the time of capacity reservation based on the User’s / Reservation Party’s capacity profile and current prices (these prices are indicative). • For National Grid to proceed to the Phase 2 PARCA Works; either • The test must be passed if capacity above available unsold is required • If NPV test is not required then capacity must be requested for at least 16 of 32 quarters. • The NPV test will be repeated using the latest (actual) price at the time of allocation. • The [Nominated] User may be able to revise their bid profile (but not the incremental quantity) to ensure the test is passed. • Default lead time • 24 months from the next 1st October after allocation. • Removal of references to the Permit scheme.

13. Timetable • Consultation on the various methodology statements is expected to broadly follow the timetable outlined below. Timeline for “RIIO” ECR & ECS. Applicable from Feb 2014 AMSEC. Review and update Proposal with the Authority for approval Timeline for ECR / ECS & ExCR / ExCS updates for PARCA. Applicable from May 2014. Consultation Potential informal consultation Proposal with the Authority for approval Consultation Review and update