Facilitating Release of Non-obligated Entry Capacity

1. Facilitating Release of Non-obligated Entry Capacity Draft – for discussion purposes only 22 November 2007

2. Agenda • Background • Product Description • Advantages / Disadvantages • Development Process • Ad-hoc Process • Open Discussion

3. Background (1) • National Grid NTS has had a number of discussions with shippers recently in relation to short term access to capacity to facilitate competition. As a result we can see a benefit in a new entry capacity product and one user has proposed a version of such. • This new product would allow National Grid NTS to make more valuable firm capacity available while managing the physical and financial risks. This specific User proposal has highlighted that there is demand for this kind of product which could benefit shippers, consumers and National Grid NTS alike.

4. Background (2) Access to short term capacity • RMSEC – monthly block of firm capacity, sold month ahead • DADSEC – daily block of firm capacity, sold day ahead • DISEC – daily block of interruptible (UIOLI + discretionary), sold day ahead • WDDSEC – daily block of firm capacity, sold on the day • Capacity trade via secondary market • Release of non-obligated firm capacity via 1,2 or 4

5. Background (3) However at a sold out ASEP from a User perspective: • RMSEC X • DADSEC X • DISEC  • WDDSEC X • Secondary market Possible, arguably illiquid • Non-obligated Release discretionary and usually only in WDDSEC Therefore limited options to acquire capacity and mainly at short notice

6. Background (4) • For Users without firm capacity at sold out ASEPs this situation predominantly requires them to rely on interruptible capacity • In our discussions with Users this may act as a barrier to gas being delivered to the UK market • What has been requested is a “firmer” product that is released a period, e.g. several weeks, in advance of the gas day and for a duration less than a month but greater than a day • One User has put forward a proposal for such a product……

7. Product Description • Non-obligated capacity • Fixed buy back price – in effect the User has an obligation to offer the capacity back to National Grid NTS at an agreed price, if National Grid NTS needs to undertake buy back action • Price of non-obligated capacity and the buy back price need to provide National Grid NTS with an appropriate risk / reward balance • Product sold in daily blocks, consisting of a number of consecutive days • Product offered in advance of the gas day, to suit User requirements, e.g. several weeks before gas flow

8. Advantages Removes a barrier to entry for some Users and thus may increase available gas supplies to UK market Provides users with a “firmer” product Product is more flexible and tailored to Users needs Provides a mechanism for the market to value and thus differentiate capacity products Provides National Grid NTS with a financial incentive not to interrupt the product Maximises release of non-obligated capacity Being a sub-monthly product, should complement proposed enduring T&T Disadvantages Devalues existing interruptible product Likely to lead to increased short term capacity prices Impacts on operation of secondary market Additional capacity release mechanism Increases complexity and operating costs Increases uncertainty Represents another fundamental change on top of existing initiatives e.g. trade and transfer, substitution etc. Will require significant industry time to develop robust enduring process that retains the intended flexibility Advantages / Disadvantages

9. Development Process • The working assumption is that the advantages of the product merit its further development • In order to formally establish the product it would be necessary to change the UNC and to include the product in the charging methodology (Licence Obligation: Standard Special Condition A4) • In terms of the UNC, two paths exist: • Urgent Code Modification – implementation for this winter • UNC Modification Proposal under normal timescales – implementation for next winter

10. Urgent UNC Modification Proposal • National Grid NTS has undertaken an initial evaluation of the product and has identified a number of areas that would require development: • Process frequency – user driven, standard intervals • Application process - timing, prioritisation of requests • Market test arrangement – “open season” at ASEP, exactly as initial User request, general auction, which elements are fixed? • Allocation – assessment of competing bids with different buy back / capacity price ratios • The product appears difficult to codify whilst maintaining the intended flexibility • Based on previous comments on Urgent Mods, is it appropriate to introduce such a fundamental change under Urgent timescales? • A solution would still have to be found to undertake the revisions to the charging methodology or Ofgem could provide a derogation for this specific purpose on the Licence Condition • The process would not be supported by systems and would require manual workarounds If this is favoured National Grid NTS would seek to arrange a special transmission workstream meeting in December

11. UNC Modification Proposal – normal timescales • This would mean that the process would not be codified for this winter • It would however provide time to fully consider the impact of introducing the product and to develop a Modification Proposal with full industry involvement • During the process other solutions may be identified • There would be sufficient time to consider the charging implications and bring forward proposals to change the charging methodology • It may be possible, although challenging, to develop systems to support the release of the new product for next winter

12. Ad Hoc Process • Although not desirable - there may be situations, in the interest of GB Consumers, that warrant the use of an ad hoc process to facilitate the release of the described non-obligated product outside of standard processes. • National Grid NTS has investigated potential methods and identified a viable process, which would involve Ofgem consent: • Under UNC B1.10 • Standard Special Condition A4 • The process is by no means ideal and has many drawbacks, but could be used as a last resort, until an enduring solution is developed to address Users needs

13. Open Discussion Specific areas for feedback: • Is there broad support for the product? • Should an Urgent UNC Code Mod be raised? • Should this be subject to further debate and based on this develop a Mod under normal timeframes? • Do people have any views on the ad hoc process option?