1. Mod 0333: Update of default System Marginal Prices Review Group 0291 11 August 2010 Transmission Workstream 07/10/2010

2. Contents • Background • Points raised at UNC Panel • Development of Mod • Next Steps

3. Background • Mod 0333 raised following C27 Licence obligation and Review Group 0291 discussions • 2 Main elements of proposal; • Introduce new method for calculating default System Marginal Prices (SMPs) • Calculate and if necessary revise and publish new default SMPs on an annual basis – calculate in Q1 each year, publish by March 1st, go live with updated prices on 1st April each year • Output from new methodology is an update of current SMPs to 0.0544p/kWh from 1st April 2011

4. Points raised at UNC Panel 16/09 • How does this proposal link with EU requirements? • Article 21 of the Gas Regulation 715/2009: “imbalance charges to be cost-reflective ‘to the extent possible’, whilst providing appropriate incentives on network users to balance their input and off-take of gas. Imbalance charges must also avoid cross-subsidisation between network users, and not hamper new market entry” • ERGEG Draft Pilot Framework Guideline on gas balancing rules: “imbalance charges which are based on the costs of TSOs balancing the system are important to the development of competitive and well functioning gas markets.” • Consider notice periods for changing prices? • Mod states that new prices would be published no later than 1 March for implementation on 1 April • New proposal is to provide 2 months notice i.e. notification by 31 January for implementation 1 April (in line with charging notifications)

5. Points raised at UNC Panel 16/09 • Is this a User Pays Proposal? • Licence Condition C8G provides the option for NG NTS to “log up” charges for Agency costs related specifically to “Energy balancing” changes • Given the complexity of identifying & levying a separate User Pays charge, NTS feels it is appropriate to recover costs via the Licence Condition above • Compressor Cost: Is this published separately from OUG? • Costs used are actual cost of gas (and electricity) used to operate compressors. • Proposal will obligate NTS to publish this info to coincide with annual review • Does this proposal time out on 1st April if it is not implemented? • No. Licence condition is to use reasonable endeavours to update figures by 1/04/2010. If date lapses obligation to update still stands • Further implementation timeline to be discussed post development but may have to consider certain IS release windows to avoid risk to other pending reforms etc

6. Methodology • What other options did we & Review Group 0291 look at? • Setting default SMPs to 0p/kWh (cashout at SAP) • Updating current Storage Bundled Unit (SBU) based methodology with new storage prices • % SAP • Reflect operational costs incurred • Proposal maintains that SMPs may also be set by Market Balancing Actions (if outside the envelope of the default SMP) • NTS is of the opinion that setting default SMPs using a proxy of operational costs is the correct route because…..

7. Mod 0333 Methodology • Justification for including a TO element in the methodology? • Mod 0333 uses one of many possible methods to derive a proxy for the costs of accommodating shipper imbalance positions using the following assumptions; • To manage an imbalance without undertaking a Market Balancing Action a TSO requires two things; • Storage Space – i.e. a High Pressure pipeline (with unutilised capability) to store or release the imbalance gas • Compressors to inject or withdraw gas into / out of the above space • The ability to accommodate shipper imbalances through a change in linepack levels is a consequence of under-utilisation of the system at various points along the supply and demand curve. • On the peak day there is little or no ability to accommodate daily imbalances • Away from peak the ability to accommodate daily imbalances varies with supply and demand patterns, maintenance, outages etc

8. Operational Cost Methodology • Current Mod 0333 methodology • Injection & Withdrawal costs • based on Compressor Fuel costs • Marginal cost = Compressor Cost / (Throughput + Imbalance) • System ‘storage space’ costs • Based on TO allowed revenue less under/over recovery • Pipeline space cost = TO cost / (Throughput + Imbalance) • Is this the best method to reflect the costs of providing this “storage space”?

9. Area for development • Mod 0333 methodology attempts to derive unit cost (p/kWh) of NTS system to reflect unit cost of space • One alternative National Grid would like to discuss and develop with help from Workstream is using the prevailing average NTS Entry and Exit capacity charges • Why use NTS Entry & Exit capacity charges? • Mod 0333 and these slides include numerous references to pipeline “space” i.e. NTS Capacity • NTS Capacity Charges already seek to derive p/kWh of pipeline capability • Clear, “transparent” and published methodology • Regular thorough review and publication of supporting numbers • Numbers reflect forward looking costs • At least one update per annum • Methodology regularly approved by the Authority

10. Rough overview of NTS Capacity charging • Charging calculations still based on allowable revenue (the cost of pipeline assets + applicable returns) but split across peak demand • Forecast Entry Cap = TO Allowed Revenue + Exit Cap 1 in 20 Daily Demand x 365

11. Indicative default SMP using NTS Capacity Charges • Cost of Storage Space (October 2010 figures); • Average NTS Entry Capacity price = 0.0138 p/KWh • Average NTS Exit Capacity price = 0.0094 p/KWh • Cost of injection or withdrawal (09/10 figures) • Compressor Cost / (Throughput + Imbalance) = 0.0029 p/kWh • Possible default SMP = 0.0261 p/kWh • Default applied equally (+ & -) to both sides of SAP

12. Any further areas for development?

13. Next Steps • Transmission Workstream recommendation on proposed methodology • Amend Modification Proposal 0333 based on Transmission Workstream feedback • Discuss possible new implementation timescales & costs with xoserve • Transmission Workstream November? • UNC Panel November / December? • Submit FMR to Ofgem by December?