1. Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Mod 452 Update 9 th September 2013

2. 2 Agenda  Follow up from August 28 th workgroup  PARCA Security and termination options  PARCA window timeline  PARCA triggered Ad-hoc QSEC  Summary of potential licence changes and rationale  Next steps

3. 33 Background At the August 28th mod 452 workgroup we discussed some alternative draft business rules with you that covered:  Security  Requirement for consistent PARCA security regardless of whether PARCA Phase 2 works are required  Termination cost for PARCA Applicant  Inclusion of a PARCA Window  Provides a focal point for customers considering a PARCA  Inclusion of an Ad-hoc QSEC  Provides opportunity for unsold Entry capacity to be competed for prior to its potential reservation under a PARCA  Rationale for change was accepted but further refinement should be considered on certain aspects Thank you for your feedback

4. 4 Security - Key principles  Security is linked to capacity value  allows a consistent approach regardless of how the reserved capacity will be delivered  Security required is consistent with existing UNC provisions  principles already established and familiar  The security value should not be so high as to become a barrier to entry but not so low to become insignificant  Feedback from August 28th workgroup:  Securitising 100% of capacity value is too high  Capacity pricing is subject to geographical differences which could lead to the value of security being different for similar sized projects

5. 5 Calculation of Security Amount: Option 1  Feedback from previous discussions is that ramping up to 100% of total indicative capacity value is too high  Previous option used max capacity quantity for a period of 4 years on exit to determine the security value and capacity requested over a 32 quarter period for entry.  Alternative is to reduce requirement to 1 year of indicative capacity value  Similar to existing UNC capacity security provisions (UNC section V – rolling 12 month security value)  Reducing the requirement to 1 year also allows the calculation to be simplified

6. 6 Option 1: Security amount calculation Exit: Total PARCA Security Amount (£) = (PARCAEx ind / 100) x Q ex x 365 Where: PARCAEx ind = the indicative NTS Exit Capacity price (p/kWh/Day) for the maximum Capacity requested at the relevant NTS Exit Point Qex = the maximum amount of Exit Capacity to be Reserved by the PARCA Applicant (kWh/Day) as specified in the Phase 1 PARCA Works Report Entry: Total PARCA Security Amount (£) = (PARCAEn ind / 100) x Q en x 365 Where: PARCAEn ind = the indicative NTS Entry Capacity clearing price (p/kWh/Day) for the Capacity requested in the relevant quarter at the relevant NTS Entry Point Qen = the maximum amount of Entry Capacity to be Reserved by the PARCA Applicant (kWh/Day) in any one quarter

7. 7 Examples: Option 1  Two sets of examples using the calculations of one year’s capacity  Entry based on 30GWh  Exit based on 50GWh  Two examples for each using one low and one high capacity price  Security phased over four years Option 1 Capacity (GWh) Capacity Price (p/kWh) One year's Capacity charge Year 1Year 2Year 3Year 4 25%50%75%100% Entry 300.0001£10,950£2,738£5,475£8,213£10,950 300.0347£3,799,650£949,913£1,899,825£2,849,738£3,799,650 Exit 500.0001£18,250£4,563£9,125£13,688£18,250 500.0278£5,073,500£1,268,375£2,536,750£3,805,125£5,073,500

8. 8 Calculation of Security Amount – option 2  Concerns over geographical capacity pricing differences vocalised at previous workgroup  Security value could be derived from an average or weighted average capacity charge  The following table illustrates typical average and weighted average capacity prices based upon different calculations: Description p/kWh/d ExitEntry Straight Average of Prices0.00900.0062 Weighted Average using Baselines x Price (exit) and Obligated level x price (entry)0.00920.0110 Weighted Average based on Bookings0.00790.0098

9. 9 Examples: Option 2  Two sets of examples using the calculations of one year’s capacity  Entry based on 30GWh  Exit based on 50GWh  Using the two examples of weighted averages capacity prices  Security phased over four years Option 2 Capacity (GWh) Capacity Price (p/kWh) One year's Capacity charge Year 1Year 2Year 3Year 4 25%50%75%100% Entry 300.0110£1,204,500£301,125£602,250£903,375£1,204,500 300.0098£1,073,100£268,275£536,550£804,825£1,073,100 Exit 500.0092£1,679,000£419,750£839,500£1,259,250£1,679,000 500.0079£1,441,750£360,438£720,875£1,081,313£1,441,750

10. 10 Examples: Comparison of Option 1 and 2 Option 1 Capacity (GWh) Capacity Price (p/kWh) One year's Capacity charge Year 1Year 2Year 3Year 4 25%50%75%100% Entry 300.0001£10,950£2,738£5,475£8,213£10,950 300.0347£3,799,650£949,913£1,899,825£2,849,738£3,799,650 Exit 500.0001£18,250£4,563£9,125£13,688£18,250 500.0278£5,073,500£1,268,375£2,536,750£3,805,125£5,073,500

11. 11 Summary of options Option 1 (using capacity prices)Option 2 (using average price) Geographical differences remain i.e. similar sized projects could require different security value Geography doesn't drive security differences (i.e. security value is purely driven by quantity of capacity required) adheres to existing principles i.e. UNC security based on 12 months of capacity value. Capacity pricing cost reflective and help inform where to connect on the NTS New principle inconsistent with existing UNC security provisions security value will be consistent with capacity value may result in security requirement being significantly higher or lower than the value of capacity reserved security value derived from capacity charges hence relatively future proofed difficult to establish appropriate level of unit cost and potential need for future mods to ensure security level remains appropriate  Not intended to be exhaustive  NG initial view is that option 1 is favourable

12. 12 Security Amount – Phasing  The Security Amount phasing required to be put in place the PARCA Applicant will be over a maximum of four years and will be based on the following cumulative profile:  Year1 = 25% x Security Amount  Year2 = 50% x Security Amount  Year3 = 75% x Security Amount  Year4 = 100% x Security Amount Where  Year1 = the financial year (1 April to 31 March) in which Phase 2 is initialised

13. 13 Security Amount – Phasing  Security will only be required up to Capacity Allocation.  Should Phase 2 complete earlier than four years then only the amount up to that year of completion will be required  E.g. if Allocation of capacity took place in Year 3, then at that point in time the security will equal 75% and the additional amount for Year 4 will not be required.  If Phase 2 goes beyond four years the security will remain at 100% of the security amount until allocation  Upon Capacity Allocation the existing UNC security requirements are applied (as detailed under UNC TDP section V)

14. 14 Security Amount – Providing Cover (updated)  PARCA Applicants will be required to post annual security to cover the phased Security Amount  August 28 th feedback – termination should take into account the day, not the year, termination occurs.  In the event of PARCA termination, a termination amount will be invoiced to the PARCA party  To take into account the effective day of the PARCA termination e.g. if PARCA phase 2 began on January 1 st 2015 and PARCA terminates 31 st January, the no. of days = 31  Termination Amount = min of ((security amount / 1461*) x no. of days) or security amount *1461 = 4 years in days

15. 15 Funding (no change)  Where investment is required this would follow the existing RIIO-T1 revenue driver timescales  20% of the value of the Revenue Driver in Year T-2  80% of the value of the Revenue Driver in Year T-1  To implement this would require some licence changes to ensure:  That there is minimal impact on Industry charges overall  National Grid’s Allowed Revenue can be amended to be kept neutral in the event of a Termination

16. 16 PARCA window – further thoughts  Concerns raised at August 28 th workgroup that the PARCA phase 1 output will be delayed and can this impact be minimised?  e.g. consider closing the PARCA window if no PARCA requests are received within a determined period  We agree that closing the window early if no further PARCA requests is beneficial  We consider 20 business days from the opening of the PARCA window allows sufficient time for a PARCA application to be submitted  allows at least a further 20 business days to agree the PARCA.  the window closes where no PARCA applications are received within 20 business days from the window opening  If PARCA applications are received within 20 business days, the window will close on the earlier of all PARCAs received within the window being agreed, or 40 business days.

17. 17 PARCA Phase 1 Activities – original proposal (PARCA Window and Ad-hoc QSEC Auction Timeline) Month 1Month 2Month 3Month 4Month 5Month 6 PARCA Phase 1 NG NTS publishes info to other Users and opens the PARCA Window 10 Business Days NG NTS publishes notice that the PARCA window is now closed and confirms the number of PARCAs requested within the window 40 Business Days Phase 1 Outputs issued to all PARCA Signatories QSEC Auction Opens QSEC Auction (up to 10 Days) 10 Business Days NG NTS invite Users to participat e in an Ad-hoc QSEC Auction 28 Calendar Days (approx 20 Business Days) QSEC Auction Closes Allocation Up to 10 Business Days

18. 18 PARCA Phase 1 Activities – revised proposal (PARCA window can close after 20 Business days if no requests received) Month 1Month 2Month 3Month 4Month 5Month 6 PARCA Phase 1 NG NTS publishes info to other Users and opens the PARCA Window 10 Business Days NG NTS publishes notice that the PARCA window is now closed and confirms the number of PARCAs requested within the window 20 Business Days Phase 1 Outputs issued to all PARCA Signatories QSEC Auction Opens QSEC Auction (up to 10 Days) 10 Business Days NG NTS invite Users to participat e in an Ad-hoc QSEC Auction 28 Calendar Days (approx 20 Business Days) QSEC Auction Closes Allocation Up to 10 Business Days NG NTS publishes notice that the PARCA window is now closed as no- one has approached us to sign a PARCA 20 Business Days

19. 19 Ad-Hoc QSEC  No further changes proposed from previous discussions  No introduction of an ad-hoc retainer process at this time  ad-hoc QSECs aspect of the current regime  January retainers are valid for 12 months

20. Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. PARCA (Mod 452) – Licence Change Requirements

21. 21 Background  There is a strong link between the Gas Transmission regulatory and commercial frameworks  The change to the release of incremental capacity through the introduction of a PARCA currently being progressed by UNC Modification 452 also requires Licence changes  There are a number of changes that we are proposing are made to the Licence to complement the PARCA modification  Some of the changes are essential in order for the PARCA modification to work. Others are not essential but the full benefits of the PARCA modification would not be realised without them  Others are Licence tidy ups  timescales

22. 22 Summary of changes ChangeHow?Essential? Default lead time shortenedChange to Special Condition 1A - definitions Yes - to achieve proposed lead times Allow pass through of termination amounts to industry and for NG to recover costs in event of termination Two options: 1) all done in Special Condition 2A 2) done in Special Condition 2A and Special Conditions 5F/G (would also require changes to financial handbook and model) Yes - to allow revenue adjustments Recognition of PARCA, PARCA Applicant, PARCA Termination Amount and Phase 1 PARCA Works Report Change to Special Condition 1A - definitions No – provides clarity by pointing reader to UNC for definition Phase one works funded as excluded services Added to list in Special Condition 11C No – licence does not require definitive list Deletion of reference to permitsChanges to Special Conditions 1A, 5F and 5G to remove references and deletion of Special Condition 2D No – permits currently not in place post 13/14. Proposed changes tidy up licence but could be left in there Revenue Driver tidy upChanges to Special Conditions 5F and 5G No – tidy up of licence conditions to reflect Generic Revenue Driver Methodology likely to be in place

23. 23 Next steps JulyAugSeptOctNovDecJanFebMarApr Panel decision on Consultation Workgroup Report Consultation Period Panel decision on Mod Ofgem decision on Mod Licence Change Consultation Period Ofgem Direct Changes to Licence 56 day period of appeal of proposed Licence changes NG NTS consider responses & make necessary updates Ofgem period of approval Methodology Statements Consultation Period Customer Seminar Ofgem period of approval Generic Revenue Driver Methodology Statement Consultation Period NG NTS request Ofgem consent for a derogation on Licence condition for independent examination of Generic Revenue Driver Methodology changes NG NTS request Ofgem consent for a derogation on Licence condition for independent examination of methodology statement changes NG NTS & Ofgem undertake formal Licence Drafting NG NTS consider responses & make necessary updates Working drafts of documents issued

24. 24 Modification 0452 - Next steps  Revised mod and legal text at further workgroup (to be scheduled)  Final workgroup report at October workgroup