1. Review Group 221: Option 3 – security provided after allocation

2. 2 Security Provision Timing Options Discussed by RG221

3. 3 Option 3 – security provided after provisional allocation Option 3 Security is provided within one month of the provisional allocation taking place.  User provides their security within [30] days of the provisional allocation ProsCons This option has the benefit of the User knowing exactly what security is required. User may fail to provide the security and the auction may need to be re-run.. Allows for sufficient time for the security to be put in place. Re-running an auction would affect other QSEC auction participants, incur costs, impact on investment lead times and may impact on the timing of other capacity auctions/processes. The existence of the “defaulting User” may effect the bids or allocations of other Users in the auction. RG Meeting 26 Feb Option 3 identified as preferred option but in the event of a User failing to provide security NG would not look to re-run auction allocations or assess impact on other auction participants

4. 4 Amendments to QSEC auction process to accommodate option 3

5. 5 Does this process work? Scenario 1 – One User bidding for baseline capacity at an existing ASEP  User fails to provide Security  Provisional allocation removed  Unsold baseline capacity considered as part of substitution and/or offered for sale again at next relevant auction  Process Works? – Yes

6. 6 Does this process work? Scenario 2 – One User bidding for Incremental capacity at a new ASEP  User fails to provide Security  Provisional allocation removed  NG will write to Ofgem to inform them that the allocation has been removed and that the revenue driver will not apply  Process works? – Yes* * Process has potential impacts on investment lead time if User does put credit in place

7. 7 Does this process work? Scenario 3 – Multiple Users bidding for Incremental capacity at a new ASEP – for example Milford Haven  Provisional allocations: User A = 100 units, User B = 180 units & User C = 30 units  User A fails to provide Security  Provisional allocation for User A removed  Remaining bids for Users B and C no longer pass Economic Test (300 units required)  Provisional allocation for User B and User C also removed  NG will write to Ofgem to inform them that the allocations have been removed and that the revenue driver will not apply  Users B and C would need to discuss with NG, the prospect of holding an adhoc auction at a later date - investment process delayed pending new auction  Process works? – Yes? 

8. 8 Does this process work? Scenario 4 – Multiple Users bidding for Incremental capacity and baseline at an existing ASEP  Provisional allocations: User A = 100 units, User B = 180 units & User C = 30 units  User A bids for both baseline and incremental but fails to provide Security  Provisional allocation (baseline and incremental) for User A removed  Remaining bids for Users B and C no longer pass Economic Test (300 units required)  Provisional allocation for capacity for User B and User C removed  NG will write to Ofgem to inform them that the allocations have been removed and that the revenue driver will not apply  Baseline is available for substitution  Users B and C would need to discuss prospect of holding an adhoc auction with NG  Process works? –No 

9. 9 Scenario 4 – Multiple Users bidding for Incremental capacity and baseline at an existing ASEP Easington – 2006 QSEC Auction  19 Users buying baseline capacity & 12 Users buying incremental capacity and baseline capacity  Baseline capacity value - £153m & Incremental capacity value - £14m~