PARCA Security and Termination Amounts Option for Using a consistent approach under the PARCA Regime Transmission Workgroup 28 August 2013

Agenda Option for applying a consistent methodology for the calculation of security / termination amounts for PARCA Phase 2 Rationale Calculation for Entry and Exit Phasing of Security Funding Examples Funding / Charging impact

Why consider a change in the approach? This option is based on a single revenue driver Based on RIIO-T1 rules for additional funding allowances To provide a consistent approach for all Applicants irrespective of whether investment is needed Divorces costs from security and moving to capacity based calculation Provides one method of calculation based on capacity Familiar calculation used in User Commitment

Calculation of Security Amount - Entry Based on User Commitment principles already established For Entry Total PARCA Security Amount Entry (£) = (PARCAEnind1 / 100 x Qen1) + (PARCAEnind2 /100 x Qen2) + (PARCAEnind3 / 100 x Qen3) + (PARCAEnind4 / 100 x Qen4)……+ (PARCAEnindn / 100 x Qenn) Where: PARCAEnind = the indicative clearing price for each individual quarter for the Quarterly NTS Entry Capacity requested for Quarters 1 to n where n is the last quarter of capacity requested and confirmed by the PARCA Applicant. Qen = total Quarterly NTS Entry Capacity quantity requested in the PARCA for each day for each quarter, for the first quarter up to and including the last quarter, n, for which capacity is requested. n = a maximum of 32 quarters

Calculation of Security Amount - Exit Based on User Commitment principles already established For Exit Total PARCA Security Amount Exit (£) = PARCAExind / 100 x Qex x (365*4+1) Where: PARCAExind = the indicative NTS Exit Capacity price (p/kWh/Day) for the relevant Enduring Annual NTS Exit (Flat) Capacity at the NTS Exit Point included in the Phase 1 PARCA Works Report. (Note: This price may differ from the actual price determined at a later date and used to calculate actual transportation charges) Qex = the maximum amount of Enduring Annual NTS Exit (Flat) Capacity to be Reserved by the PARCA Applicant (kWh/Day) as specified in the Phase 1 PARCA Works Report

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 the PARCA is signed and progression into Phase 2 is confirmed

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 point will be required as security 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% until allocation Upon Capacity Allocation the requirement to put in place security for Phase 2 will cease and existing UNC requirements are applied

Security Amount – Providing Cover PARCA Applicants will be required to post security to cover the Security Amount Security can be provided in accordance with existing UNC requirements In the event of termination, the value of the security amount will be invoiced to the PARCA Applicant In the event of non payment, security can be used

Funding 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 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

Termination during Phase 2 - Examples Example 1 - Termination where costs are lower than security

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 PARCA requires customer to put in place £7m security per year £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £7m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564 -£5.564 NG spends £10m over two years The Totex Incentive Mechanism (TIM) compares expenditure against allowances and makes an adjustment to allowed revenues. Considers each year as a £5m overspend as there is no revenue allowance at this stage There is no allowance as this doesn’t get triggered until allocation

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £7m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564 -£5.564 Termination charge £14m -£14m Customer terminates so must pay a Termination amount equivalent to the security accrued so far

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £7m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564m -£5.564m Termination charge £14m -£14m +£14m Allowance adjustment £4.436m +£4.436m -£4.436m Adjustment is made to allowed revenue to pass termination charge through to industry As the PARCA is terminated, NG recovers the efficiently incurred costs, multiplied by the TIM efficiency rate to recognise the amount already received

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £7m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564m -£5.564m Termination charge £14m -£14m +£14m Allowance adjustment £4.436m +£4.436m -£4.436m FINAL POSITION Neutral +£4m

Termination during Phase 2 - Examples Example 2 - Termination where costs are greater than security

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 PARCA requires customer to put in place £2.5m security per year £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £2.5m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564 -£5.564 NG spends £10m over two years The Totex Incentive Mechanism (TIM) compares expenditure against allowances and makes an adjustment to allowed revenues. Considers each year as a £5m overspend as there is no revenue allowance at this stage There is no allowance as this doesn’t get triggered until allocation

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £2.5m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564 -£5.564 Termination charge -£5m Customer terminates so must pay a Termination amount equivalent to the security accrued so far

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £2.5m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564m -£5.564m Termination charge -£5m +£5m Allowance adjustment £4.436m +£4.436m -£4.436m Adjustment is made to allowed revenue to pass termination charge through to industry As the PARCA is terminated, NG recovers the efficiently incurred costs, multiplied by the TIM efficiency rate to recognise the amount already received

PARCA Applicant terminates Yr 1 Yr 2 Yr 3 Yr 4 £5m spent £5m spent Yr1 Yr2 Yr3 Yr4 NG Total Customer Industry Customer Security £2.5m NG spends £5m -£10m Allowance £0m NG receives through TIM £2.782m +£5.564m -£5.564m Termination charge -£5m +£5m Allowance adjustment £4.436m +£4.436m -£4.436m FINAL POSITION Neutral