Ritchard Hewitt – September 2010 Hybrid Option(s) Ritchard Hewitt – September 2010

Incentive “Hybrid” option What behaviour do we want to incentivise? Current Cashout incentives seek in part to reduce use of day on day linepack service. NG Incentives directly encourage reduced change in Linepack levels. SMP prices set by Residual Balancer actions reflect the cost of both the energy bought and the cost of replacing “utilised” but unavailable Linepack flexibility service. Above incentives therefore could be viewed as being at odds with an objective of maximising the “efficient release” of available linepack flexibility Incentives are however required to encourage “efficient use” of Linepack flexibility This option seeks to strike a balance between the above

Incentive option …. Should the shipper incentives vary according to system position or overall shipper imbalance position?, i.e. Small linepack change / imbalance = moderate (or no?) incentive Larger linepack change / imbalance = greater incentive NB – if Balancing Actions taken then Marginal SMPs still apply Should incentives be different for those who “helped” the system? Do shipper actions on D-1 affect D balancing actions?. If yes – then should the D-1 shipper that “contributed” to the need to balance incur a proportion of the costs of addressing the imbalance on D? If yes – then should the D-1 shipper attribution be the same or different than the D shippers?

Cost Option National Grid Transmission (NGT) is a monopoly Assessment of its service provisions are therefore generally based on “cost reflectivity”. Linepack flexibility service in its simplest possible form is a function of the cost to put a piece of pipe in the ground divided by the amount of linepack it could generate each day over its useful service life plus the injection and withdrawal costs (compressors) But what happens on the day that you run out of pipe…?

Hybrid Option – “Cost + Incentive” This option seeks to combine part of the Cost Option with the Incentive Option. This option has a number of areas where it could be “developed” to either include or exclude certain aspects. These aspects are identified in red text in the slides that follow. This is a strawman and we are seeking comments on its merits and how it may be developed / improved

Hybrid Option – “Cost + Incentive” On “Non - MBA days” the cashout differentials will be set to reflect Mod 333 i.e. cost of providing the “storage” facility plus the costs of injection or withdrawal On “MBA days” the cashout differentials will be set by the SRMC type cost to the Transporter of having to arrange for “short notice” access to more “storage” plus injection and withdrawal MBA = Market Balancing Action as defined in the UNC

“Non - MBA days” This day is one where no Market Balancing Actions were completed and there was no Market Balancing Action on the following Gas Day either. On this day all the Linepack is provided by the system and therefore the cost proposed is one based on the cost of providing an asset capable of delivering this amount of linepack and the Opex needed to operate this asset. More detail in Mod 333. Lets call this a Standard Flexibility Charge or SFC

“MBA Days” “When use of the service outstrips supply”. The amount of available Linepack varies every day and therefore it is inevitable that on some days demand outstrips supply. On these days the Linepack level is maintained within an acceptable range by taking Market Balancing Actions (MBAs). The “cost” of these actions could be considered to be the cost of sourcing and then providing “short notice” linepack. Lets call this “Dynamic Flexibility” MBAs also includes that day’s cost of energy and this should perhaps be factored out?

Strawman Dynamic Flexibility Charge (DFC) Pseudo - Short run cost of linepack flexibility For Long shippers - Suggest this is the weighted average price of all Market Balancing Actions above eod SAP minus EOD SAP price For Short shippers – Suggest this is SAP minus the weighted average price of all MBAs below SAP DFC will be greater than or equal to the SFC charge

Strawman - example Day 0 and Day 1 shippers maintain supplies and demand within acceptable ranges and system pressures are within acceptable limits. No Market Balancing Actions. Initial cashout for Day 0 and Day 1 Short = SAP plus Standard Flexibility Charge (SFC) Long = SAP minus SFC

Strawman Day 1 through to Day 2 shipper imbalances lead to Market Balancing Actions (MBA) on Day 2. Cashout for D2 Short = SMPbuy set by MBAs plus Dynamic Flexibility Charge Long = SMPsell set by MBAs minus DFC Cashout Marginal prices for D1 reset: Replace previous SFC with Day 2 DFC for those shippers who were in the opposite direction to the Day 2 MBA, or Replace Standard Flexibility Charge with Dynamic Flexibility Charge for all shippers What if MBAs on a Day are in both directions? Note – SAP for D1 is not changed

End of Day one position Day One (no MBA) Day 2 Day 3 Shipper position Short Long SAP+SFC SAP-SFC

First step Day 2 Initial cashout of Day 2 shippers Day One (non MBA) Day 2 (MBA) Buy System Short Day 3 Shipper position Short Long SAP+SFC SAP-SFC SMPb + (DFC) SMPs – (DFC) Initial cashout of Day 2 shippers

Now revisit Day one Cashout Day One (non MBA) Day 2 (MBA) Buy System Short Day 3 Shipper position Short Long SAP+SFC SAP-SFC SMPb + DFC SMPs – DFC SAP+(> SFC or D2 DFC) Day one cashout now changes to reflect short shipper’s contribution to Day 2 balancing action

Day 3 – First step Day One (non MBA) Day 2 (MBA) Buy System Short Day 3 (MBA) Sell System Long Shipper position Short Long SAP+SFC SAP-SFC SMPb + DFC SMPs – DFC SMPb + DFC3 SMPs – DFC3 SAP+(> SFC or D2 DFC)

Now revisit Day 2 Cashout Day One (non MBA) Day 2 (MBA) Buy System Short Day 3 (MBA) Sell System Long Shipper position Short Long SAP+SFC SAP-SFC SMPb + DFC SMPs – DFC SMPb + DFC3 SMPs – DFC3 SAP+(> SFC or D2 DFC) As above SMPs – (> Day 2 DFC or Day 3 DFC)

Strawman All revenues from the additional charges to feed into Capacity Neutrality? or Fed back through Balancing Neutrality (SO activity)

Strawman Advantages: Automatic release of Linepack service avoids “auction” option costs and difficulty of establishing amount to release. Cost reflective and yet dynamic and market based when required Maintains existing Daily Clearing process Disadvantages: Does not facilitate shipper “carrying forward” an imbalance position – System is cleared daily as now. Complex clearing process – New systems and audit trails Lack of within day Cashout price discovery

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