Review of the UNC Post-emergency Arrangements Workshop 1 March 2009

2 Review of UNC Post-emergency Arrangements background  Various proposals have been made to the UNC Emergency Arrangements in relation to industry concerns  In the latest Proposal, Ofgem’s 0149a decision letter advised it would welcome further progression on:- attracting non-UKCS supplies into the UK, the introduction of dynamic pricing and, mitigating the effects of potentially spiralling prices  National Grid remains mindful of concerns raised by the community and Ofgem during the progression of 149/149a  National Grid believes there is merit in reviewing and modifying the existing UNC Post- emergency ‘Claims’ process with the objective of addressing some of those concerns  A strawman has been drafted to consider pragmatic changes for discussion and development with the community at the Transmission Workstream (Note: proposed changes would have no effect on the role of the NEC nor shippers’ GSMR obligations)

3 Review of UNC Post-emergency Arrangements suggested timetable  Discuss/develop at Transmission Workstream – February/May 2009  ‘workshops’ in March/April 2009  might be a requirement for additional meetings; for example, to define/agree detailed claim validation rules  Send draft proposal to UNC Mod Panel - May/June 2009 recommend to consultation  Final Mod Report & Mod Panel - July/August 2009  Ofgem decision August/September 2009  Implementation 1 st October 2009

4 Review of UNC Post-emergency Arrangements primary objectives General:  To develop and implement robust, well defined UNC Post-emergency Claims Arrangements To facilitate and, recognise shippers that:  Put in place commercial arrangements prior to a GDE taking place  Provide additional supplies into the UK with a fair expectation that they will receive appropriate financial recompense where appropriate  Provide additional firm demand-side reduction prior to entering into, or during, a GDE Stage 3  Seek to address their imbalance To introduce:  Ring-fencing of the costs of providing additional supplies/reducing demand during a GDE  Dampened cost apportionment as a result of revised post-emergency claims arrangements  Market transparency (of costs and prices) through the use of OCM Physical Market Offers during a GDE

5 Review of UNC Post-emergency Arrangements existing arrangements A User may submit a claim (for each Gas Day within a GDE); - To recover financial loss (in excess of frozen SAP) for delivery of gas to the Total System - May only claim against its long Daily Imbalance quantity Gas Deficit Emergency (Stage 2+) - Users with long imbalances are cashed-out at frozen SAP - Triggers UNC Section Q (Post Emergency Claims) National Grid NTS - Shall appoint a ‘claims reviewer’ to assess each claim - Valid claims are subsequently paid and recovered through Balancing Neutrality Issues: - There are no defined timescales to these arrangements - There is no market transparency of the potential costs of the emergency or commercial exposure until the claims are processed through Balancing Neutrality (possibly several months after the GDE) - Users have little guarantee that they will receive payment at the claimed price - Emergency claims assessment (validation) rules are not clearly defined - Recovery of costs is against all Users; including those with a long Daily Imbalance

6 Review of UNC Post-emergency Arrangements proposed arrangements Emergency cashout prices  No changes are proposed to the derivation of the emergency cashout prices (frozen at Stage 2) Post-emergency Arrangements - claims In addition to UNC section Q section 4.2.6: e.g. appointment of an individual claims agent:  In order to submit emergency claims, shippers will be required to have posted additional supplies and/or demand-side reduction (quantity and price) as offers to sell on the OCM physical market during the GDE  These physical offers might be taken as trades by shippers that are short – cleared through existing OCM rules and therefore would not be eligible for progression through the revised claims arrangements  Any offers remaining on the OCM at the end of each Gas Day of the GDE can be submitted as potential claims – however, only the quantity of gas over-delivered by that shipper (for each Gas Day) for the duration of the GDE (daily balance) can be claimed  The costs of the Σ claims will be targeted against shippers that have a short imbalance position; based on the weighted average price (p/kWh) of all valid emergency claims multiplied by the shipper’s short imbalance quantity (kWh)  Any under-over recovery of emergency claims costs will be smeared across all shippers through Balancing Neutrality

7 Review of UNC Post-emergency Arrangements overview of proposed arrangements Emergency cashout (Daily imbalance) SMP Buy SAP Prices GDE Stage 2 Daily emergency cashout and emergency claims process following a GDE (Stage 2+) Emergency Claims (1) cost-targeting (Short imbalance) “Emergency Claims Neutrality Charge” (wapoec * imbalance) Emergency Claims (2) under/over recovery of costs If any under/over- recovery of emergency claims costs from previous step then residue is apportioned through Neutrality No UNC changes are proposedProposed UNC changes to post emergency claims arrangements Valid OCM physical offers (not taken as trades)

8 Review of UNC Post-emergency Arrangements advantages The emergency cashout price (s) remain unchanged u Addresses several key concerns raised during the progression of 149/149a  Provides non-UKCS shippers with greater confidence they will receive payment for additional supplies of gas  Enhances the existing incentives for a shipper to address its short imbalance position  Utilising the OCM physical market in this manner facilitates the transparency of the prices and costs of gas during an emergency and allows shippers to estimate their commercial exposure  Ring-fences the costs of the emergency and extends the period over which the costs of the emergency are invoiced  Does not require any material changes to the NEC Safety Case nor, impinge on shippers’ obligations to comply with their safety obligations / NEC instructions

9 Review of UNC Post-emergency Arrangements disadvantages  Cost targeting of emergency claims against those shippers with a short imbalance following a GDE might be viewed as inappropriate to the extent that a shipper has the ability to mitigate its risk  Utilisation of the OCM physical market during an emergency in this manner might be construed as discriminatory by certain Users e.g. those without physical capability  Delayed timescales for cost recovery (through Claims process) might continue to deter non-UKCS shippers from committing additional supplies to the UK during a GDE

10 Review of UNC Post-emergency Arrangements Any questions (so far) ?