Initial Thoughts on the Release of Non Obligated NTS System Entry Capacity Transmission Workstream 3 rd April 2008

Background (1)  Concept of releasing strips of Non Obligated NTS System Entry Capacity first raised November  Discussions with the Industry reached consensus to postpone until such time as could be considered in more depth.  National Grid NTS have now been asked to revisit and bring ideas forward to April 08 Transmission Workstream with a view to introduce a new product in time for Winter 08/09.  The timeframes involved rule out the introduction of new system functionality, any solution will be based on manual processes utilising existing functionality where possible.  In light of timeframes available we are providing 3 options to form the basis of the discussion.

Background (2)  Some Shippers want monthly blocks released ahead of the winter.  Some Shippers want sub monthly released close to the time of usage.  Both groups would like Firm System Entry Capacity or as a minimum an incentive on National Grid NTS to not interrupt the capacity i.e. some degree of buy-back.  The above products are very different in terms of the complexity involved in developing them through to implementation.

Background (3)  To satisfy either product request National Grid NTS believe a mechanism to release non-obligated system entry capacity outside of the existing auction processes is needed.  National Grid NTS have chosen to focus on the longer term product as:  National Grid NTS have seen a clear demand for the product;  Ability to potentially implement ahead of this winter;  National Grid NTS believe that due to a number of new investments it may be possible to release additional non-obligated capacity this year.  We have put together 3 initial options for discussion at April 08 Transmission Workstream.

Option A – Ad-hoc Release of Non Obligated System Entry Capacity  Ad-hoc Auction Process - National Grid NTS creates new auction to release Firm System Entry Capacity ahead of the winter.  Sold in 1m blocks, more than one month in advance and less than a year ahead.  Quantity made available to be based on a risk assessment at those ASEPs where there was unsatisfied demand at the AMSEC auction.  May require less complex enabling UNC modification.  Potentially minimal system intervention required (expected to be held off-line).  Will be taken into account in the calculation of Trade and Transfer exchange rates (once the capacity has been sold it becomes Obligated Firm System Entry Capacity).  Price paid for the capacity to be equal to or greater than the corresponding MSEC Reserve Price – otherwise there may be significant charging implications.

Option B - Ad-hoc Release of Non-Obligated System Entry Capacity with Buy-Back  Ad-hoc Auction Process.  Sold in 1m blocks, more than one month in advance and less than a year ahead.  May require less complex enabling UNC modification.  Potentially minimal system intervention required (expected to be held off-line).  Associated buy-back e.g. 1 day of capacity to have 1 day of corresponding buy-back.  Not taken account of in calculation of Trade and Transfer exchange rates.  Price paid for the capacity to be equal to or greater than the corresponding MSEC Reserve Price – otherwise there may be significant charging implications.

Option C - Scheduled Release of Non-obligated System Entry Capacity with Buy-Back  Ongoing Auction Process.  System Entry Capacity Released twice per annum [August & March].  Sold in 1m blocks.  Would require detailed UNC modification proposal.  Associated System Entry Capacity Buy-Back e.g. 1 day of capacity to have 1 day of corresponding Buy-Back.  Not taken account of in calculation of Trade and Transfer exchange rates.  Price paid for System Entry Capacity to be equal to or greater than the corresponding MSEC Reserve Price – otherwise significant charging implications.

General Issues  There are a number of issues that will need to be resolved:  Can any of the options be achieved for this year (08/09)?  Do these options have any real value thereafter 2009+?  How would auction interact with Trade and Transfer.  System Requirements  Unable to incorporate into Gemini release pre winter 08/09  How would ad-hoc processes be initiated?  Criteria for determining which ASEPs would participate in these auctions.  What quantities should be released as part of a scheduled or ad hoc release?

Specific issues for System Entry Capacity with associated Buy-Back (1)  Product Classification  Neither Firm nor Interruptible System Entry Capacity  Will need to be included in the SMPS  Assumption being that any associated Buy-Back would be utilised after Interruptible Capacity had been scaled  Revenues/Costs  Impact upon National Grid NTS Entry Capacity Buy-Back incentive  Impact upon existing mechanisms  Use It Or Lose It  Discretionary Interruptible  Overrun Price  Neutrality

Specific issues for System Entry Capacity with associated Buy-Back (2)  Accrued Rights;  Can Capacity be traded?  May undermine the development of the Secondary Market;  Need to assess charging implications;  How would Shippers value the System Entry Capacity as the Trade and Transfer process will move “Firm” System Entry Capacity over and above this release of capacity.

Summary AdvantagesDisadvantages Option A  Potential for additional revenue to be passed to Shippers  Less complex to implement i.e. minimal system set up costs  Firm Product  Will impact upon the Trade and Transfer process  Potentially less Entry Capacity available than in options B and C Option B  Potential for additional revenue to be passed to Shippers  Impact upon Trade and Transfer process is minimised  Increased Entry Capacity may be made available  Not linked to Trade and Transfer process, increased likelihood of Buy-Back being called  Significantly more complex than Option A, as it is a new product Option C  Potential for additional revenue to be passed to Shippers  Impact upon Trade and Transfer process is minimised  Increased Entry Capacity may be made available  More formal and codified process  Not linked to Trade and Transfer process, increased likelihood of Buy-Back being called  More complex than Option B  Embeds an additional process into an already congested schedule  Systems need to be developed to support on-going process

Way Forward  Request Industry view on all 3 options  Views on any alternative approaches