Entry Capacity Substitution: Discussion Document Transmission Workstream 7 th August 2008 Initial Analysis of Responses

2 Introduction  National Grid has held a series of workshops to aid:  understanding of the Entry Capacity Substitution policy; and  development of an Entry Capacity Substitution Methodology Statement.  On 7 th July 2008 National Grid published a “discussion draft” of the Entry Capacity Substitution Methodology Statement.  A number of specific issues were identified in the workshops and views have been sought on these issues.  On 9 th July at Substitution Workshop 4 these questions were reviewed.  Clarification note and supplementary questions raised on 17 th July.  Consultation closed on 4 th August 2008.

3 Responses  The following organisations submitted a response:  Excelerate Energy, Gassco AS, RWE npower, Association of Electricity Producers, Statoil (UK) Ltd, Centrica Storage Ltd, Chevron North Sea Limited, Interconnector (UK) Ltd, Scottish and Southern Energy, Centrica Energy, BG Gas Services, Scottish Power, BP Gas Marketing.  Initial high-level assessment of the results are provided in this presentation.  Copies of responses can be found on the National Grid website at: nsportation/ecms/

4 General Comments  Support for the principle of Entry Capacity Substitution  Avoid sterilisation of assets and unnecessary investment  All respondents expressed concern at potential consequences  Loss of flexibility / security of supply / consumer prices  Negative impact on new UKCS / storage developments  Overwhelming support for Impact Assessment which should consider:  Other recent regime changes; e.g. baselines, T&T.;  Impact on exit;  Cost / benefit analysis of identified options;  Impact on security of supply, competition, prices.  Phased introduction with regular review of the methodology

5 Question 1: Interpretation of “Minimising Costs” General agreement with National Grid’s interpretation of the Licence; that all available capacity should be substituted to meet the incremental signal, without placing any restrictions on the substitution process. But concern that the interpretation is inappropriate given that the current proposals…  reflect neither the spirit nor intent of Ofgem’s policy decision;  conflict with “economic and efficient” obligations;  do not take account of the impact on the wider gas market;  Hence support for limiting the scope for substitution to take place.

6 Question 2/3/5/6: Miscellaneous NPV Test and Lead-Time General support for consistency between capacity released via substitution and via investment; Single Quarter Issue Mainly in support of no action; Later review. Entry Zones Mainly in support of retaining zones; Use for sharing the “pain” at multiple donor ASEPs; Restrict substitution to within zone.

7 Question 7/8/10/11/12: Miscellaneous Recipient ASEP Merit Order Few comments; question whether Lowest Revenue Driver is consistent with minimising investment. NG Discretion vs Rigid Methodology Mixed response; Need flexibility to avoid undesirable outcomes; but Loss of transparency, scope for challenge Increased complexity through audit / regulatory scrutiny; Some support for Ofgem discretion over NG capacity release proposals. New ASEPs Support for transitional rule excluding stand-alone auctions from substitution; Some support for making this a permanent rule. Other Transitional Rules Delay or phase introduction of substitution; Exclude specific ASEP from being donor ASEPs.

8 Question 4: Substitutable Capacity  Support expressed for increasing the amount of capacity withheld from QSEC to the previous level of 20% of baseline (one opposed to this view);  Recognition that this requires Licence change;  30% suggested as previous 20% level was in the absence of the effects of substitution.  Strong support for limiting the quantity of capacity available for substitution;  Based on historic flows (4 support, 2 oppose)  Based on TBE forecasts (4 support, 2 oppose)  Limited by [20%] of baseline limit (5 support)  Aggregate limit applied (1 support)  Some support for no substitution (possibly at specific ASEPs) for 5 years or until next PCR.

9 Question 9: Restriction on Substitution of Available Capacity  Most respondents support limiting how “substitutable” capacity is used.  All but two support an exchange rate cap  1:1 (3 responses)  “Low single figures” (1 response)  1.5 (1 response)  No limit specified (3 responses)  Three responses support and one oppose pro-rating across all donor ASEPs in a zone or some other means of “sharing” capacity reductions.  Only one comment (against) on limiting substitution to within zone.

10 General Questions: Impact Assessment  A: Impact Assessment.  Overwhelming support for Impact Assessment.  B / C / D: Economic and Efficient / Security of Supply / Consumer Prices.  Adverse effects anticipated but not quantified. Perceived risks outweigh potential benefits.  Cover in Impact Assessment.  E: Ofgem Discretionary Powers.  Support for Ofgem discretion to over-rule NG capacity release proposals (i.e. substitution) where the methodology has been followed but outcomes are plainly undesirable.

11 Next Steps  National Grid / Ofgem to discuss implication of consultation responses;  Finalise policy / processes.  National Grid to finalise proposed Entry Capacity Substitution Methodology Statement;  This is likely to be in early November.