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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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

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

16. 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

17. 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

18. 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

19. 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