1. Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line. Mod 0333: Update of default System Marginal Prices Transmission Workstream: 9 th November 2010

2. Contents  Progress to date  Balancing performance analysis  Assessment of Mod 0333 against Relevant Objectives  Assessment of any alternative options?  Next Steps

3. Progress to date  Review Group 0291 looked at possible options to update values  Mod 0333 raised using proxy of compressor fuel (injection + withdrawal) & pipeline (space) costs  UNC Panel sent mod to Tx Workstream for up to 3 months, with a target of 1 month mindful of April 2011  Following feedback from October Tx Workstream an option for the Mod has been developed to reflect;  NTS entry & exit capacity charges  1 October Annual Review  Removal of Imbalance volume from methodology  Workstream Report due no later than December Panel

4. Balancing Performance (1) Imbalance volumes  Since 2000/2001 average daily imbalance volume has reduced by 16GWh  This equates to daily reduction of £252k* gross cashout amount  Equivalent to annual reduction of £107M* gross cashout amount  Indication is that introduction of default cashout has provided incentive for users to balance *based on prices @ 29/10/2010; WD price of 1.5457p/kWh Gas Year price of 1.7982p/kWh + average cashout of 0.0305p/kWh Gross cashout volume per day Gross cashout as % of throughput per day Trend of Gross cashout volume Soft Landing Introduced Default Cashout introduced Imbalance tolerances removed

5. Balancing Performance (2) Market Balancing Actions  Residual Balancing volume has also decreased since 2001  Equivalent to annual reduction of 5,497GWh or £9.9M  Reduction in costs should be considered alongside Linepack Measure Incentive & Shipper imbalance performance (previous slide)  Introduction of Linepack Measure Incentive may be expected to increase Residual Balancing volume Linepack incentive introduced

6. Assessment of Mod 0333 against Relevant Objectives  (a) “the coordinated, efficient and economic operation of the pipe-line system to which this licence relates”  Updated default cashout levels will provide a robust proxy for operational costs of managing imbalanced gas volumes  Users will be able to take informed decisions on their use of Linepack flexibility by assessing the benefits and costs of being ‘cashed out’

7. Assessment of Mod 0333 against Relevant Objectives  (d) “so far as is consistent with sub-paragraphs (a) to (c) the securing of effective competition”  Proposed default cashout charges will continue to incentivise users to balance  Users will continue to be encouraged totrade out their imbalance positions efficiently & economically thereby promoting competition and market liquidity  Updated cashout values based on proxy for operational costs will ensure users have greater transparency of the costs of Linepack flexibility & the ability to compare these costs with alternative sources of flexible gas.  Providing improved information will encourage further competition in the provision of flexibility services

8. Assessment of Mod 0333 against Relevant Objectives  (f) “so far as is consistent with sub-paragraphs (a) to (e), the promotion of efficiency in the implementation and administration of the network code and/or the uniform network code”  Introduces mechanism to ensure default cashout prices are updated on an annual basis (more efficient than an annual mod)  (c) “the efficient discharge of the licensee's obligations under this licence”  In proposer’s view, Mod 0333 is the most appropriate update to the default cashout values in line with C27 obligations

9. Summary  Mod 0333 is in the proposer’s view the most appropriate update to the default cashout prices  Reflects a proxy for operational costs of providing linepack flexibility  Maintains current commercial incentive for users to balance (preserves efficient primary balancing role)  Maintains basis for competition and market liquidity to allow users to efficiently and economically trade out imbalance positions

10. Assessment of alternative options?  In previous discussions a number of alternative options have been raised  Would Tx workstream like to take the opportunity to evaluate some / all alternative options against relevant objectives?  Remove default cashout  Use solely compressor costs  Update current storage based methodology  Market based option (% SAP, average bid/offer spread)  Polluter pays, helper get SAP  ?

11. Next Steps  Workstream Report due at December Panel  ??

12. Appendix: Assessment of alternative options? SAP Compressor Costs Update current methodology % SAP SAP & SMP (a) Economic & Efficient operation of the system (Cashout & Residual Balancing volumes) (d) Securing of effective competition (Impact to market liquidity & alternative flexible sources)