1. UNC Mod 485: CMP-LTUIOLI Progress Update 3 April 2014

2. 22 Mod 0485 – progress update  MOD 485 introduced to UNC Work Group 6 th March 2014:  Issues arising:  Concern over trigger for withdrawal  no prior test of congestion – only be apparent at auction where withdrawal offered  Different legal interpretations – should IP be sold out before withdrawal is triggered?  Initial draft: underutilisation test can trigger withdrawal process but no reallocation will occur unless demand exceeds unsold plus voluntary Surrender Offers

3. 33 Mod 0485 – progress update  National Grid view re concern over trigger for withdrawal  NG accepts that current draft could lead to unnecessary workload on TSO, NRA and shippers if withdrawal/justification process progressed where there is unsold capacity greater than 100,000 kWh for the withdrawal period  NG considering inclusion of an additional trigger

4. 44 Mod 0485 – progress update  In addition to underutilisation test, IP must also exhibit contractual congestion to initiate next stage of withdrawal process of inviting shippers to submit “justification”  AMBER Trigger where utilisation less than 80% but for the 12 month withdrawal period there is greater/equal than 100,000kWh of unsold  No justification required  Information provided to Ofgem  Simplest test could be National Grid indicating to Ofgem whether or not unsold is available throughout the auction period. or  Could CMP: Firm DA UIOLI congestion test be applied?  Links to NRA Annual Monitoring Report

5. 5 CMP: Firm DA UIOLI congestion test  CMP text on test used for DA UIOLI which could also be applied to LTUIOLI:  …….it is shown that at interconnection points demand exceeded offer, at the reserve price when auctions are used, in the course of capacity allocation procedures in the year covered by the monitoring report for products for use in either that year or in one of the subsequent two years, (a) for at least three firm capacity products with a duration of one month or (b) for at least two firm capacity products with a duration of one quarter or (c) for at least one firm capacity product with a duration of one year or more or (d) where no firm capacity product with a duration of one month or more has been offered.

6. 66 Mod 0485 – progress update  Concern over zero price paid to shippers for Forward after reallocating withdrawn capacity  Stakeholders argued that forced surrender through withdrawal was sufficiently dissuasive  EC have publically stated that Users should not gain from LTUIOLI but must be at least neutral.  National Grid proposing to align MOD to existing Surrender process such that shippers receive weighted average price for reallocated capacity in withdrawal  We believe this is the simplest approach but will need to be reviewed as part of CAM

7. 77 Mod 0485 – progress update  Some stakeholders expressed that “justification” process for underutilisation is purely between shipper and Ofgem – i.e. no need for National Grid involvement.  National Grid wishes to understand reasoning behind this position but still believes that there are some standard elements that could be included in its monitoring report to Ofgem (e.g. previous unsuccessful Surrender Offers by a shipper)  NG acknowledges that additional elements may require shipper/Ofgem dialogue  National Grid believes that there would be a reduced burden on TSO, NRA and shipper if National Grid includes in its monitoring report some additional information (including any submitted by shipper) that clarifies shipper utilisation. Shipper would decide what clarifications it chooses to submit for inclusion in report.  Additional information provided by shippers directly to Ofgem should sit outside MOD 485

8. 8 Who and what gets monitored?  Underutilisation of capacity at an IP “with an effective contract duration of more than one year”  CMP defines relevant capacity as “only contracts with duration of more than one year or recurring quarters covering at least two years, for bundled and unbundled capacity, are effected by this CMP.”  With this interpretation then in current GB system we propose underutilisation shall be deemed to occur for  Entry, where shippers underutilise 4 consecutive quarters and hold 8 consecutive quarters (e.g. Bacton QSEC Oct13-Sep15)  Exit, underutilisation for exit shall have to occur for a year where shipper holds ESEC or 2 consecutive years of ASEC at IUK or Moffat.

9. 9 Monitoring of Utilisation – draft proposal  What is underutilisation according to CMP?  “the network user uses less than on average 80 % of its contracted capacity both from 1 April until 30 September and from 1 October until 31 March with an effective contract duration of more than one year for which no proper justification could be provided”  Key issue is what to monitor.  For UNC regime it is our view that entitlements rather than holdings should be used to monitor utilisation.  Why choose net entitlement over specific holdings?  In UNC system shippers flow against entitlements not specific capacity contracts  Entitlement takes account of capacity trades  This approach maintains current arrangements.

10. 10 Monitoring of Utilisation – draft proposal  Utilisation determined on a daily basis  Based on:  Shipper’s daily allocation at IP  Shipper’s firm entitlement with “an effective contract duration of more than one year”  As entitlements may differ each day this means need way of calculating “effective contract ……”  Calculated as minimum firm entitlement held over relevant gas day and previous 365 days

11. 11 6 month period Determining effective contract duration > 1 year: - Calculation for each Day (Initial Thoughts) D188 D187 D2 D1 D3 Capacity with effective contract duration > 1 year could vary day to day. For example: For D1: 180 GWh/d For D188: 200 GWh/d 200 180 200 Calculate the effective contract duration > 1 yr for every gas day in period. Daily Allocated Quantity

12. 12

13. 13 Shipper Notification and Justification – Initial Thoughts  NGG notifies Ofgem and all relevant shippers on their utilisation rate at each IP every six months (Oct-Mar, Apr-Sept)  Report utilisation as “traffic lights”  GREEN = utilisation 80% or over  AMBER = utilisation under 80% over 6 month period  AMBER = stays amber if utilisation under 80% over two or more consecutive 6 month periods but no contractual congestion [unsold available see slide 3]  RED = utilisation under 80% over two consecutive 6 month periods and contractual congestion demonstrated – shippers invited to provided information to explain utilisation

14. 14 Shipper Justification  Triggering the LTUIOLI mechanism also requires:  “where that user has not sold or offered under reasonable conditions its unused capacity and where other network users request firm capacity.”  Justification process:  Could include some standard items provided by National Grid (e.g. as unsuccessful Surrender Offers).  Shippers invited to provide evidence for inclusion in Monitoring Report to explain utilisation rate.  Any additional information supplied by shippers to Ofgem sits outside Mod 485.

15. 15 Withdrawal Process  Based on existing surrender process  NGG would submit surrender offers (on behalf of any affected shipper) per calendar month/quarter (or annual quantity) per affected IP  Hierarchy of allocation needs to be considered  Unsold -> voluntary surrender -> withdrawal -> non-obligated  ENTRY  First available AMSEC  EXIT  First available ASEC auction

16. 16 Withdrawal Process for Entry Capacity  Withdrawn capacity will be reallocated where capacity bids exceed unsold available capacity plus voluntary surrender offers  All withdrawn capacity from all relevant shippers would have the same time stamp (which would be after the time stamp of the last voluntary surrender offer)  Any allocation would be prorated amongst relevant shippers  Revenues for resold withdrawn capacity will feed into entry capacity neutrality arrangements  Where withdrawn capacity is reallocated NG NTS will undertake the withdrawal through a Forward Agreement  The capacity management charge (i.e. what the relevant shipper is paid for the Forward) will be as for existing surrender process

17. 17 Withdrawal Process for Entry Capacity  Example using existing surrender process for AMSEC  Individually notify relevant shippers of withdrawal concurrently with invitation to submit surrender offers in AMSEC  Shipper remains liable to pay for any capacity withdrawn  Withdrawal notice will state:  IP  Amount to be withdrawn and treated as a surrender offer  Subject to Ofgem direction all capacity allocated for that shipper could be offered for surrender  Calendar months for which surrender offer applies  Proposed to be at least 1 year – e.g. from start of AMSEC release period but subject to Ofgem direction  First withdrawal could be Feb 2015 for April 2015

18. 18 Withdrawal Process for Entry Capacity

19. 19 Withdrawal Process for Entry Capacity Oct-Mar = 59% utilisation AMBER notification

20. 20 Withdrawal Process for Entry Capacity Oct-Mar = 57% utilisation AMBER notification Apr-Sep = 37% utilisation RED notification

21. 21 Withdrawal Process for Entry Capacity Withdrawal applies to Shipper A’s entitlement for 1 year for period Apr’15 to Mar’16.

22. 22 Withdrawal Process for Entry Capacity NG offers this capacity based on default methodology as a Surrender Offer in AMSEC auction for period Apr’15 to Mar’16.

23. 23 Withdrawal Process for Entry Capacity Shippers allocated this quantity as capacity bids have exceeded unsold available capacity + voluntary surrender offers (note: in this example all entitlement was offered in withdrawal process but only part of it was sold.)

24. 24 Withdrawal Process for Entry Capacity Shipper A left with this quantity after NG carries out Forward Agreement to match quantity sold in AMSEC auction. Entitlement fully retained after withdrawal period.

25. 25 Withdrawal Process for Exit Capacity  Could use existing surrender process for Annual (Flat) Exit  Withdrawal based on capacity allocated to shipper – therefore not relevant if withdrawn capacity is registered as Annual or Enduring  Individually notify relevant shippers of withdrawal concurrently with invitation to submit surrender offers in Annual (Flat) Exit  Shipper remains liable to pay for any capacity withdrawn  Withdrawal notice will state:  IP  Amount to be withdrawn and treated as a surrender offer  All capacity could be offered for surrender  Period for which surrender offer applies  e.g. 1 st October to 30 th September Y+1

26. 26 Long-term Use-it-or-lose-it: Summary  Only triggered if no unsold  Aim to minimise changes to systems and look to utilise existing functionality  Uses transparent utilisation test  Withdrawal process also requires point to be congested  Allow period for shipper challenge to “justify” utilisation  Withdrawal based on existing surrender processes (arising from Mod 449) until CAM is implemented  Utilisation monitoring from 1 st October 2013  First report ~April 2014  LTUIOLI withdrawal instruction from Ofgem could occur post- October 2014  First withdrawal could be Feb 2015 AMSEC auction for entry and July 2015 for annual enduring exit