1. Why does OTEG need a charging subgroup? OTEG Open Meeting 3 July 2006

2. Why does OTEG need a charging subgroup? What are TNUoS charges? –Price controlled revenue and TNUoS charges How are TNUoS charges currently set? –The TNUoS charging methodology Why is a charging subgroup required? –Work needed to extend the current methodology into the offshore –Proposal

3. Price controlled revenue and TNUoS charges Transmission Licensees NGET SHETL SPT Price controlled revenue Users of the transmission system Generation Demand TNUoS charges GBSO

4. Price controlled revenue An allowed revenue is set for each transmission licensee at the price control Revenue set to recover the cost of installing, operating and maintaining the transmission system The transmission licensees’ charges – equal to the allowed revenue – are paid by the GBSO The GBSO recovers the transmission licensees’ charges from users through TNUoS charges

5. TNUoS charges TNUoS charges should, as far as practicable, recover the allowed revenue The GBSO charges users of the transmission system –Develop and apply a use of system charging methodology –Approved by Ofgem –To be kept under continuous review Charges are for generation or demand use of system and vary by location

6. Current TNUoS charging methodology (1) Separate charges for generation and demand (from 27:73 split of revenue) Two elements (£/kW): –Locational charge –Non-locational charge (or residual) Locational charge from DC loadflow investment cost related pricing (DCLF ICRP) transport model

7. Current TNUoS charging methodology (2) DCLF ICRP transport model assesses the marginal cost of investment in the transmission system as a result of an increase in generation or demand Model takes as the starting point an onshore system comprising secure 400 kV overhead line Adjustments for 132/275 kV line, potential line upgrades, cable, “non-firm” connections…

8. TNUoS charges offshore: Why a charging subgroup is required (1) Indicative charges are an important element when obtaining project financing Current charging methodology is complex, and the model parameters are not suited to offshore systems. For example: –Assumes double-circuit connection (GB SQSS compliant) –No adjustments for AC or HVDC submarine cables –Cannot accommodate “modular” offshore infrastructure –Shorter asset life of offshore infrastructure will result in higher annual revenue requirement

9. TNUoS charges offshore: Why a charging subgroup is required (2) Changes to the charging methodology are time consuming to develop, consult on, notify and implement Will change onshore TNUoS charges (and zones?) Number of options – must be cost-reflective and non-discriminatory Charges will be required for adopted assets

10. Proposal Charging subgroup established –Possibly as subgroup of the Charging Issues Standing Group (CISG) –CISG already considering changes to charging methodology to accommodate “non-firm” connections, e.g. island links Date for publication of draft methodology and indicative tariffs to be added to OTEG timetable