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. 0504 -Development of a Demand Side Response Methodology 02 July 2014

2. 2 AGENDA Development of a DSR Methodology 1.Development Background 2.Broad Structure of proposed DSR so far 3.Key Issues 4.Proposed Workgroup Schedule 5.Issue 1: a)What is the DSR Product – Turn Down to/ Turn Down by

3. 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. DSR Development Background

4. Significant Code Review (SCR) Security of Supply (SoS) Background  Ofgem Raised in January 2011  Aim of the Gas SoS SCR:  to reduce the likelihood, severity and duration of an emergency;  ensure market arrangements provide appropriate incentives on shippers to maintain SoS  In the context of the Customer: Key issue the SCR sought to address was:  cost of involuntary demand reduction in an Emergency, i.e. Firm Load Shedding (FLS) is not factored into cashout price, therefore much of the risk sits with consumer; Develop appropriate payment arrangements for voluntary and involuntary DSR

5. SCR Proposed DSR Compensation Payment Price (without DSR Methodology in place)  Daily Read sites Firm Load Shed at GDE Stage 2 will receive a DSR payment based on; Unit Price = 30 day average SAP price (set on the Day preceding entering into Stage 2 GDE) per kWh Entitlement for this payment will be for each day of the Daily Read site’s curtailment during the GDE (subject to stage 3 isolation).

6. A Draft Licence Obligation on NGG to develop a DSR Mechanism in consultation with the industry. (Statutory Licence Consultation Summer 2015) Introduction of the DSR Licence Obligation  Ofgem’s SCR SoS Review – Final Policy Decision issued 12 February 2014 Included as part of consultation:

7. Proposed DSR Licence Obligation  Draft Licence Condition on NGG to;  Develop a draft DSR Methodology, in consultation with stakeholders; and  Submit the DSR Methodology, to the Authority, by March 2015  Where directed by the Authority run a trial (paper based) of the DSR Methodology; and  Report back to the Authority on the outcome of the trial; and  Subject to the trial, implement the DSR Mechanism and Methodology by winter 2016/17.

8. DSR Methodology and Mechanism Timescales SC8I draft published 12/02/2014 201420152016 Submit a draft Methodology to Ofgem May 2014 – Jan 2015 Consultation closes 09/04/2014 01/03/2015 Industry Development of a draft DSR Methodology & DSR Mechanism May – Jul Run Trial (subject to Authority Direction) Sep - Dec Final Modification and consult Implement methodology & mechanism 01/10/2016 Submit report on trial to Ofgem ??? ? Ofgem decision ? Feb - Sep System Design, Build, Test & Implementation ? Summer 2014 Stat consultation on Licence changes

9. SC8I – ‘Development and Implementation of a DSR Methodology for use after a GDW’ proposed timeline 13 June 2014SC8I licence drafting due to be submitted for statutory consultation on the 13th June 2014 16 July 2014Consultation Closeout Sept 2014Publish Authority decision on the SC8I Licence drafting and the SoS SCR legal text

10. Development process so far: 10  Since April, NGG has held DSR Development meetings with industry parties (End Users, Shippers and Suppliers) to understand needs, opinions, concerns and ideas  New engagement opportunities with ~ 60 stakeholders  Outcome of meetings, and Ofgem SCR SoS policy decision consultation responses, provide initial building blocks for DSR Methodology draft strawman  Continued development of DSR Methodology would now benefit from a more centralised collaborative industry engagement.

11. UNC Modification 0504 11 19 June 2014 - Proposal submitted for Panel direction – recommending workgroup development 02 July 2014 – First DSR Development Workgroup – to agree workgroup schedule, ToRs, Issues to be addressed July – December 2014 – Run a suite of Workgroups to develop the DSR Methodology and address outstanding issues

12. 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. Initial Structure of the Proposed DSR

13. DSR Licence Condition  Ofgem’s key principles for DSR Development are:  To create “route to market” for additional DSR and not prevent commercial interruption from emerging  Reveal price for DSR and factor into Cashout  Minimise market distortions, and  Be compatible with existing market arrangements

14. Feedback suggests that any DSR mechanism should focus on providing the Customer with; Confidence that product is only utilised by NG Confidence that product will only by utilised on specified occasions Flexibility for customers to respond to price changes and volume availability Provision that any customer offer, to reduce offtake, must be compatible with their operational schedules Simple route to market, familiar platform, easy to access & use, as not expected to be frequently utilised

15. Key Features of the DSR Mechanism Trigger Gas Deficit Warning (GDW) DSR Offers accepted from GDW up to end of stage 1 GDE (NGG still in the market) Three way party interaction – NGG to Shipper/Supplier (on behalf of Customer) DSR Offers only accepted by NGG DSR Offer prices held in price stack order with all other OCM offers price - lowest price in stack first accepted DSR offer could be made in Tranches As DSR mechanism on an OCM platform has potential to feed automatically into Energy Balancing system clearing contract DMC (site > 2 Million therms per annum)

16. Key areas of the DSR Methodology 1.Eligibility rules for Participation in the DSR Tender Process 2.Definition of DSR product and service 3.Timescales of the DSR service 4. DSR Process - contractual arrangements 5.DSR Mechanism submission process and operational arrangements: -DSR Offer posting process -DSR Offer acceptance process 6.DSR Service Fees 7.DSR offer price feed into daily Cashout price (real-time) 8.Payment and Settlement arrangements; -Pre Stage 2 -Post Stage 2 (including settlement process for DSR offers not that were not accepted through the DSR mechanism) 9.Payments, Costs, Expenses and Liabilities for failing to deliver DSR 16 We need to ensure that development of key areas complies with key principles set out the DSR Licence Condition

17. 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. Key Issues

18. Ofgem’s Final Policy Decision Document  Ofgem’s view is that: a DSR methodology would be unlikely to meet the principles if it included:  CCGT involvement;  Option fees;  And there was merit in development of:  A market based mechanism facilitated by the SO Ofgem expressed support for the development of a market based approach as described by NGG

19. Issues identified by the Industry Key Issues I1DSR productTurn down to / Turn down by I2Eligibility rulesGas Fired Generation eligibility and interaction with Electricity Market Reform I3Contractual Relationships Define contractual arrangements between Shipper/Supplier and end consumers facilitating transactions, contractual relationships, liabilities and how contracts should be reported on under existing regulatory requirements I4DSR TrialDefine trial success criteria, volumetrics will need to be established to ensure viability of mechanism I5OCM platformNeed to understand the costs associated with OCM development and implementation I6Option Fees 19 Resolution of these Issues needs to be consistent with the key principles set out the DSR Licence Condition

20. 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. Proposed Workgroup Schedules

21. 0504 Workgroup meeting schedule: All 0504 workgroup sessions will be held at: 31 Homer Road, Solihull, West Midlands WG1: Wed, Jul 2, 2014 10:30 WG2: Wed, Aug 13, 2014 10:30 WG3: Wed, Sep 10, 2014 10:30 WG4: Mon, Oct 13, 2014 10:30 WG5: Tue, Nov 11, 2014 10:30 21 Contact the Joint Office of Gas Transporters to request attendance on: Tel: 0121 288 2107 Email: enquiries@gasgovernance.co.ukenquiries@gasgovernance.co.uk

22. Scheduling of Issues and development areas Proposed Workgroup agenda schedule WG1-Background, agreement of TORs, Scheduling of Issues and key areas to be developed. -Issue 1: What is the DSR product, Turn down to or turn down by? WG2Issue – Key Area – WG3Issue – Key Area - WG4Issue – Key Area – WG5Draft and agreement of Workgroup report 22 Planning and agreement of schedule and agenda items

23. 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. Turn Down To Vs Turn Down By

24. What is the product – Turn Down To versus Turn Down By or hybrid ? Actual Load Offtaken On Day Expected Volume available to NGG Need to fully understand the issues and requirements of Customers, Shippers and NGG Reduced offtake Scheduled Offtake for Day Actual Load Offtaken On Day Increased offtake Example 1: Scheduled Offtake for Day Example 2:

25. Features of the DSR mechanism – Offer Volume  Offers to be for a volume of energy (kWh)  End User may offer several tranches of volume  For instance: 5% (plant can run between 100% and 95%) 10% (Minimum Operational Load = 85%) @ 6 Hours notice With high risk of tripping off costed in to offer 30% site minimum Gas required to protect plant load 55% (manufacturing shut down) 3 day Start up costs ~ £0.5M

26. DSR mechanism three way party interaction End User Offers to reduce gas offtake NGG Accept Offers for volume Shipper Offers Volume on the OCM (to NGG only) cost and risk mitigation certainty of volume & level cashout exposure certainty of volume for safety purposes

27. Turn Down To: 27 The End User will define and offer a level which they will cease to flow above, the End User defined p/unit rate will be applied ex-post to any volume reduction Pros:Preference for some End Users that don’t monitor their gas usage on the day but understand the minimum they need to protect essential operations Cons:Volumes of response will not be known on the day. System Operator will not know what volumes of physical response have been effected, or whether it is an efficient action likely to assist in prevention of the emergency. Cannot be priced into SAP, can only set SMP Buy price due to volume uncertainty End User won’t have knowledge of final compensation level until after the day, as ex-post process will calculate volume. Volume uncertainty leads to increased uncertainty for the shipper/supplier in terms of balancing their portfolio - an increased cashout risk

28. Turn down by DSR product: 28 The End User defines and offers a quantity that it commits to reduce load by, from the prevailing nomination level. This volume will be an End User determine p/unit rate. Pros:System Operator has more certainty, on the day, of the volume associated with accepted DSR Offers and is better able to access whether accepting such offers is likely prevent escalation into an emergency with in the day. The accepted DSR Offers can be fully reflected in both SAP and SMP Buy within day. End Users can define tranches of load reduction – still allowing protection of a minimum load akin to turn down to, which enables End Users to value and offer discrete levels of load. Cons:Some End Users consider they are unable to participate in this style of product due to uncertainty around their load volume on the day.

29. DSR as a Risk mitigation tool  Would expect Gas prices to rise during a sustained period of high supply demand deficit.  We have been told that prices may reach levels where it may not be economic to continue to manufacture.  The DSR mechanism may provide a risk mitigation tool to recover some of the costs which result from reduction in production.  Reduction in gas offtake may help maintain more critical loads and avoid the system progressing into emergency

30. Next Steps  Draft initial strawman proposal - August  One page, high level email summary of discussions and updates on key issues and developments to be issued following each workgroup session.  DSR expressions of interest Feedback Survey to be published to End Consumers.  Any further views/issues/concerns you may wish to discuss further please get in touch: Claire.thorneywork@nationalgrid.comClaire.thorneywork@nationalgrid.com Tel : 01926 656383: or Darren.lond@nationalgrid.com Tel:01926 653493Darren.lond@nationalgrid.comTel:01926