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Mod 452 Update

9th September 2013

2

Agenda

Follow up from August 28th workgroup

PARCA Security and termination options

PARCA window timeline

PARCA triggered Ad-hoc QSEC

Summary of potential licence changes and rationale

Next steps

33

Background

At the August 28th mod 452 workgroup we discussed some alternative draft business rules with you that covered:

Security Requirement for consistent PARCA security regardless of whether

PARCA Phase 2 works are required

Termination cost for PARCA Applicant

Inclusion of a PARCA Window Provides a focal point for customers considering a PARCA

Inclusion of an Ad-hoc QSEC Provides opportunity for unsold Entry capacity to be competed for prior

to its potential reservation under a PARCA

Rationale for change was accepted but further refinement should be considered on certain aspects

Thank you for your feedback

4

Security - Key principles

Security is linked to capacity value

allows a consistent approach regardless of how the reserved capacity will be delivered

Security required is consistent with existing UNC provisions

principles already established and familiar

The security value should not be so high as to become a barrier to entry but not so low to become insignificant

Feedback from August 28th workgroup:

Securitising 100% of capacity value is too high

Capacity pricing is subject to geographical differences which could lead to the value of security being different for similar sized projects

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Calculation of Security Amount: Option 1

Feedback from previous discussions is that ramping up to 100% of total indicative capacity value is too high

Previous option used max capacity quantity for a period of 4 years on exit to determine the security value and capacity requested over a 32 quarter period for entry.

Alternative is to reduce requirement to 1 year of indicative capacity value

Similar to existing UNC capacity security provisions (UNC section V – rolling 12 month security value)

Reducing the requirement to 1 year also allows the calculation to be simplified

6

Option 1: Security amount calculation

Exit:

Total PARCA Security Amount (£) = (PARCAExind / 100) x Qex x 365

Where:

PARCAExind = the indicative NTS Exit Capacity price (p/kWh/Day) for the maximum Capacity requested at the relevant NTS Exit Point

Qex = the maximum amount of Exit Capacity to be Reserved by the PARCA Applicant (kWh/Day) as specified in the Phase 1 PARCA Works Report

Entry:

Total PARCA Security Amount (£) = (PARCAEnind / 100) x Qen x 365

Where:

PARCAEnind = the indicative NTS Entry Capacity clearing price (p/kWh/Day) for the Capacity requested in the relevant quarter at the relevant NTS Entry Point

Qen = the maximum amount of Entry Capacity to be Reserved by the PARCA Applicant (kWh/Day) in any one quarter

7

Examples: Option 1

Two sets of examples using the calculations of one year’s capacity

Entry based on 30GWh

Exit based on 50GWh

Two examples for each using one low and one high capacity price

Security phased over four years

Option 1 Capacity (GWh)

Capacity Price

(p/kWh)

One year's Capacity charge

Year 1 Year 2 Year 3 Year 4

25% 50% 75% 100%

Entry30 0.0001 £10,950 £2,738 £5,475 £8,213 £10,950

30 0.0347 £3,799,650 £949,913 £1,899,825 £2,849,738 £3,799,650

               

Exit50 0.0001 £18,250 £4,563 £9,125 £13,688 £18,250

50 0.0278 £5,073,500 £1,268,375 £2,536,750 £3,805,125 £5,073,500

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Calculation of Security Amount – option 2

Concerns over geographical capacity pricing differences vocalised at previous workgroup

Security value could be derived from an average or weighted average capacity charge

The following table illustrates typical average and weighted average capacity prices based upon different calculations:

Descriptionp/kWh/d

Exit Entry

Straight Average of Prices 0.0090 0.0062

Weighted Average using Baselines x Price (exit) and Obligated level x price (entry) 0.0092 0.0110

Weighted Average based on Bookings 0.0079 0.0098

9

Examples: Option 2

Two sets of examples using the calculations of one year’s capacity

Entry based on 30GWh

Exit based on 50GWh

Using the two examples of weighted averages capacity prices

Security phased over four years

Option 2 Capacity (GWh)

Capacity Price

(p/kWh)

One year's Capacity charge

Year 1 Year 2 Year 3 Year 4

25% 50% 75% 100%

Entry30 0.0110 £1,204,500 £301,125 £602,250 £903,375 £1,204,500

30 0.0098 £1,073,100 £268,275 £536,550 £804,825 £1,073,100

               

Exit50 0.0092 £1,679,000 £419,750 £839,500 £1,259,250 £1,679,000

50 0.0079 £1,441,750 £360,438 £720,875 £1,081,313 £1,441,750

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Examples: Comparison of Option 1 and 2

£1,441,750£1,081,313£720,875£360,438£1,441,7500.007950

£1,679,000£1,259,250£839,500£419,750£1,679,0000.009250Exit

£1,073,100£804,825£536,550£268,275£1,073,1000.009830

£1,204,500£903,375£602,250£301,125£1,204,5000.011030Entry

100%75%50%25%

Year 4Year 3Year 2Year 1One year's Capacity charge

Capacity Price

(p/kWh)

Capacity (GWh)Option 2

£1,441,750£1,081,313£720,875£360,438£1,441,7500.007950

£1,679,000£1,259,250£839,500£419,750£1,679,0000.009250Exit

£1,073,100£804,825£536,550£268,275£1,073,1000.009830

£1,204,500£903,375£602,250£301,125£1,204,5000.011030Entry

100%75%50%25%

Year 4Year 3Year 2Year 1One year's Capacity charge

Capacity Price

(p/kWh)

Capacity (GWh)Option 2

Option 1 Capacity (GWh)

Capacity Price

(p/kWh)

One year's Capacity charge

Year 1 Year 2 Year 3 Year 4

25% 50% 75% 100%

Entry30 0.0001 £10,950 £2,738 £5,475 £8,213 £10,950

30 0.0347 £3,799,650 £949,913 £1,899,825 £2,849,738 £3,799,650

               

Exit50 0.0001 £18,250 £4,563 £9,125 £13,688 £18,250

50 0.0278 £5,073,500 £1,268,375 £2,536,750 £3,805,125 £5,073,500

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Summary of options

Option 1 (using capacity prices) Option 2 (using average price)

Geographical differences remain i.e. similar sized projects could require different

security value

Geography doesn't drive security differences (i.e. security value is purely driven by quantity of capacity required)

adheres to existing principles i.e. UNC security based on 12 months of capacity

value. Capacity pricing cost reflective and help inform where to connect on the NTS

New principle inconsistent with existing UNC security provisions

security value will be consistent with capacity value

may result in security requirement being significantly higher or lower than the

value of capacity reserved

security value derived from capacity charges hence relatively future proofed

difficult to establish appropriate level of unit cost and potential need for future mods

to ensure security level remains appropriate

Not intended to be exhaustive

NG initial view is that option 1 is favourable

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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 Phase 2 is initialised

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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 year of completion will be required

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% of the security amount until allocation

Upon Capacity Allocation the existing UNC security requirements are applied (as detailed under UNC TDP section V)

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Security Amount – Providing Cover (updated)

PARCA Applicants will be required to post annual security to cover the phased Security Amount

August 28th feedback – termination should take into account the day, not the year, termination occurs.

In the event of PARCA termination, a termination amount will be invoiced to the PARCA party

To take into account the effective day of the PARCA termination e.g. if PARCA phase 2 began on January 1st 2015 and PARCA terminates 31st January, the no. of days = 31

Termination Amount = min of ((security amount / 1461*) x no. of days) or security amount

*1461 = 4 years in days

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Funding (no change)

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 licence 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

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PARCA window – further thoughts

Concerns raised at August 28th workgroup that the PARCA phase 1 output will be delayed and can this impact be minimised? e.g. consider closing the PARCA window if no PARCA requests are received

within a determined period

We agree that closing the window early if no further PARCA requests is beneficial

We consider 20 business days from the opening of the PARCA window allows sufficient time for a PARCA application to be submitted allows at least a further 20 business days to agree the PARCA.

the window closes where no PARCA applications are received within 20 business days from the window opening

If PARCA applications are received within 20 business days, the window will close on the earlier of all PARCAs received within the window being agreed, or 40 business days.

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PARCA Phase 1 Activities – original proposal(PARCA Window and Ad-hoc QSEC Auction Timeline)

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

PARCA Phase 1

NG NTS publishes

info to other

Users and opens the

PARCA Window

10 Business Days

NG NTS publishes notice that the

PARCA window is now closed and

confirms the number of PARCAs

requested within the window

40 Business Days

Phase 1 Outputs

issued to all PARCA

Signatories

QSEC Auction Opens

QSEC Auction (up to 10

Days)10 Business

Days

NG NTS invite

Users to participat

e in an Ad-hoc QSEC

Auction

28 Calendar Days

(approx 20 Business

Days)

QSEC Auction Closes

Allocation

Up to 10 Business

Days

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PARCA Phase 1 Activities – revised proposal (PARCA window can close after 20 Business days if no requests received)

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

PARCA Phase 1

NG NTS publishes

info to other

Users and opens the

PARCA Window

10 Business

Days

NG NTS publishes notice that the

PARCA window is now closed and

confirms the number of PARCAs

requested within the window

20 Business Days

Phase 1 Outputs

issued to all PARCA

Signatories

QSEC Auction Opens

QSEC Auction (up to 10

Days)

10 Business

Days

NG NTS invite

Users to participat

e in an Ad-hoc QSEC

Auction

28 Calendar Days

(approx 20 Business

Days)

QSEC Auction Closes

Allocation

Up to 10 Business

Days

NG NTS publishes notice that the

PARCA window is now closed as no-

one has approached us to

sign a PARCA

20 Business Days

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Ad-Hoc QSEC

No further changes proposed from previous discussions

No introduction of an ad-hoc retainer process at this time

ad-hoc QSECs aspect of the current regime

January retainers are valid for 12 months

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PARCA (Mod 452) – Licence Change Requirements

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Background

There is a strong link between the Gas Transmission regulatory and commercial frameworks

The change to the release of incremental capacity through the introduction of a PARCA currently being progressed by UNC Modification 452 also requires Licence changes

There are a number of changes that we are proposing are made to the Licence to complement the PARCA modification

Some of the changes are essential in order for the PARCA modification to work. Others are not essential but the full benefits of the PARCA modification would not be realised without them

Others are Licence tidy ups

timescales

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Summary of changesChange How? Essential?

Default lead time shortened Change to Special Condition 1A - definitions

Yes - to achieve proposed lead times

Allow pass through of termination amounts to industry and for NG to recover costs in event of termination

Two options: 1) all done in Special Condition 2A 2) done in Special Condition 2A and Special Conditions 5F/G (would also require changes to financial handbook and model)

Yes - to allow revenue adjustments

Recognition of PARCA, PARCA Applicant, PARCA Termination Amount and Phase 1 PARCA Works Report

Change to Special Condition 1A - definitions

No – provides clarity by pointing reader to UNC for definition

Phase one works funded as excluded services

Added to list in Special Condition 11C No – licence does not require definitive list

Deletion of reference to permits Changes to Special Conditions 1A, 5F and 5G to remove references and deletion of Special Condition 2D

No – permits currently not in place post 13/14. Proposed changes tidy up licence but could be left in there

Revenue Driver tidy up Changes to Special Conditions 5F and 5G

No – tidy up of licence conditions to reflect Generic Revenue Driver Methodology likely to be in place

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Next steps

July Aug Sept Oct Nov Dec Jan Feb Mar Apr

Panel decision on Consultation

Workgroup Report

Consultation Period

Panel decision on Mod

Ofgem decision on Mod

Licence Change Consultation

Period

Ofgem Direct Changes to

Licence

56 day period of appeal of proposed Licence

changes

NG NTS consider responses &

make necessary updates

Ofgem period of approval

Methodology Statements Consultation Period

Customer Seminar

Ofgem period of approval

Generic Revenue Driver Methodology Statement

Consultation Period

NG NTS request Ofgem consent for a derogation on Licence condition for independent examination of Generic

Revenue Driver Methodology changes

NG NTS request Ofgem consent for a derogation on Licence condition for

independent examination of methodology statement changes

NG NTS & Ofgem undertake formal Licence Drafting

NG NTS consider responses &

make necessary updates

Working drafts of documents issued

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Modification 0452 - Next steps

Revised mod and legal text at further workgroup (to be scheduled)

Final workgroup report at October workgroup