Entry Capacity Substitution Workshop 9 – 7 th July 2009 DRAFT PRESENTATION.

Entry Capacity Substitution Workshop 9 – 7th July 2009DRAFT PRESENTATION

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Overview

After the informal consultation Ofgem has made clear, in their letter of 3rd July,

that they would not approve an Entry Capacity Substitution methodology based

on future forecast flows, i.e. the Mechanical Approach.

National Grid has therefore reviewed the remaining two options.

Unfortunately National Grid does not believe that the Two-Stage Auction can be

implemented for March 2010.

Hence National Grid is proposing to put forward the Option Approach for formal

consultation.

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Agenda

Review / further development of proposals

Two-stage Auction

Option Approach

Next Steps

Entry Capacity Substitution Two Stage Auction

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National Grid views

Two-stage Auction

Full User commitment required (or possibly no User commitment if no incremental signal). Assumes unsold = unwanted Forces Users to commit earlier than they may feel able

Particularly relevant to short-term players, marginal fields.

Implementation is highly complex and uncertain (see timeline) Alters QSEC processes by reducing number of bid windows Uses mixture of auction functionality Depends on a major change to UNC (i.e. credit) to be implemented.

Since this proposal was first considered new “credit” arrangements have been proposed which would adjust the QSEC timeline to make implementation of 2-stage auction more challenging.

Systems implication of credit interactions need to be confirmed, e.g. to remove stage 2 allocations if credit check fails.

Further UNC change may be required to accommodate credit processes for stage 2.

Hence we do not intend to pursue this approach for March 2010.

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STAGE 2: 3 roundsObligated only

Two Stage Auction – Proposed March 2010 timeline

1 2 3 4 5 6 7 8 9 10 11 12 13 14

STAGE 1: Five roundsObligated & incremental

Stage 1closed

Allocations madeon Gemini

Stage 1 QSECopened

NPV testIncremental capacity identified

Info published for each ASEP:

Total sold & quantity passing NPV test

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Stage 2 opened

Stage 2 closed

Earliest start date. AMSEC run in Feb.

Latest end date. 42 month lead time

starts.

Shippers review position

Reduced from current 10 rounds. Min 5 requested.

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STAGE 2: 3 roundsObligated only

Two Stage Auction – Proposed March 2010 timelinePotential Impact of Entry Credit Mod Proposals

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Stage 1closed

Stage 1allocations made on Gemini

Stage 1 QSECopened

NPV testIncremental

capacity identified

Info published for each ASEP:

Total sold & quantity passing NPV test

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Stage 2 opened

Stage 2 closed

Shippers review

position

Potential discontinuity

Credit proposals are subject to Ofgem Impact Assessment which is not expected to conclude until late August. Hence the Two-Stage auction presents a challenge to accommodate within the available time.

One day after each bid window for credit checks.

STAGE 1: Five roundsObligated & incremental

Entry Capacity Substitution Option Model

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National Grid views

Option Approach.

A good compromise between the two extremes.

Requires User Commitment May be considered too small at some ASEPs. Or too high at others (where reserve price is low). But, could be zero cost if capacity is booked.

Relies on Shippers’ assessment of needs not National Grid judgement.

Relatively simple to implement. No impact on QSEC processes for Shippers.

Except for participation in the earlier Options Window

No major impact on QSEC processes for National Grid. Allocations rules / process need to be managed; “Tracking” of Options will be required: Both may require future IT development.

Further clarity on how the Option process would work has been provided (see subsequent slides).

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Option Approach

Capacity at an ASEP would be prevented from being substituted in response to an incremental signal elsewhere.

This would be subject to a signal and commitment from Shippers by way of an “Option”.

The Option

does not give rights to the Shipper to use the capacity covered by the Option;

does not give the Shipper first option to buy the capacity; but

it would reserve capacity at the relevant ASEP.

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Option Approach – What is the Option?

It is proposed that the Option:

identifies and excludes capacity from substitution processes thereby protecting capacity for the duration of the Option;

nominally applies in respect of Q3 Y+4, i.e. from the default 42 month lead-time, for the purposes of defining refunds;

will still prevent capacity being substituted away if the incremental capacity is allocated earlier or later than the default lead time;

is placed ahead of QSEC and applies for 12 months,

i.e. covers (normally) one QSEC and any ad-hoc QSECs before the next option window.

will be subject to a one-off Option Fee. This will be a fixed price per unit of capacity and will be the same for all ASEPs. The Option Fee shall be:

£32,120 per mcmd of capacity covered by the Option.

This is derived from minimum reserve price * 32 quarters.

i.e. 1 mcmd * 11 * 10^6 (convert to kWh/day) * 0.0001 p * 365 * 8 / 100 (convert p to £)

will be pro-rated if available capacity is exceeded.

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Option Approach – What is the Option?

The Option will not:

prevent other Shippers (or the relevant Shipper) buying capacity at that ASEP in the period covered by the Option;

be sold in quantities above the quantity available in QSEC (usually 90% baseline – sold);

be available to non-Users. This is due to complications with potential refunds. However, extending the process to non-Users could be an option to be considered for 2011.

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90 % of baseline capacity.

(May be higher if incremental capacity has previously been

released).

Time

Diagram 1: Capacity Available for Substitution at Donor ASEPsOption Approach

Capacity release date at recipient ASEP(usually 42 months)

Sold capacity

Capacity.

Option quantity

Available capacity for substitution

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Diagram 2: Capacity Allocation at ASEPs with Options

Existing Sold Capacity

“Unprotected”

Options Quantity

Post-auction allocations

Sold Capacity

Options Quantity

“Unprotected”

90% baseline

Capacity

Pre-auction capacity

Withheld from QSEC

Baseline capacity

Unsold Capacity

New Sold Capacity

Withheld from QSEC

Unprotected capacity will be allocated first,

then capacity under Option.

New Sold Capacity

NB: In respect of subsequent QSEC and AMSEC auctions the Shipper taking out an Option will be allocated the protect capacity, thereby triggering the refund.

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The Option Window

It is proposed that: The Option Window will be open for 2 “bid days” from [8am to 5pm].;

There will be one day between the bid days;

Option requests will not be visible within the bid window but Options granted shall be published before [7pm] on the bid day;

This will consist of relevant ASEP and quantity.

The same data on Options granted will be included in the QSEC invitation letter.

Options will be requested via fax. A pro-forma will be developed.

Any Options requested cannot be removed or amended except where the request submitted is identified by National Grid as blatantly erroneous and is rejected.

National Grid will accept no liability in respect of erroneous applications, but will endeavour to resolve errors within the bid day. Those not resolved or rejected by 5pm will be accepted as submitted.

Any pro-rating due to Options exceeding available capacity will be carried out at the end of each bid day.

The Option Window will be run in January 2010 (see timeline).

Avoid clash with AMSEC in February.

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Diagram 3: Option Approach – Timeline for 2010 QSEC

Mid Dec

Invitation letter for Options issued

7 Dec

Approval of Methodology Statement

Mid Jan Option window.

2 days plus1 day between

Mid Mar QSEC

Apr / May Bids Allocated - 2 months – as defined in UNC section B 2.6.7

Feb AMSEC

4 tranches with 2 days between

Early June

Ad hoc Invoice for Option if required

DEC 09 JAN 10 FEB 10 MAR 10 APR 10 MAY 10 JUN 10 JUL 10

Mid Feb

QSEC invitation

letter

Mid Jan

Notice of

charges

N Grid AnalysisN Grid GovernanceOfgem Governance

Precise dates for QSEC auction to be confirmed

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Option Fees

It is proposed that: The Option Fee will be £32,120 per mcmd irrespective of ASEP;

The Option Fee shall be invoiced via an “ad-hoc invoice” after capacity allocations are confirmed; i.e. June 2010.

In the event that capacity covered by an Option is allocated in the same year as the Option is taken out then the Option will be revoked, the Option Fee will not apply and no invoice will be raised.

The Option Fee shall not be subject to additional credit or security.

Amounts involved are relatively small

Impact in event of default is/may be unnecessary investment due to missed substitution opportunity. However, the risk of default is highest where there are no incremental capacity requests.

Option Fees will be refunded where capacity is subsequently allocated (see next slide for details).

Refunds will be credited in June 2010.

Treatment of Fees National Grid’s current view is that Option Fees will be offset against TO Entry Commodity

Charges (and refunds treated accordingly).

National Grid anticipate raising a Charging Consultation on the treatment of Option Fees following September TCMF.

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It is proposed that the Option Fee will be refunded where the relevant Shipper is subsequently allocated, in a QSEC or AMSEC auction, the capacity covered by the Option. In these auctions the minimum reserve price will apply to the allocated capacity.

For the refund to apply the capacity must be obtained for one or more months for the designated year covered by the Option.

For an option taken out in Jan 2010 capacity must be allocated for October 2013 to Sept

2014.

The refund amount will equal the charge for the capacity allocated but will be capped at the Option Fee.

In the event that the capacity covered by the Option is allocated in the QSEC in the year in which the Option is taken out, to the relevant Shipper or to another Shipper, the Option will be revoked. The Option Fee will not be invoiced.

• Note that in this QSEC auction all Shippers (including the relevant Shipper) will be allocated unprotected capacity before that covered by the Option. The Option will be revoked (in part or whole) after all unprotected capacity has been allocated.

Option Fee Refunds

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Option Fee Refunds

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

Option taken

QSEC auction

Period covered by Option

Period covered by QSEC 11

Period covered by QSEC 12QSEC 11

QSEC 12

AMSEC 13

Period covered by AMSEC 13

AMSEC 14

Period covered by AMSEC 14

Refund if capacity obtained for any month in this period

Auctions where capacity can be obtained that may trigger a refund.Relevant Shipper must be allocated capacity to get refund.

Option Fee not raised if any Shipper is allocated capacity in this QSEC

National Grid will track Options from January 2010 until February 2014. If a refund has not been triggered the Option will fall away and the Option Fee retained.

Substitution will be allowed in QSEC 11 from 42 months (Q4 14) unless a further Option is taken out in Jan 11.

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Option Approach – Associated Issues

Informal consultation respondents mostly favoured a low exchange rate cap.

Several see exchange rate caps as being a soft landing tool that can be reviewed and

relaxed after experience of substitution is gained.

National Grid is proposing an exchange rate cap of 3:1

This is significantly lower that the cap applied to Transfer and Trades.

With Shippers having an opportunity through the Options to protect capacity, an additional constraint by way of 1:1 exchange rate cap would seem inappropriate.

Partial substitutions will be progressed

Entry Zones are proposed to be used for selecting potential donor ASEPs. Within zone,

donor ASEPs would be selected on the basis of best exchange rate. This should provide

the most economic outcome. Out of zone, donor ASEPs would be selected on the basis

of shortest pipeline distance from the recipient ASEP.

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Option Approach.

Hold QSEC auction

Determine whether any requests pass

the NPV test?

No

Finish

Yes

Identify recipient ASEP with lowest

revenue driver auction

Do any ASEPs within zone have

substitutable capacity?

Yes

Accept substitutions and update ASEP obligated levels

Are there any other recipient ASEPs?

Yes

Finish

No

Consider non-zonal substitutions

Yes

Do any remaining ASEPs have substitutable

capacity?

No

Optimise reinforcements to

provide most efficient investment

strategy

Where applicable accept substitutions

and update ASEP obligated levels

Consider next nearest out of

zone ASEP with substitutable

capacity

Yes

No

Yes

No

No

Run options window

Publish Options results.Quantity / ASEPs

Publish QSEC auction invitation -

including Option result and substitution data: entry zones,

ASEP distance order.

Substitutable capacity is defined as:90% of the baseline obligated entry capacity; plus any previous released incremental capacity that has been reclassified as non-incremental obligated entry capacity; plus any capacity that has been substituted to the ASEP; minus any capacity that has been substituted from the ASEP; minus any capacity that has been allocated to any User; minus any capacity that is subject to an option.

Identify within zone donor

ASEPs with most favourable

(lowest) exchange rate.

Undertake Network Analysis

Can all reinforcement be avoided and is the

exchange rate below 3:1?

Retain partial valid substitutions

Identify within zone donor

ASEPs with next most favourable exchange rate.

Are there any more ASEPs within zone with substitutable

capacity?

Yes

No

Undertake Network Analysis

Can all reinforcement be

avoided and is the exchange rate

below 3:1?

Retain partial valid substitutions

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Summary

The Option Approach protects capacity, but only to the extent that it is genuinely needed, as demonstrated by Shippers taking out Options.

A commitment is required from Shippers but this may be much lower than buying the capacity.

National Grid is proposing that Option Fees are refundable if the capacity is ultimately bought (see slide 18) thereby making the fee relevant only to speculative Options.

The Option Approach allows and encourages Shippers to identify and protect their needs.

Shippers may benefit from awareness of market developments but this is not essential.

The amount of protected capacity is determined by Shippers actions not National Grid assumptions.

Options (and existing sold capacity) will quantify reasonable and foreseeable future capacity demands which should be excluded from substitution.

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Next Steps

Formal consultation

24th July 2009

Closes 21st August 2009

Proposed methodology statement submitted to Authority by 4th September 2009

Ofgem Impact Assessment

To follow submission of proposed methodology statement

Subject to Licence change to allow additional time between submission of methodology statement and deemed approval to facilitate IA time table.

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Consultation and reportingDevelop Treatment of Option Fees

07/11/09Submit Charging

Proposals for Approval

Approval of

Charging Proposals

Timeline – Development of Options Approach

Jan 09 Feb 09 Mar 09 Apr 09 May 09 June 09 July 09 Aug 09 Sept 09 Oct 09 Nov 09 Dec 09

07/01/09Workshop 6

07/04/09Workshop 8

07/07/09Workshop 9

10/02/09Workshop 7

Develop Licence Change

01/09/09Licence Changes

Effective

07/09/09Submit ECS for Approval

07/12/09Approval of

ECS

24/07/09

Impact Assessment as necessary

formal consultation

08/06/09 21/08/09

informal consultation

03/09/09TCMF