Planning and Advanced Reservation of Capacity Agreement – Issues

1. Planning and Advanced Reservation of Capacity Agreement – Issues TX issues workgroup – 19th December 2012

2. Purpose • Detail some key outstanding issues • Provide initial views/options on potential ways forward • Aim to agree a way forward on the outstanding issues and incorporate into business rules as appropriate • Other potential business rule changes • Taking into account comments from November 9th workgroup • Next steps

3. Refresher 1 NG NTS cap/con objectives include: • Develop an industry wide consensus of approach to modify the regime considering the impacts of the Planning Act (2008) • Work together with our customers to ensure we meet their requirements • Flexible lead times to adapt to specific projects • Some projects may require a DCO for both NG and the customer • Some projects may require a DCO for just the customer or NG • Some projects may not require a DCO at all • Define a transparent capacity and connection process that provides greater certainty and flexibility to our customers

4. Refresher 2 Key aspects of the PARCA contract include: • Developers and/or Users are able to reserve Quarterly NTS Entry and/or Enduring NTS Exit (Flat) Capacity through the PARCA process • Underpins work required to investigate build / no build options to provide the required capacity • Phased User Commitment up to point of capacity allocation • PARCA stages provide natural break points • Reserved unsold returns to market • PARCA signatory funds revenue allowance to cover spend / committed spend • Capacity financially committed to upon allocation to the User associated to the PARCA • Allocation subject to terms and conditions of the PARCA (e.g. relevant demo info provided)

5. Refresher 3 Potential changes to existing Entry Capacity release mechanisms include: • March QSEC • Incremental release not guaranteed • Demand for incremental may be met through substitution, existing capability or through non-obligated release • Ad-hoc QSEC • No longer for new ASEPs • National Grid NTS invite Users to book unsold capacity that may otherwise be reserved through a PARCA

6. Refresher 4 Potential changes to existing Exit Capacity release mechanisms include: • Enduring applications • Incremental release not guaranteed • Demand for incremental may be met through substitution, existing capability or through non-obligated release • Additional ad-hoc process • National Grid NTS invite Users to book unsold capacity that may otherwise be reserved through a PARCA

7. Fine tuning of Capacity requirement 1 Issue: What is the scope for fine tuning the initial PARCA Capacity requirement? Potential way forward? • The PARCA signatory informs National Grid of their initial capacity requirement and also provides an upper and lower range around the initial requirement. • The range should reflect the customers project design uncertainty • Demonstration information could be provided to prove legitimacy of the range provided • As an output from stage 1a of the PARCA, National Grid NTS would identify if the options indentified to deliver the initial capacity requirement can also accommodate the range provided by the PARCA signatory • If the range can not be accommodated, National Grid NTS will provide a revised range that can be accommodated • Provides certainty to the PARCA signatory i.e. as long as the capacity requirement remains within the permitted range then no impact on timeframes / costs / need case etc. • Prior to the progression of each PARCA stage the customer could have opportunity to review and adjust their initial capacity requirement within the permitted range • The permitted range would be continually reviewed for appropriateness throughout the PARCA lifecycle • supply/demand assumptions could change • other capacity signals may manifest etc • may provide additional or reduced scope for further refinement

8. Fine tuning of Capacity requirement 2 Considerations: • Reasonable to limit the number of times and the stages where fine tuning can be permitted • Limits scope to undermine User commitment – what should the limit be? Once? • Alternatively introduce a standard fee where the customer wishes to change the capacity quantity required • At what stages should fine tuning within the permitted range be allowed? • Any time up to the point of formal allocation – increases uncertainty • Between PARCA stages? up to DCO submission (if needed)? Depends on answer to 1st bullet? • Need to also consider the impact, if any, on the physical connection • May impact upon the unsold capacity levels made available to Users • If the PARCA capacity requirement decreases unsold reserved capacity could be released back to the market at the earliest opportunity • If the capacity requirement increases this may result in additional unsold capacity being reserved – is this reasonable? • The upper limit could be reserved and then manage it down if required – is this anti-competitive? • Fine tuning only allowed if it is a decrease? • Substitution • if PARCA capacity can be fully or partially met through substitution, National Grid NTS will need to seek approval from Ofgem for the proposed substitution. • Fine tuning may impact upon the substitution requirement and hence any prior approval may be invalid – may lengthen the end to end process • Likewise for incremental proposals to Ofgem

9. Interacting projects Issue: How should interactive PARCAs be progressed? Potential way forward? • National Grid NTS believe it is possible to progress and consult upon multiple options prior to submitting a DCO. • Options will need to be narrowed down to one for the DCO submission. • Allows progression to be maintained should one or more projects fail to progress prior to the submission of a DCO • Revenue drivers could be tranched to take this into account (similar to South East revenue driver) • What if a project drops out post DCO submission but prior to the formal allocation of capacity? • Do the demo info requirements insure against this? • e.g. proof of FID, proof of credit worthiness to progress (guards against insolvency) etc • Review the impact and assess alternative options that still enable delivery of capacity to the remaining projects – if no alternative we carry on with the original proposal? • Would need Ofgem approval with respect to funding • What if interacting projects have different timeframes? • Do we insist that the formal allocation occurs for all at the same time? may mean one customer commits to capacity earlier in their project lifecycle than another – acceptable?

10. Events / triggers for releasing cap back Issue: What are the circumstances that release reserved capacity back to the market? Potential Way forward? • Will be detailed within the PARCA contract, including: • Termination of PARCA contract • Demo info not provided • Credit (security / funding) • Customer chooses not to progress to next “stage” • Insolvency • Capacity delivery date changes • Capacity released back for interim period • Fine tuning

11. EU compliance Issue: Does the solution need to comply with EU Capacity codes? Potential way forward? • EU applies to interconnector points only • will EU principles extend beyond EU IPs? • Incremental EU rules in their infancy • Cap/Conn – seeking implementation by April 2014, ahead of currently anticipated CAM, CMP and incremental implementation timeframes • National Grid current view is to progress PARCA solution including EU IPs • EU IP arrangements may need to change upon EU implementation

12. PARCA reservation fee Issue: Is the PARCA User commitment sufficient? Potential way forward? • Sufficient User commitment is necessary to discourage speculative and anti competitive behaviour • PARCA Funding and User commitment is still to be discussed • Aim is to discuss in detail in January 2013 • National Grid NTS Initial view is for stage1a to be funded by the PARCA party, post stage 1a securitised by the PARCA party and allowed revenue is socialised • Security drawn upon if PARCA party drops out • Appropriateness of reservation fee should be assessed against backdrop of other User commitment (e.g. demonstration information and PARCA funding may be enough) • Limit on deferral time between PARCA stages and the formal capacity allocation limits scope for speculative & anti competitive behaviour • Further assess the need once PARCA funding and PARCA User commitment business rules are more certain?

13. Reasonable grounds for altering delivery date / pausing 1 Issue: what scope should there be for National Grid NTS and/or the PARCA signatory to amend the capacity delivery date? Potential way forward? • Applies to both National Grid NTS and the PARCA signatory • National Grid NTS commit to an indicative capacity delivery date post stage 1a (i.e. once National Grid NTS know, at a high level, how the capacity can be delivered) • subject to the terms and conditions of the PARCA e.g. planning consent may not be granted, demo info not provided by 1st demonstration date etc. • As project progresses, there may be scope to bring the date forward due to acceleration of planning activities or finessing of options – only where valued & requested by the customer and considering the impact on other Users • No scope for National Grid NTS to extend indicative delivery time scales where the terms of the PARCA are adhered to, demo info provided on time etc unless requested or agreed to by the PARCA signatory. • PARCA signatory commits to the capacity delivery date and formal capacity allocation date post stage 1a of the PARCA • Between PARCA stages, PARCA signatory has up to [28] days to decide whether to progress to the next stage • Next stage will only be progressed where the required demonstration information is provided by the demonstration date • The failure to provide demonstration information should not provide for undue delay to the capacity delivery date (refer to potential business rule changes)

14. Reasonable grounds for altering delivery date / pausing 2 • If the PARCA signatory wishes to defer the capacity delivery date the following principles could be applied: • The PARCA signatory sufficiently demonstrates why deferment is required • The delivery date of another customers capacity requirement is not negatively impacted by the proposed deferment • No additional costs to the industry and/or National Grid NTS would be incurred • Deferment can’t be requested post the formal allocation of capacity • No previous deferment by the PARCA signatory • Deferment can’t extend the capacity delivery date by more than 12 months • need to further consider how this will work on Entry with respect to quarterly profiles and the NPV test • The same principles could apply where National Grid NTS wish to defer the capacity delivery date (with agreement from the PARCA signatory) • costs to National Grid NTS not applicable • National Grid NTS would assess this prior to the request

15. Potential business rule changes 1 • Based on feedback from the previous Issues workgroup • Revised Demonstration dates • The Issue: Should these be by agreement? What if agreement is not forthcoming? dispute process or default date fall back? • Potential solution: • “PARCA Demonstration Date” means a date(s) specified in the PARCA whereby the PARCA signatory needs to provide specific PARCA Demonstration Information to National Grid NTS and is further defined as: • First PARCA Demonstration Date; or • in the event the PARCA signatory has not provided National Grid NTS with the PARCA Demonstration Information by no later than 5 Business Days Prior to the First PARCA Demonstration Date, a second date [x] month(s) after the First PARCA Demonstration Date (or with the agreement of the PARCA Signatory, any other date) (Second PARCA Demonstration Date); etc etc • Current demo date provisions also allow the capacity delivery date to shift where the demo info is not provided by the first, second and potentially third demonstration info date (where demo info is not provided by the third demo date capacity obligation can fall away) • Feels reasonable to apply the same logic to the PARCA? • Delivery date shifts by no more than the shift in demo date? • PARCA can be terminated if the demonstration information is not provided by the 3rd demo date • Need to ensure does not unduly delay capacity delivery • therefore what value should [x] months be?

16. Potential business rule changes 2 • Stage 1a of the PARCA • Issue: should stage 1a be a stand alone contract? • Potential solution • Stage 1a is a standalone stage of the PARCA contract and funded separately • no financial or contractual liability post stage 1a until PARCA signatory confirms they wish to progress beyond stage 1a • Simple approach & provides more certainty to customer of end to end contract and associated liability

17. High level view of progress needed over next 6 months • Our Aim is to have a solution that is implementable for April 2014

18. ... and finally • Wishing you a very Merry Christmas and a Happy New Year