Next-Gen Trading Framework for Network Capacity in Glasgow and London Seminars - February 2007

1. Medium-term TEC Trading ARODG Seminars Glasgow & London February 2007

2. Content • Outline of concept • Key issues • Interaction with other industry codes • Implementation

3. Aim • To facilitate the transfer of rights to use existing network capacity without increasing costs to industry participants • … to provide opportunities to connect prior to the completion of all works necessary to provide a compliant connection • Trading existing capacity more efficient when none spare • Balance effectiveness with pragmatism • Seeking to work within existing regulatory / market rules Note: Presentation describes the key concepts of aframework not a working model

4. Key concepts of trading frameworkAn annual process • Trades facilitated using a pre-defined annual process • Staggered process to gather information and prepare exchange rates • Defined timetable • facilitates resource planning for industry participants • designed to provide sufficient time for analysis required • e.g. exchanges rates and possibly zones • provide compatibility with existing industry processes • e.g. transmission outage planning

5. Key concepts of trading frameworkWhat could be traded • Physical capacity • does not provide value to “paper projects” • does not undermine proposals to enhance user commitment • Defined capacity tranches across multiple years • Rights for a finite duration e.g. up to 3 years • limits to which assumptions outside operational timescales hold • Seek to fully unwind trade at the end of the period • TEC would remain with the original party • obligation to pay TNUoS remains with the original party • export rights temporarily be transferred to another user(s)

6. Key concepts of trading frameworkMatching donors and recipients • Counterparties matched according rules to promote economically efficient outcomes • recipients on their willingness to acquire rights • donors on the willingness to surrender rights • Capacity prices set by donors • schedule of MWs & prices provided to users that want to trade • exchange rates used to express this information in different zones • Recipients bid for this capacity (adjusted by exchange rate) • One-to-many and many-to-one trades would be facilitated

7. Key concepts of trading frameworkSetting the exchange rate • Exchange Rate set to avoid creating additional constraints • but not will not be taking all opportunities to minimise these costs and return the system to compliance with the planning standards • Need to ensure that this is still consistent with duties to be economic and efficient, and to facilitate competition • Trades must be subject to an Exchange Rate that reflects the capability of the transmission system

8. Key issuesCapability of the transmission system • Assumptions made about generation behaviour in planning and operational time frames • Assumptions ensure that total costs remain efficient • for example, Transmission Owners do not build a network that accommodates all generation all of the time • Need to set exchange rates that avoid undermining these assumptions or, failing this, need to understand the range of consequences of this • operational costs

9. Key issuesCompetition • Some industry concern that existing generation might • not reduce their TEC when otherwise they would have • is it in the interests of competition e.g. a barrier to entry? • set prices that do not reflect costs / lost generation opportunities • Difficult to preclude by design • But could consider ways to identify possible abuse, if any

10. Interactions with other codes • Have sought to progress these arrangements to minimise impacts on other codes • Impacts on • CUSC… to give force to the new arrangements • others… may become apparent as detailed designed proceeds • Need to ensure that the introduction of trading remains consistent with wider duties to be efficient and economic • specifically, System Operator incentives and SQSS derogations need to be cognisant of the potential impact of capacity trading

11. Implementation • If • the industry considers it beneficial (now and in the future) • When • depends on what other access amendment proposals are raised • progress more detailed design • exchange rate issues present the greatest challenge • How • discuss detailed proposal informally before raising amendment • enhance the proposal • provide clarity & definition before working group phase

12. Conclusions • A flexible trading framework to enable opportunities for earlier transmission access • Seeks to use existing network capability which means exchange rate should reflect this • Still work to do on the detail • Feedback from the industry would be helpful • is it something that would be desirable? • would it be used?