Modification Proposal 0246: Quarterly NTS Entry Capacity User Commitment

Chris Shanley

2

Modification Proposal 0246: Entry Capacity User Commitment – “The Concept”

Long Term Entry Capacity Car

Value - £1.3bn Value - £40,000

Security - £? Deposit - £1000

3

Timeline

RG221 was established in September 2008

Main questions:

Is the balance of investment risk right between existing and new shippers and National Grid NTS?

How do you mitigate the risk of “default”*.

Modification Proposal 0246 to the UNC Panel in March 2009.

Aim is to put new arrangements in place prior to the next Long Term

Entry Capacity Auction (QSEC)

Ofgem Impact Assessment is highly likely.

* “default” = payment for allocated capacity is not received at the time expected

4

Issues discussed by Review Group

Currently no security required at time of long term capacity auction.

Security called for 12 months prior to the start date of the entry

capacity – potentially long after system investment made.

User currently able to defer capacity commitments 12 months prior to use and keep deferring without penalty.

Incremental Capacity auction allocations lead to fixed additional

allowed revenue to National Grid.

If a User “defaults” = Allowed revenue shortfall is recovered through wider Transportation charges

5

Proposal – General terms agreed

Provision of security

To cover auction allocations – inc. past auctions

Amount of security – sufficient to deter speculative auction bidding

Aspiration for annual cost of security to be proportionate to the risk to the Shipper Community of a User Default

Security tools

Only Letter of Credit (LoC) or deposit allowed.

Default rules

Y2 to Y16 Entry Capacity at all ASEPs is withdrawn from User and User incurs cancellation fee equivalent to security provided by that User

6

Allocated Capacity Value (ACV) – Options considered

Profile of Capacity Booked Per Year - Option 1

£0

£20,000,000

£40,000,000

£60,000,000

£80,000,000

£100,000,000

£120,000,000

£140,000,000

£160,000,000

£180,000,000

2009 -10

2010 -11

2011 -12

2012 -13

2013 -14

2014 -15

2015 -16

2016 -17

2017 -18

2018 -19

2019 -20

2020 -21

2021 -22

2022 -23

2023 -24

2024 -25

Year

To

tal Q

SE

C H

old

ing

ACV = £319.8M(Y+1 & peak Y)

Profile of Capacity Booked Per Year - Option 3

£0

£20,000,000

£40,000,000

£60,000,000

£80,000,000

£100,000,000

£120,000,000

£140,000,000

£160,000,000

£180,000,000

2009 -10

2010 -11

2011 -12

2012 -13

2013 -14

2014 -15

2015 -16

2016 -17

2017 -18

2018 -19

2019 -20

2020 -21

2021 -22

2022 -23

2023 -24

2024 -25

Year

To

tal

QS

EC

Ho

ldin

g

ACV = £427.9M(Y+2 to Y+4)

Profile of Capacity Booked Per Year - Option 2d

£0

£20,000,000

£40,000,000

£60,000,000

£80,000,000

£100,000,000

£120,000,000

£140,000,000

£160,000,000

£180,000,000

2009 -10

2010 -11

2011 -12

2012 -13

2013 -14

2014 -15

2015 -16

2016 -17

2017 -18

2018 -19

2019 -20

2020 -21

2021 -22

2022 -23

2023 -24

2024 -25

Year

To

tal Q

SE

C H

old

ing

ACV * 10% = £119.5M(Y+2 to Y+16)

7

Entry Capacity Risk Assessment

ACV = Years Y2 to Y16 * [0.1]

Modification 0246 proposes that the ACV derived will be further reduced depending on the Users credit rating risk (between 30% and 100% of the ACV)

User Security Value (USV) = ACV * UCR + VAT

During legal drafting for Mod 0246 concerns have been raised by our Legal representatives

Charging a different cancellation fee when cancelling the same quantity of capacity, could be considered as unduly discriminatory

We propose to remove UCR

User Security Value (USV) = ACV + VAT

8

Barrier to Entry ‘vs’ Community Risk

Proposal seeks to strike a balance

LoC costs to cover aggregate USV estimated at around £4m per annum

Risk of a project or major User failure has been estimated at ~£20m per year – this figure is based on current levels of capacity holdings and not historic defaults

Views are sought on whether an appropriate balance has been met, i.e. should the 10% ACV figure be amended or not?

9

Security Tools and Operating Costs

For the purposes of long term entry capacity, only the following types of security shall apply:

“Deposit Deed”

“Letter of Credit”

ACV against Operating Cost

119.447

0

50

100

150

200

250

300

350

0 2 4 6 8 10 12

Operating Cost (£M)

AC

V (£M

)

Assumed LoC Range:1% - 7%

Note: Users with poor credit ratings may choose to use a deposit deed as a cheaper option

10

Security Required – Across Users

Security Required against Estimated Operating Cost

£0

£5

£10

£15

£20

£25

£0 £200,000 £400,000 £600,000 £800,000 £1,000,000 £1,200,000 £1,400,000

Operating Cost (£)

Sec

uri

ty R

equ

ired

(£M

)

Total Security Required£119M

Users with Assumed BB-Credit Rating

11

When should security be put in place? – Options Considered

Sept

Option 1 -Security Provided

pre auction

Aug

QSECAuction

held

Allocation processstarts - after last

bid window

Option 3 - Securityprovided after

allocation

Max 18 days

Allocation processfinalised

Max 60 days

Oct Nov Dec

30 days?

Jan

Min 30 days

Option 2. Securityprovided prior to

allocationAdditional 15days requiredfor allocation

proccess

Variations

Option 4 - (hybrid of option 1 + 2) - minimum level of security or bid bond provided pre auction and security topped up prior to allocation

Option 5 - (hybrid of 1 + 3) minimum level of security or bid bond provided pre auction and security topped up after allocation has been finalised

12

Options - Pros and Cons

No consensus reached

Option One – 14 days before auction proposed within Mod 0246

Option Three - Post auction favoured by some Review Group Members

Advantages Disadvantages

Option 1 No impact on current auction processes

or timetables

Removes unsecured bids prior to

allocation.

Involves estimating the value of your

successful auction bids

Potential barrier to entry for smaller

developers due to financing difficulties

Option 3 Provisional Allocations known before

security is called for

Aligns better with project financing

processes.

“default” = Potential effect on other

bidders at multi user ASEPs

13

QSEC – Bid Window Amendment

Issues identified with removing a Users bids prior to allocation

(option 1) - potential effect on other bidders at multi user ASEPs

Current QSEC Bid window:

Opens at 08:00 and closes at 17:00. Bid Windows must be held between 1st Sept - 30th Sept.

Open for 10 consecutive Business Days (stability can be met from day 2 and auction closes early).

The bid window closes 17:00 and auction information is sent to Users by 20:00 on each day

Now proposing that we check the security after each bid window

and remove any bids where the USV > security provided.

This will require us to amend the QSEC auction to have a day

between each bid window and reduce the number of windows to 8.

14

Example of a User’s Security Value - 2008 QSEC

User's Capacity Value from 2008 QSEC

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

2009 - 1

0

2010 - 1

1

2011 - 1

2

2012 - 1

3

2013 - 1

4

2014 - 1

5

2015 - 1

6

2016 - 1

7

2017 - 1

8

2018 - 1

9

2019 - 2

0

2020 - 2

1

2021 - 2

2

2022 - 2

3

2023 - 2

4

2024 - 2

5

An

nu

al

Cap

acit

y V

alu

e (

£M

)

ASEP 1 (2008) ASEP 2 (2008)

Total Holding £44.4M ACV = £4.44M

Est. Annual LoC Cost at 2.5% = £0.11M

M

ACV = Years Y2 to Y16 * [0.1]

15

Example of a User’s Security Value - 2009 QSEC

User's Capacity Value from 2009 QSEC

0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

5.000

2010 - 1

1

2011 - 1

2

2012 - 1

3

2013 - 1

4

2014 - 1

5

2015 - 1

6

2016 - 1

7

2017 - 1

8

2018 - 1

9

2019 - 2

0

2020 - 2

1

2021 - 2

2

2022 - 2

3

2023 - 2

4

2024 - 2

5

2025 - 2

6

An

nu

al

Cap

acit

y V

alu

e (

£M

)

ASEP 1 (2008) ASEP 2 (2008) ASEP 1 (2009) ASEP 2 (2009)

Total Holding £46.8M

ACV = £4.68MEst. Annual LoC Cost at

2.5% = £0.17M

ACV = Years Y2 to Y16 * [0.1]

16

Default Rules

Long term entry capacity “events of default” will be:

Security < USV

The security tool (LOC/Bank Deed) is about to expire (less than 28 days).

The User is Terminated (UNC Section V4) for other reasons under UNC.

17

Default Rules - process

User will be notified and given 10 business days to rectify (except where Termination is for other reasons under UNC).

If not rectified: Invoice will be raised for the Secured amount (cancellation fee)

NG will call on the USV pending payment of the above invoice.

The User loses the right to acquire entry capacity

NG will re-call the User’s QSEC capacity at all entry points across all years (Y2 – Y16).

NG offer Capacity to trading party (UNC B5.4)

NG will resell the capacity in subsequent auctions