Optimisation of Entry Capacity Strawman

Transmission Workstream

4th May 2006

Current Arrangements

Under the current regime we are obliged to release up to baseline levels at all ASEPs until a clearing allocation has been held.

In the last AMSEC auction we had some ASEPs that had sold out and were oversubscribed whilst others had unsold capacity.

We can release non-obligated capacityIf the revenue generated from releasing this capacity is not

exceeded by the forecast costs associated with the release i.e. entry constraints and buy backs.

Historically we have only released non-obligated capacity in the constrained period close to the gas day.

Issues

This can create a scenario where capacity is effectively sterilised

In the event that we did look to release non-obligated capacity at more than one ASEP we do not have a non discriminatory process by which it could be achieved

These proposals look to address these issues

Optimisation of Entry capacity – Key Features

The process for optimisation of entry capacity can be broken down into 5 key areas;-

Identification of recipient ASEPs This establishes which ASEPs require additional capacity

Identification of donor ASEPs This establishes which ASEPs have capacity available for transfer

Identify demand for transferable capacity This identifies the amount of capacity required at the recipient ASEP

Exchange Rate This establishes the cost of transferring capacity between from the

donor ASEP(s) to the recipient ASEP(s) and therefore indicates the value required to successfully bid for capacity.

Allocation methodology This establishes how the capacity is allocated between competing

recipient ASEPs and competing Users.

Identification of recipient ASEPs

Identification of recipient ASEPs It is proposed that ASEPs which have demand for

capacity in excess of baseline levels would become the ‘recipient ASEPs’

This would take place after the AMSEC auction and would look at the period April to March

Identification of Donor ASEPs - Options

All ASEPs This would make every ASEP with unsold capacity or with capacity

being offered back to National Grid a donor ASEP.

ASEPs within local vicinity This would identify only ASEPs in the same geographical area as

the donor ASEP(s) Donor ASEPs will have a physical interaction with recipient ASEP.

Lowest cost ASEP This would identify only one ASEP as the donor and would be based

on the cheapest capacity available to transfer to the recipient ASEP In the event that this donor ASEP didn’t have enough capacity to

meet demand then the next lowest cost ASEP would then be selected.

Transferable Capacity

The proposals for identifying capacity available for transfer are as follows:-

Unsold Capacity After completion of the AMSEC auction any unsold

capacity at the donor ASEP(s) would be available for transfer.

Sold Capacity After completion of the AMSEC auction we could hold a

tender at the donor ASEP to buy back firm capacity and if a User wished to sell then this capacity would become available for transfer

Identify demand for transferable capacity

This would be done by holding an AMTSEC auction for the identified recipient ASEPs.

Auction rules would be similar to existing AMSEC Pay as bid Applications could be for [April] to [March] The invitation could include:-

The [1] date on which the auction would be heldThe reserve price for the recipient ASEP(s)The recipient ASEP(s)Indicative exchange rate

Valid bids would identify level of demand for transferable capacity at the recipient ASEPs.

Exchange Rates

There is a requirement to establish the value of the transferable capacity, this accounts for;

the expected change in supply profile the buy back risk of transferring the capacity between ASEPs.

The exchange rate sets the value of transferring the capacity between the donor ASEP and the recipient ASEP.

Allocation methodology

The basis of the allocation process is to maximise the release of the transferable capacity. This is achieved by;

Assessing the cost of transferring the capacity from the donor ASEP (through the exchange rate)

Assessing the value of the bids for the transferable capacity at the recipient ASEP (through the AMTSEC auction)

Allocate capacity until the cost of transferring the capacity exceeds the value of the bids for the capacity

This is relatively straight forward if there is one donor ASEP and one recipient ASEP.

High degree of complexity when there are multiple donor and recipient ASEPs

Treatment of costs and revenues

It is proposed that the costs and revenues would be managed through the existing incentive mechanism

The revenues generated by the sale of the capacity are based on the forecast cost of transferring capacity

Impact on Users through neutrality and impact on incentive should be minimal

Commercial Framework

The following amendments have been identified as being required to facilitate the process

UNCAmendments to facilitate ‘new’ AMTSEC auction and allocation

processAmendment to move current AMSEC auction

Licence Amendment to change the obligation to release baselines and/or

clearing allocation

Timetable (option 1- post AMSEC)

Nov LTSEC Allocation confirmedIssue Invitation letter for AMSEC

Dec Hold AMSEC auctionIdentify recipient ASEP(s)Identify donor ASEP(s)Issue invitation letter for AMTSECIssue buy back tender for donor ASEP(s)

Jan Hold AMTSEC auctionFeb – Mar Complete allocation processMar Confirm allocations (including successful buy

back tender)Apr – Mar Capacity transfer effective

Timetable (option 2 – pre AMSEC)

AMSEC auction completedIdentify recipient ASEP(s)Identify donor ASEP(s)

Nov Issue invitation letter for AMTSECIssue buy back tender for donor

ASEP(s)Dec Hold AMTSEC auctionDec – Feb Complete allocation processFeb Confirm allocations (including

successful buy back tender)Apr – Mar Capacity transfer effective

Timetable

NG to consider bringing forward a draft UNC proposal to June Workstream

Submit Mod Proposal to July Mod Panel