PARCA: Incentive Arrangements

Place your chosen image here. The four corners must just cover the arrow tips. For covers, the three pictures should be the same size and in a straight line.

PARCA: Incentive Arrangements

2

Purpose

To detail our initial thoughts and seek your views on potential incentive arrangements under a PARCA solution

These initial thoughts are based upon our May 2012 RIIO business plan submission

Annex B delivering Connections and Capacity

The following slides cover the following:

Capacity Delivery Incentive (to replace the permits scheme)

Pre-capacity Allocation Proposal

We believe that the incentive arrangements detailed in these slides compliment the PARCA solution and bring additional benefits to industry

We do not consider that the PARCA solution is reliant on revised incentive arrangements

Note: The following slides do not indicate the acceptance or otherwise of the RIIO final proposals by National Grid NTS

3

Capacity Delivery Incentive - initial thoughts (1)

We recognise that a customer may value both:

the early delivery of incremental capacity against default lead times

an appropriate risk versus reward balance being applied where National Grid NTS consider delivery of incremental capacity in excess of default lead times

The PARCA solution currently being discussed has the potential to result in allocation of Capacity much closer to the capacity delivery date

Planning activities occur prior to Capacity allocation under the PARCA solution

The Capacity allocation becomes the trigger for starting any required reinforcement

We therefore believe it is appropriate to reduce the licence defined capacity delivery lead times to 24 months (from the October following capacity allocation). This lead time would be applicable to:

the post-capacity allocation activities of the proposed PARCA solution, and/or

incremental capacity made available in the QSEC auction and Enduring Exit Applications (where no revenue driver is required)

4

Capacity Delivery Incentive (2)

We are therefore seeking your views on our initial thoughts for a Capacity Delivery Incentive as an alternative to the permit scheme arrangements

The scheme would incentivise National Grid NTS to meet a customers request for early Capacity delivery where possible and apply an appropriate risk / reward balance

The scheme would incentivise National Grid NTS to carefully consider delivery of Capacity, reserved through a PARCA, outside of default lead times and apply an appropriate risk / reward balance

We do not believe that an incentive scheme should allow National Grid NTS to extend project specific lead times beyond [12 / 24] months without requiring Ofgem consent

5

Capacity Delivery Incentive (3)

Accelerating capacity delivery quicker than the default obligated lead time, is likely to have an associated cost

Based on prior experience of accelerating projects we believe it costs ~10% of total construction costs to accelerate a reinforcement project by one year

We have reviewed several large reinforcement projects, comparing their construction costs and additional capacity generated to calculate a monthly acceleration cost per GWh/d

This has concluded that on average the cost of accelerating a project is ~£10,000 per GWh/d per month (09/10 prices) and that £10,000 per GWh/d per month is appropriate as the value of the incentive

These costs have been calculated based on the cost of acceleration, however we also consider that the incentive scheme should be symmetrical

Equal values would apply as the penalty for extending lead times beyond the later of the default or that requested by the customer

6

Capacity Delivery Incentive Proposal (4)

Our initial thoughts on the scheme parameters are:

Zero target

No upfront cash allowance enables the incentive to be applied on a project specific basis

100% sharing factors on National Grid

We believe that as this incentive is within our control, we should be exposed to 100% of the costs

100% upside creates an appropriate tension between cost recovery and out-performance

No caps and collars

The benefits of this incentive should not be limited

We do not anticipate unlimited risk

The number of projects on an annual basis is limited

£10,000 per GWh/d per month delayed or accelerated

7

Capacity Delivery Incentive Proposal (5)

Initial Thoughts (continued):

Proposed for the remainder of the RIIO-T1 period from April 2014

The incentive would be cashed out annually

This is in line with RIIO incentives detailed in Final Proposals

Incentive would be ‘played’ prior to the formal capacity application method i.e. we would indicate our ability to deliver in the invitation letter for the relevant auction/application window

The incentive would only apply where the customer values it or where we cannot meet the obligated lead time, or a later date requested by the customer

The incentive would only apply where:

The customer wants the capacity early and we have committed to this

The customer wants the capacity from the default lead time or later and we are unable to commit to this

The following diagrams demonstrate the application of the proposal

8

Illustrations 1

24 monthsCapacity allocation Default

capacity delivery

Incentive earned

NGG agrees to deliver

capacity

Customer wants

capacity

INCENTIVEIncentive penalises


capacityCustomer wants

capacity


capacity delivery

(b)

(a)

9

Illustrations 2

Incentive penalises


capacity

Customer wants

capacity

24 monthsCapacity allocation Default capacity delivery

INCENTIVEIncentive penalises


capacity

Customer wants

capacity

24 monthsCapacity allocation Default capacity delivery

(c)

(d)

10

Illustrations 3

No incentive applies


capacity delivery

NGG agrees to

deliver capacity

Customer wants

capacity

No incentive applies


capacity delivery

NGG can deliver

capacity

Customer wants

capacity

(e)

(f)

11

Capacity Delivery Incentive (9) Where a PARCA has been agreed, we would indicate our ability to

deliver at the conclusion of Stage 1a

This indication may suggest earlier or later than the obligated timescales

For capacity signalled through the QSEC / Enduring Exit applications we would indicate our ability to deliver early in the invitation letter prior to the auction/application window (as per permit arrangements)

Where lead times have been adjusted under the proposed incentive and we are unable to deliver within these adjusted obligated lead times, the buyback regime principles would apply (see illustrations (g) & (h))

Where a customer is not ready to deliver or offtake gas, we would not be obliged to buyback, as per current UNC principles

12

Proposal Illustrations 4

Incentive earned

NGG actually delivers capacity

Buyback

NGG agrees to

deliver capacity

Customer wants

capacity


capacity delivery

Incentive penalty


capacityCustomer

wants capacity

24 monthsCapacity allocation Default capacity

delivery

Buyback

NGG actually delivers capacity

(g)

(h)

13

Pre-capacity Allocation Reporting In our May 2012 business plan submission we considered that a reputational incentive is

initially appropriate for the Cap/con pre capacity allocation activities

We continue to believe that National Grid NTS should be obliged to make information available to industry with respect to these activities and welcome views on this is it appropriate?

should this be a reputational incentive in the licence, or a reporting obligation in the UNC or both?

We believe that a reporting obligation under the UNC in relation to the time taken to progress through pre-capacity application activities has merit allows change through the UNC governance process

licence and UNC change not dependant on each other

This would oblige us to report on the time taken to progress through the key stages of the PARCA process to the point where we provide a formal capacity signal

This reporting would include the timescales relating to:

Identification of preferred route corridors

Completion of the Environmental Impact Assessment

Stakeholder engagement activities

The submission of a Development Consent Order (where required)

Any others?

A mid-term RIIO-T1 review may be appropriate, to consider the form of future incentives around planning activities


PARCA – Proposed Licence Changes

15

PARCA Solution – Funding (1)

3 different funding mechanisms applicable to the PARCA

Schedule 1a

Pre-Capacity Allocation Revenue Driver

Post-Capacity Allocation Revenue Driver

Works for Schedule 1a are proposed to be treated as Excluded Services and can be covered by the Special Condition 11C – Services to be treated as Excluded Service

This could be achieved by one of the existing categories or some text included to add clarification relating to PARCA works

We also need to consider how a potential reservation fee may impact the licence.

We intend to share our further thoughts on the reservation fee next month

16


Generic revenue driver methodology would detail the process of how the revenue drivers are calculated

Licence would need to recognise two revenue drivers for each project

Add the principles underpinning the phasing of the two stage Revenue Driver (pre & post-capacity allocation) as proposed under the terms of the PARCA to the licence

Under current RIIO Licence drafting Revenue Drivers are funded: Special Conditions 5F (Entry) and 5G (Exit)

20% in year y-2

80% in year y-1

1% in year y and any subsequent formula year to the end of the RIIO-T1 period

Updates would be required to these conditions to include the Pre Capacity and Post Capacity Allocation Revenue Driver phasing to replace the 20% and 80% with those profiles proposed

17


Termination Credit due to Termination of PARCA

It is proposed that a new term is introduced to Special Condition 2A of the Licence to allow the Allowed Revenue to be adjusted to compensate industry for any monies already recovered from Transportation charges following Termination of the PARCA

The term would adjust the next available years revenue following receipt from the PARCA signatory terminating the contract

18

PARCA Solution – Lead Time

As aforementioned, we believe it is appropriate to reduce the licence defined capacity delivery lead times to 24 months (from the October following capacity allocation). This lead time would be applicable to:

the post-capacity allocation activities of the proposed PARCA solution, and/or

incremental capacity made available in the QSEC auction and Enduring Exit Applications (where no revenue driver is required)

This could be applied through licence change


PARCA – Anticipated Timeline & Next Steps

20

Time line

Formal Licence Consultation

Mod submitted to UNC Mod

Panel

Licence Drafting

Mod, Licence and Methodology Statements Implemented

Consultation Participation

Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr MayN

atio

nal

Grid

Indu

stry

Ofg

em

Industry Workshops

PARCA Consultation Process

Consultation & Workshop Participation

Work group report

UNC Legal Text, Proposed Licence Changes, Updated (Draft) Methodology Statements, PARCA Contract, Process Flow Diagrams

Consultation & Workshop Participation

Consultation Participation

2013 2014

Mod Panel & 15 Days Consultation

Process

Mod Decision

Mod Panel

Licence Drafting

PARCA: Incentive Arrangements

Documents

Transcript of PARCA: Incentive Arrangements