Review Group 221: Option 3 – security provided after allocation

2

Security Provision Timing Options Discussed by RG221

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

3

Option 3 – security provided after provisional allocation

Option 3 Security is provided within one month of the provisional allocation taking place.

User provides their security within [30] days of the provisional allocation

Pros Cons

This option has the benefit of the User knowing

exactly what security is required.

User may fail to provide the security and the

auction may need to be re-run..

Allows for sufficient time for the security to be put

in place.

Re-running an auction would affect other QSEC

auction participants, incur costs, impact on

investment lead times and may impact on the

timing of other capacity auctions/processes.

The existence of the “defaulting User” may effect

the bids or allocations of other Users in the

auction.

•RG Meeting 26 Feb •Option 3 identified as preferred option but in the event of a User failing to provide security NG would not look to re-run auction allocations or assess impact on other auction participants

4

Amendments to QSEC auction process to accommodate option 3

SeptAug

QSECAuction

held

Allocationprocess

starts - afterlast bidwindow

User informed ofprovisional

allocation andgiven 28 days toprovide security

Max 18days

Allocationprocessfinalised90 days (previously 60 days)

Oct Nov Dec Jan

28 days

Network DesignEvaluation

28 days to veto

Application toOfgem

28 days

Securityprovided?

Allocation removed and where anapplication had been sent to

Ofgem, NG will write to informOfgem that the allocation has

been removed and that therevenue driver will not apply

Yes

No

42 Month Investment lead time starts 1/10

5

Does this process work?

Scenario 1 – One User bidding for baseline capacity at an existing ASEP

User fails to provide Security

Provisional allocation removed

Unsold baseline capacity considered as part of substitution and/or offered for sale again at next relevant auction

Process Works? – Yes

6

Does this process work?

Scenario 2 – One User bidding for Incremental capacity at a new ASEP

User fails to provide Security

Provisional allocation removed

NG will write to Ofgem to inform them that the allocation has been removed and that the revenue driver will not apply

Process works? – Yes*

* Process has potential impacts on investment lead time if User does put credit in place

7

Does this process work?

Scenario 3 – Multiple Users bidding for Incremental capacity at a new ASEP – for example Milford Haven

Provisional allocations: User A = 100 units, User B = 180 units & User C = 30 units

User A fails to provide Security

Provisional allocation for User A removed

Remaining bids for Users B and C no longer pass Economic Test (300 units required)

Provisional allocation for User B and User C also removed

NG will write to Ofgem to inform them that the allocations have been removed and that the revenue driver will not apply

Users B and C would need to discuss with NG, the prospect of holding an adhoc auction at a later date - investment process delayed pending new auction

Process works? – Yes?

8

Does this process work?

Scenario 4 – Multiple Users bidding for Incremental capacity and baseline at an existing ASEP

Provisional allocations: User A = 100 units, User B = 180 units & User C = 30 units

User A bids for both baseline and incremental but fails to provide Security

Provisional allocation (baseline and incremental) for User A removed

Remaining bids for Users B and C no longer pass Economic Test (300 units required)

Provisional allocation for capacity for User B and User C removed

NG will write to Ofgem to inform them that the allocations have been removed and that the revenue driver will not apply

Baseline is available for substitution

Users B and C would need to discuss prospect of holding an adhoc auction with NG

Process works? –No

9

Scenario 4 – Multiple Users bidding for Incremental capacity and baseline at an existing ASEP

Easington – 2006 QSEC Auction

19 Users buying baseline capacity & 12 Users buying incremental capacity and baseline capacity

Baseline capacity value - £153m & Incremental capacity value - £14m~

Easington

0

5000000

10000000

15000000

20000000

25000000

30000000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Baseline Incremental