National Grid Gas Transmission s RIIO-T1 business plan overview

Transcription

1 MARCH 2012 National Grid Gas Transmission s RIIO-T1 business plan overview Connecting a sustainable future UK GAS TRANSMISSION

2 Contents 01 Introduction 02 The structure of our plan 03 Context 05 Our key challenges 07 Stakeholder engagement 08 Our planned expenditure 10 How our plan has changed 11 Outputs 12 Safety 14 Reliability and availability 17 Environment 19 Customer satisfaction 21 Customer connections 23 How we will deliver 25 Innovation 26 Managing uncertainty 28 Financing our plan 30 Impact on customer charges 31 Impact on consumer bills 32 Summary of key data 33 Who we are

3 Introduction This document sets out National Grid Gas (NGG) Transmission s business plan through to the end of the RIIO-T1 period in Our plan has been developed in conjunction with our stakeholders and we would like to thank all of you for your time and commitment throughout this process. This will be our first business plan under RIIO the new regulatory framework introduced by Ofgem. The goal of RIIO is to ensure reliable and sustainable energy networks that give consumers today s and tomorrow s value for money. Informed by our stakeholders views, our plan puts our customers at its heart and addresses five key requirements: we will continue to operate a safe and reliable network whilst facilitating a lower carbon future, as well as managing our own environmental footprint. Our plan considers the needs of investors as we must ensure we can attract adequate capital to finance our growing business and deliver our agreed outputs. This is all underpinned by the need to ensure affordability for consumers. Innovation will be a crucial tool in ensuring we can deliver the required investments efficiently. We demonstrate within our business plan how we will challenge ourselves to drive down the cost of delivery, utilising benchmarking to demonstrate efficiency and working with other companies to develop and adopt best practice. Our plan is based on the Gone Green electricity generation and demand scenario along with a set of assumptions for incremental capacity requirements, driven by anticipated new customer connections during the RIIO-T1 period. As this is just one view of the future, however, we have modelled alternative outcomes in order to ensure that neither we nor consumers face windfall gains or losses if reality should differ. We have proposed a series of regulatory mechanisms to adjust our revenue to reflect what actually happens. Sustainable Safe Innovation Customer Reliable Operating a safe, reliable and efficient network has always been at the heart of our operations. This, along with our role in facilitating a low-carbon future and shaping UK and European energy policy, will continue to be our core priorities. Our business plan reflects this. We look forward to evolving the network and the way we manage it to meet our customers and wider stakeholders needs over the coming decade. Affordable Financeable Nick Winser Executive Director, UK Gas Transmission s RIIO-T1 business plan 01

4 The structure of our plan This document provides an overview of our business plan for stakeholders. More comprehensive information is available in the detailed annexes that comprise our overall plan. These annexes are summarised below. This document:- Overview Summarises the elements of our plan that are of most interest to our stakeholders Detailed plan The detail behind our baseline plan How we will deliver The adaptability and deliverability of our plans, including key challenges such as workforce renewal and growth Managing risk & uncertainty Key risks we have identified and the proposed mechanisms to deal with future uncertainties Outputs The outputs we will deliver and how we will measure their delivery European context Our role in Europe and the benefits and challenges that Europe brings Innovation strategy Our innovation strategy (incorporating R&D, partnering strategy and grass roots innovation) Stakeholder engagement process The process followed to gather stakeholder views and how they shaped our plan Finance The proposed finance package to allow us to fund our investment plan Future of Energy Our longer term view of energy to 2050 Efficiency & value for money Demonstrating how we test efficiency and use benchmarking to lower the cost of delivery Assumptions and glossary Asset guide OUR PLAN 02

5 Context Over the past decade, the indigenous UK gas supplies from the continental shelf have been rapidly declining. Recently, the UK has become a net importer of gas. Operational context With limited new UK continental shelf development and plateauing Norwegian imports over the RIIO-T1 period, the options for bridging the future demand and supply gap will come largely from Liquefied Natural Gas (LNG) sourced from the global market and possibly continental imports. Historical and forecast sources of gas TWh 1,600 1,400 1, Perhaps more importantly for security of gas supplies going forward, however, is the need to manage the changing location and unpredictable behaviours of gas inputs to and outputs from the system / / / / / / / / / / / 21 Historically, gas entered the network primarily from the UK continental shelf into our northern gas terminals and flowed south towards the southern centres of demand. Today, flows are more central and southerly based, with increasing uncertainty over where the gas will enter and leave the National Transmission System (NTS) day-today and the role of storage UKCS Norway LNG Biogas Continent Demand inc. exports Demand is also becoming increasingly unpredictable as the gas network provides the flexible back up for intermittent wind generation on the electricity network. We have moved from stable supply and demand patterns that were relatively straightforward to predict, to a situation where flows from day-to-day, and increasingly within day, are constantly changing. Additional capability and innovative system management are therefore required to ensure the network is flexible enough to move gas quickly from where it arrives onto the system to meet the increasingly unpredictable demand. Gas Transmission System Gas Transmission s RIIO-T1 business plan 03

6 Context (continued) Climate change targets The energy industry between now and 2050 is set to change dramatically, in order to provide secure, affordable and low-carbon energy. The path to low-carbon energy is driven by UK Government and European targets for emissions and renewable energy, which will ultimately deliver an 80% cut in greenhouse gas emissions, compared with 1990 levels, by Meeting these targets will require the UK to reduce emissions from electricity generation through increased deployment of renewable and other low-carbon power generation. Our business plan reflects the resulting impact these changes will have on the gas transmission network. The utilisation of gas will remain an efficient approach to space heating, particularly during winter peak demand, and the use of gas fired power stations will provide an economic way to help balance the variability introduced onto the electricity network by wind generation. Adaptable and flexible Our business plan is capable of dealing with a wide range of potential impacts on the gas transmission network resulting from decarbonisation of the electricity sector and changing supply and demand patterns. Our business plan has been developed around the industry- and stakeholder-supported Gone Green scenario which takes a holistic approach to meeting government targets. We have, however, also tested our business plan against credible alternative scenarios and have identified uncertainties and the corresponding impact on investment to create a robust and flexible approach to the range of credible future outcomes. We achieve this flexibility via our proposed suite of uncertainty mechanisms.? Want to know more? Refer to our Managing risk and uncertainty annex Want to know more? Refer to our Future of energy annex? 04

7 Our key challenges We will deliver our plan in the face of considerable uncertainty, adapting and constantly innovating as our customers needs evolve. We will do this while maintaining our high levels of operational performance and efficiency. In order to do this there are a number of major challenges we need to overcome. Providing capacity to meet our customers requirements We expect to receive market signals for incremental capacity from our customers, and it will be important that we respond to these in a timely and efficient way. To help meet our customers requirements, we are working with them to develop an improved process. Delivery of this capacity will bring with it a greater challenge as a result of the impact of the planning process, as detailed below. Securing planning permission for our major infrastructure projects The Planning Act (2008) requires us to do more work earlier in the planning process including more engineering design and wider consultation before planning permission can be sought. Although we welcome the fact that the planning process is more predictable, this makes the process longer and more expensive. Because the Planning Act is relatively new, the effect it will have on major projects is not yet fully known. We will need to deal with the challenges of the new Act at the same time as increasing the number of planning applications we make as our investment grows throughout the RIIO-T1 period. Given the current level of interest in new infrastructure amongst many of our stakeholders, we will be dealing with these challenges against a backdrop of increased public scrutiny and greater levels of local consultations. Upgrading our critical IT systems Our complex networks rely heavily on a small number of critical IT systems which help us to operate and manage them 24 hours a day, 365 days a year. We review the hardware for these systems approximately every five years to determine how they should be supported. These reviews and subsequent upgrades will allow us to build in the flexibility that we will need to efficiently operate the transmission networks of the future, as well as increasing our cyber-security. Many stakeholders expressed deep concerns about the significantly increased timelines that are likely to result from the Planning Act. Comments from stakeholder workshop, November 2011 Gas Transmission s RIIO-T1 business plan 05

8 Our key challenges (continued) Finding and developing enough people with the right skills Over the next decade we will evolve and update the gas transmission system. Doing this will require more people with specialist skills, people who are currently recruited from all around the world and for whom there is a great deal of competition. In addition, over 400 gas transmission staff are expected to leave or retire between now and To replace these people and further grow our workforce, we anticipate that we will recruit and train almost 600 new employees by the end of the RIIO-T1 period. To ensure we can be flexible enough to achieve our plan, we need to start recruiting now as it can take up to four years to fully train a new starter. We are recruiting via a wide range of channels, and developing our training schemes to make sure our employees have the skills we need. We are also doing as much as we can to increase the number of potential recruits. This includes expanding our apprentice and graduate recruitment programmes as well as working with schools to encourage more children to study science, technology, engineering and mathematics. Managing commodity price volatility Independent, specialist advisors forecast that prices for commodities such as fuel, materials (steel in particular) and specialist labour will rise faster than general inflation. This is a result of increasing worldwide competition for these resources. Our business plan presents evidence of these potential cost increases and explains the actions we will take to mitigate the impact this has on the cost of running our business. Developing the commercial regime to encourage an efficient market The changing nature of supply and customer behaviour is likely to require innovative developments to the commercial regime, to ensure the network retains the required flexibility whilst maintaining security of supply. These developments will be progressed in close consultation with stakeholders as we explore the optimum balance of network investment and commercial evolution. Europe As one of the driving forces behind the creation of the European Network of Transmission System Operators for Gas (ENTSOG), we put a great deal of effort into influencing the way the European energy industry is regulated. Europe will have an increasing effect on the UK s energy regulation and legislation in the coming years, as signalled by the development of European Network Codes. We will work towards our aim that regulation should maximise the benefits to UK consumers while minimising the cost to them by, among other things, ensuring that transmission and supply companies have the right incentives to innovate and invest. A concern raised at more than one event was the shortage of people with relevant skills to meet future energy needs. Comments from stakeholder workshops, March-May

9 Stakeholder engagement Change on the scale we are talking about affects everyone, and we have listened hard in order to produce this business plan. We have always sought stakeholders views, but they have now become an integral part of the way we do business and make decisions. This is a permanent change, not just for RIIO-T1. Under the banner of Talking Networks, we have been proactively engaging with our stakeholders on topics related to our RIIO-T1 business plan. We promised our stakeholders we would discuss our future challenges and plans with them, listen to what they had to say, and act on what they told us. Talking Networks builds on our regular stakeholder engagement activities, through which we have been engaging with our stakeholders for many years on the critical energy challenges facing the UK and Europe as well as on our day-to-day operational activities. These take the form of many different types of engagement, from energy industry discussions through our Transporting Britain s Energy process to community engagement in relation to new infrastructure projects. In the course of developing our business plan, we held 14 workshops, talking directly to several hundred stakeholders with a broad range of interests. We also carried out three consultations, held dozens of bilateral meetings and explored consumers attitudes to transmission. The stakeholders we consulted included consumers (current and future bill payers) and consumer representative groups, government, other regulators (e.g. the Health and Safety Executive (HSE) and the Environment Agency (EA)), the energy sector, environmental organisations, and academic experts. These sessions were facilitated by an independent third party so that we could be sure we were not unwittingly influencing, misunderstanding or misinterpreting what our stakeholders were saying. There has been a positive reaction to our Talking Networks process and the transparency with which we have developed our plan. We will continue to build on our stakeholder engagement activities, liaising with our stakeholders throughout the RIIO-T1 period. We have welcomed the open and transparent way in which the business plans have been developed EdF, November 2011 consultation response? Want to know more? Refer to our Stakeholder engagement process annex or visit Gas Transmission s RIIO-T1 business plan 07

10 Our planned expenditure Over the period we anticipate 6.9bn of totex (total expenditure, i.e. capex plus opex) will be required to deliver the outputs agreed with stakeholders. Our actual spend will be driven by user requirements and we are proposing uncertainty mechanisms to adjust revenues in line with what becomes reality. Total forecast expenditure over the RIIO-T1 period m, 09/10 prices 2013/ / / / / / / /21 Total Customer-driven capital expenditure Non customer-driven capital expenditure System Operator capital expenditure Total operating expenditure Total , , , ,088 1,382 1,

11 In order to deliver the outputs, our plan contains a number of key activities. These can be grouped into five core categories and form the foundations upon which we operate to optimise efficient delivery and drive our choices of delivery model and organisational structure. Load-related activities (customer-driven) Load-related activities represent 55% ( 3.8bn) of our business plan and are activities we must undertake which are directly driven by changes in load patterns or incremental capacity requirements. This includes provision of incremental capacity and management of the process to efficiently facilitate new connections to the transmission network, following receipt of a customer signal. Load-related activities can also arise where there has not been a specific market signal, for example where changing gas flows or utilisation of existing capacity requires action to maintain reliability and availability of the NTS. Non load-related activities (non customer-driven) Non load-related activities represent 32% ( 2.2bn) of our business plan and are defined as necessary activities we must undertake which are not directly driven by changes in load patterns or incremental capacity requirements; this includes the provision of diversions for customers. Asset health activities, including maintenance and decommissioning of existing assets, drive non load-related activities, as does investment in telemetry, property and enhanced security at Critical National Infrastructure sites. Additionally, within the business plan period, non loadrelated investment will be required to mitigate gaseous emissions from our compressor fleet, which is driven by the requirement to comply with environmental legislation. System operation The costs associated with our system operation function are predominantly driven by the resources and IT solutions that we require to safely and economically run the network, whilst still maintaining reliability. System operation represents 7% ( 0.5bn) of our business plan. The System Operator also facilitates a number of activities including maintenance and construction activities, the release of incremental capacity and market facilitation through publication of timely and accurate data. Network planning and support Network planning and support activities represent 3% ( 0.2bn) of our business plan and are those activities which provide the expert technical assistance required to plan and deliver construction and maintenance work. Business support Business support activities represent 4% ( 0.3bn) of our business plan and are defined as operational services such as IT, property management, HR and finance which are provided across National Grid with Gas Transmission s proportion allocated using a regulatory agreed methodology. These support functions aid the delivery of our core activities, and maintain the longterm health of our business by providing key services such as financial control, transactional processing, recruitment and IT support. Want to know more? Refer to our Detailed plan annex? Gas Transmission s RIIO-T1 business plan 09

12 How our plan has changed Since our July 2011 submission, we have updated our business plan in response to Ofgem s and stakeholders feedback. The key differences are: Around 200m of Industrial Emissions Directive (IED) related expenditure brought forward into RIIO-T1 as our understanding of how IED may be transposed into UK legislation develops Unit cost decreases of around 100m as our understanding of IED legislation builds Review of our plan against the updated Gone Green scenario (there is minimal effect for NGG most updates are electricity-related) These updates have had the following impact on our business plan headline numbers: billion July 2011 March 2012 Capex Opex Totex As part of the development of our updated business plan, we have also addressed stakeholders feedback on our initial July 2011 submission. This has included: Creating a new outputs annex, which: Links expenditure to outputs Assesses the impact of delivering more or less in order to justify our baseline plan as the best outcome for consumers Provides more information on our environmental strategy Developing our new Innovation strategy annex, which provides more information on our overall approach to innovation, including commercial innovation. Developing our Detailed plan annex to demonstrate the linkages between capital and operational expenditure. Further justifying our finance proposals by: Providing more detail on the link between risk and the cost of equity Justifying our requirement for 7.5% cost of equity Providing the rationale for our proposed notional dividend policy Developing our stakeholder annex: To demonstrate a wider range of stakeholder views To engage more with the voluntary sector and local communities To explain the implications of our uncertainty mechanisms on charging volatility To show more clearly how stakeholders have influenced our plans 10

13 Outputs During the RIIO-T1 period, we will deliver agreed levels of outputs for safety, reliability and availability, our environmental impact, customer satisfaction and customer connections. In developing the outputs we will deliver over the next decade, we have actively sought stakeholders views on what they want from our network over the period. The following pages examine each of the RIIO outputs in turn. We explain the key elements that contribute to the delivery of each output, including what we already do to deliver these and what we will do in the future. For each output, we describe what was included in our July 2011 business plan, what our stakeholders have told us is important to them, and what we are proposing in our updated March 2012 submission. We list the primary and secondary deliverables in each area and explain how we will be funded and, where appropriate, incentivised to meet our targets over the business plan period. Most of our activities contribute to several outputs, so we have mapped costs to the most significant outputs that each activity delivers. For example, the money we spend on maintaining our network assets contributes to the safety and environmental outputs, but the main reason for the work is to maintain reliability. These costs are therefore split, with 82% allocated to reliability, 14% to safety and 4% to the environmental output. The chart below shows the proportion of our totex costs associated with each output. Not surprisingly, maintaining reliability and availability is our biggest focus. Mapping costs to outputs Following our July 2011 submission, Ofgem and our other stakeholders told us they wanted to see better linkage between our costs and outputs. As a result, each of the following output sections includes our forecast expenditure for RIIO-T1. In assessing how much of our proposed spending can be attributed to each of the outputs, we have made some broad assumptions. Gas Transmission s RIIO-T1 business plan 11

14 Outputs: Safety Safety is at the core of our business and is a top priority for us. We will continue to mitigate risks and strive to eradicate injuries. Our business plan enables us to comply with our statutory duties with regard to relevant safety legislation. Stakeholders have been complimentary of our approach to safety. Thank you for the safest gas networks in the world. Please keep doing it! Stakeholder comment, January 2011 Process safety Process safety is upheld through the maintenance of assets on our network and a series of IT related updates as system operation changes. Our asset health investment programme is therefore structured to ensure the continued safety and integrity of the NTS. Health and Safety Executive representatives believe we demonstrate good alignment of process safety priorities and that we have an exceptional safety record but we should remain vigilant against complacency. Gas Safety (Management) Regulations (Gas Quality) As new and more diverse sources of gas connect to the NTS we will continue to ensure that only gas that is deemed safe is allowed for onward transportation through our network, which will require investment in enhanced monitoring and measurement equipment. Physical security The UK Government (DECC), working closely with the Centre for the Protection of National Infrastructure, has designated a number of our sites and critical IT systems as Critical National Infrastructure. Our security strategy allows for effective and appropriate security measures to be employed to safeguard our above ground assets and provides for the enhanced protection necessary to ensure the continued safe operation of our IT systems. Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will ensure compliance with relevant legislation Stakeholders agreed, stating that safety is not negotiable Our plan is designed to comply with all applicable legislation 12

15 The following table outlines the key deliverables in relation to the safety output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Safety Primary deliverable Compliance with all applicable safety legislation regarding operation of the National Transmission System and all people potentially impacted by it (including staff, contractors, customers and members of the general public) Secondary deliverable Maintenance of a sustainable level of network risk through the use of Network Output Measures (NOMs), our asset health and criticality indices Funding and incentives Ex ante allowance Reputational incentive Relevant uncertainty mechanisms (see page 27 for more details) Asset Health How stakeholders can assess our performance Compliance with Health and Safety Legislation Total forecast expenditure for safety over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total * * Discrepancies between individual numbers and the total are due to rounding Want to know more? Refer to our Outputs annex? Gas Transmission s RIIO-T1 business plan 13

16 Outputs: Reliability and availability Stakeholders have told us that the reliability of the transmission network is important and it is not appropriate for this to be reduced with users consequently picking up more risk as a result of a less reliable service. Network capacity and capability Our business plan includes investment for entry and exit capacity growth which has already been triggered by capacity signals from customers, known activity that is being completed under preliminary works agreements with third parties where no formal signal has yet been received and for capacity signals our market intelligence suggests we will receive. We estimate that during the plan period this will cost 3.7bn if physical solutions are employed. For existing capacity, the network is currently designed to provide a reliable service assuming customer behaviour does not significantly change from the original requirements. With the decline of indigenous gas supplies, the arrival of significant LNG importation terminals, greater European interconnection and the emergence of a new generation of fast cycle storage, the nature and behaviour of connected parties has materially changed. Capability of the network will therefore need to be enhanced and the network innovatively managed to maintain current performance against the reliability and availability output by facilitating these emerging customer behaviours. This may be via the development of commercial, operational or physical solutions. To facilitate this increased network flexibility, we have proposed an uncertainty mechanism that will allow funding for these solutions if the industry agrees it is required. Asset health As with any other type of asset, the condition, reliability and performance of our assets deteriorate with age and use. Maintenance will mitigate against this; however, there will always come a point where replacement (or in some cases, refurbishment) is the more efficient option. Our network consists of a large number of secondary assets (such as valves and pressure regulators) which support the operation of primary assets (such as pipelines) as defined by the asset health and criticality indices Network Output Measures (NOMs) agreed with Ofgem. We utilise the NOMs methodology to indicate a replacement priority for our secondary assets. Our business plan reflects our experience and incorporates learning from other organisations where appropriate to maintain the existing level of asset health. The strategy for asset health investment is to avoid costly replacement of the primary assets (entry points, pipelines, multi-junctions, compressor stations and exit points) by maintaining the reliability, performance and condition of the secondary assets. This will ensure the continued safety and integrity of the primary assets, allowing them to deliver the outputs they were designed to provide. We forecast we will spend 0.6bn over the period on such investment. Unexpected material events can occur and whilst we plan to prevent such occurrences, additional funds will be required to manage these unforeseen events if they do arise. We have proposed an uncertainty mechanism to cater for this should a material event occur. We have included expenditure in our plans to manage the health of our IT assets by refreshing (rather than replacing) hardware and software after approximately five years to sustain the system at its designed level of reliability and availability. 14

17 Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will invest 224m in the NTS to increase capability to cope with changing user requirements, enhancing Network Flexibility Stakeholders supported the need for investment to meet 1 in 20 supply obligations Stakeholders said the case for investment in the rest of the network has not been made and commercial and operational options should be reviewed 52m in our plan to meet supply obligations 9m seedcorn expenditure to keep remaining investment options open Funding for the remaining investment will be triggered by an uncertainty mechanism if a need case is agreed with stakeholders Our asset health framework is designed to maintain the integrity of the network Stakeholders stated that asset health expenditure is not their area of expertise, but the level has been about right up to now We will use Network Output Measures to monitor and maintain the integrity of the network and help prioritise expenditure of 0.6bn The 1 in 20 peak year planning standard should be developed and expanded to cope with changing user requirements Stakeholders agreed that the changing environment warrants a review of this standard Our plan is based on the 1 in 20 year standard, as this is a legal obligation, but we will be reviewing this with industry and regulators Following our July 2011 plan, we spoke to stakeholders about the interactions between the Transmission Owner and System Operator Stakeholders stated that we should always explore interactions and trade-offs to make the most efficient decision for the consumer We have taken a view of the most efficient trade-offs and interactions in our plan, but will adapt these to cope with changes during the RIIO-T1 period Following our July 2011 plan and in response to stakeholder feedback, we considered the principle of anticipatory investment Stakeholders were concerned about the risk of stranded investment and de-linking capacity with user commitment Bi-lateral customer contracts will allow some activities to be undertaken ahead of customer signals. We will develop some of the anticipatory investment principles such as considering commercial intelligence alongside auction signals. Gas Transmission s RIIO-T1 business plan 15

18 Reliability and availability (continued) The following table outlines the key deliverables in relation to the reliability and availability output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Reliability and availability Primary deliverable Compliance with our obligation to convey gas volumes at system entry and exit points in compliance with the Gas Act and other legislation Secondary deliverable Maintenance of a sustainable level of network risk through the use of Network Output Measures (NOMs), our asset health and criticality indices Funding and incentives Ex ante allowance Relevant uncertainty mechanisms (see page 27 for more details) Incremental entry and exit Asset Health Network flexibility Critical National Infrastructure EU and GB market facilitation Buybacks / constraint management Real Price Effects How stakeholders can assess our performance Regular reporting on our performance at the existing industry Operational Forum meeting Total forecast expenditure for reliability and availability over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total ,101 1, ,337* * Discrepancies between individual numbers and the total are due to rounding Want to know more? Refer to our Outputs annex? 16

19 Outputs: Environment Our plan delivers our environmental legislative obligations, supports the decarbonisation of the electricity sector by connecting gas fired generation plant to the NTS and reduces our impact on the environment. Design of the network The Industrial Emissions Directive (IED) will place more stringent requirements on emissions from our compressor fleet in the future. Although the precise impact of the IED is unclear (as it has not yet been transposed into UK legislation), we have identified that 21 compressor drive units will not meet the requirements of the directive and so removal of these is included in our plan. Up to another 24 units could be affected. We will continue to work closely with the environmental regulators and have proposed a specific uncertainty mechanism to provide funding if a level of investment above our baseline forecast is required. Venting (the necessary evacuation of natural gas from our compressors) will be reduced through the development of innovative techniques to optimise maintenance scheduling, compressor operation and decompression techniques. Construction of the network During construction we consider a variety of methods and mitigating measures we can utilise to ensure we deliver our projects whilst minimising the disturbance to the local environment and the threat of polluting nearby watercourses. Stakeholder engagement is a key component of any new routeing. Our business carbon footprint As a group we have traced previously published and verifiable data back to 1990 to define our baseline emission level as 19.6 million tonnes of carbon dioxide equivalent. We are committed to reducing our emissions by 80% by 2050, compared to 1990 levels. Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will take action to minimise our impact on the environment both directly through reducing our own emissions and through our role in facilitating the decarbonisation of energy Most stakeholders saw our primary role as facilitating the connection of renewable energy, although some were interested in our own business carbon footprint Our plan anticipates new connections, which support decarbonisation of the electricity network, the funding for which will be provided by an uncertainty mechanism We will comply with government requirements to lower our business carbon footprint and have set targets to reduce our emissions by 80% by 2050, compared to 1990 levels As a sustainable and responsible business, we are considering taking voluntary action above legislative obligations Stakeholders said this was an individual business decision and consumers should not pay for voluntary action Actions above legislative requirements are not included in our RIIO-T1 submission Gas Transmission s RIIO-T1 business plan 17

20 Environment (continued) The following table outlines the key deliverables in relation to the environment output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Environment Primary deliverable Compliance with all applicable environmental legislation Secondary deliverable The SO incentives, currently under discussion with Ofgem, are likely to cover deliverables such as venting of natural gas to the atmosphere Funding and incentives Ex ante allowance to replace gas generators currently known as non-compliant Relevant uncertainty mechanisms (see page 27 for more details) Asset Health Industrial Emissions Directive Real Price Effects How stakeholders can assess our performance Compliance with environmental legislation we are required to meet EA and SEPA standards as set in site permits for emissions We report through the Regulatory Reporting Pack s annual emission performance We publish information annually relating to our business carbon footprint Total forecast expenditure for environment over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total ,083 Want to know more? Refer to our Outputs annex? 18

21 Outputs: Customer satisfaction To deliver our part in meeting the UK s climate change targets, we need to be a flexible organisation that is in tune with the market environment and with our customers. Customer research helps us understand our customers perspective of our performance and helps us continuously improve our customer service levels. Feedback is important to us and as such we introduced a formal survey in 2009 to help identify potential improvements to our customer service levels. This survey will be further enhanced throughout the RIIO-T1 period. Our work in this area is underpinned by our customer commitment, which articulates for ourselves and our customers what is expected in the delivery of our services. There are, however, times when we get it wrong and so we have introduced a formal complaints process that provides an independent escalation route in the event that customers do not receive a satisfactory resolution to their concerns through their normal day-today contacts. Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will introduce a customer complaints process Stakeholders felt that tracking customer complaints is a good measure of customer service We have implemented a complaints process and customer commitment to drive improvements in our service We will improve our website Stakeholders said our website is difficult to navigate We have started work on website improvements and these will be released incrementally over the next 12 months We will consider stakeholder requirements in relation to predictability of charges Stability is the preference, but if unachievable, charges must be predictable and transparent We have adjusted our financing proposals to make revenue recovery smoother over the period and are progressing developments to improve the transparency and predictability of charges Following our July 2011 plan we discussed a customer survey as the tool to measure customer satisfaction Stakeholders were wary that customer satisfaction would be measured by surveys alone. The survey itself must not be a resource burden on stakeholders. We continue to work with Ofgem and the other TOs on the format of the survey Gas Transmission s RIIO-T1 business plan 19

22 Customer satisfaction (continued) The following table outlines the key deliverables in relation to the customer satisfaction output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Customer satisfaction Primary deliverable Improved levels of customer satisfaction and development of a customer satisfaction survey. We will be measured and incentivised according to the results of the survey. Secondary deliverable Not applicable Funding and incentives Ex ante allowance for staff and systems Financial incentive based on annual customer survey (+/- 1% of total annual revenue) Discretionary reward for outstanding stakeholder engagement (up to 0.5% of total annual revenue) Relevant uncertainty mechanisms (see page 27 for more details) EU and GB market facilitation Real Price Effects How stakeholders can assess our performance Publication of survey results and our stakeholder engagement submission Total forecast expenditure for customer satisfaction over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total * * Discrepancies between individual numbers and the total are due to rounding? Want to know more? Refer to our Outputs and Stakeholder engagement process annexes or visit our Customer Commitment website: TransmissionCustomerCommitment 20

23 Outputs: Customer connections A connection to the NTS is essential for the input or offtake of gas; however, the provision of it does not entitle the connected party to take or deliver gas. Under the Gas Act, only registered Shippers, Distribution Network transporters and interconnector operators are able to input or offtake gas and to do so they must hold capacity rights. Capacity rights are available through auction / application processes or bi-lateral agreements, which are separate to the process for gaining a connection. Many of our stakeholders consider connections as a key priority for National Grid. The process of obtaining a connection is seen as complicated and lacking clarity regarding timescales. A modification to the Uniform Network Code is currently being progressed which will deliver clearer timescales around the gas connection process. We will adopt the principles of this Modification Proposal and adhere to clear deliverables and timescales in relation to providing connection offers. In response to stakeholder feedback we are developing a process to align the connections and capacity processes to deliver improvements. In our Detailed plan annex we propose high level process steps we will follow. We are proposing that our obligated lead time is reduced to 24 months for the delivery of entry and exit capacity from current timescales of 42 and 38 months respectively. Our proposal in July 2011 What stakeholders said What is in our March 2012 plan We will develop the connections and capacity processes to align them and to mitigate against the implications of the Planning Act (2008) on delivery timescales Stakeholders supported further development of the processes and would like to fully explore and understand a number of options We have proposed a high level process that specifies the steps we will follow in delivering incremental capacity We propose that our obligated lead time to deliver incremental capacity is reduced to 24 months Gas Transmission s RIIO-T1 business plan 21

24 Customer connections (continued) The following table outlines the key deliverables in relation to the customer connections output, how it will be funded and our anticipated investment over the RIIO-T1 period. Output Customer connections Primary deliverable Meeting our licence obligations to deliver timely capacity and connections. We will be subject to a penalty-only incentive for failing to meet these obligations Adhering to the requirements of UNC Modification 373 in relation to the delivery of connection offers Delivering incremental capacity in 24 months from the acceptance of a formal capacity signal Secondary deliverable Not applicable Funding and incentives Incentive around the reduction or lengthening of obligated lead times Volume driver for incremental capacity Relevant uncertainty mechanisms (see page 27 for more details) Incremental entry and exit How stakeholders can assess our performance Compliance with our Gas Act and licence obligations Revenue driver consultations and results, along with the spending or gaining of permits through the incremental capacity application methods will demonstrate the progress of connections Total forecast expenditure for customer connections over the RIIO-T1 period ( m, 09/10 prices) 2013/ / / / / / / /21 Total * * Discrepancies between individual numbers and the total are due to rounding Want to know more? Refer to our Outputs annex? 22

25 How we will deliver To provide the outputs our stakeholders want, we will continue to optimise our structure and deliver work efficiently. Deliverability We need to make decisions on delivery models, organisational structure and our preferred balance between cost and risk. We have weighed up the benefits of alternative delivery models for our main activities and have explored the trade-offs between activities to deliver required outputs. Delivery models Delivery models are the methods and contracting strategies for undertaking work, both within the business and the choices we make about the mix of work completed in-house or by third parties. We currently use different combinations of delivery models across our activities to optimise efficient delivery. We take a variety of factors into account such as the complexity of the work, where the expertise sits, the need for flexibility and economic factors when assessing whether insourcing or outsourcing is most appropriate and what this should look like. For example the majority of our work relating to designing customer connections is outsourced as this allows us to respond to variations in workload. On the other hand our analysis in relation to providing extra capacity on the network requires specialist knowledge and expertise which we possess in house and would require significant preparation before work could be transferred externally. We therefore carry out the majority of this work internally. Equitable trade-offs In undertaking our operations, we make a number of trade-offs between different costs, risks and benefits. The main trade-offs within our business are the interactions and relationship between our Transmission Owner (TO) and System Operator (SO) functions and balancing capital and operational costs in relation to asset replacements, refurbishment and maintenance. As TO and SO, our risk profile is different to networks which are TO only. This is considered within our risk and uncertainty analysis and our finance package.? Want to know more? Refer to our Managing risk and uncertainty and Finance annexes We assess the operational, physical investment and commercial options available to us and assess which is the most efficient outcome for consumers. This may, for example, include putting in place a contract with a particular operator on the network. We will keep these trade-offs under review throughout the business plan period and change the trade-off if it no longer offers the most efficient option, for example if liquidity in the market reduces and costs for contractual solutions become disproportionate relative to physical build. Throughout the business plan period we will continue to review and evolve our practices, seeking to continually improve and find innovative ways of working. Gas Transmission s RIIO-T1 business plan 23

26 How we will deliver (continued) Efficiency We anticipate that we will be entering a phase of steep capital and workload growth; delivering investments required by our customers whilst operating and maintaining an increasing asset base. As such, the majority of our costs are increasing and a growing element of our forecast efficiencies takes the form of delivering more for the same through productivity initiatives, mitigation of upward pressures and spend to save transformation programmes, along with more traditional cost reduction methods. Innovation will be critical in ensuring the efficient delivery of our challenging plans. For operational expenditure, we have embedded an average long-term efficiency level of 1.3% per annum. This efficiency level is challenging and is at the top end of historical utility averages and regulatory precedent. As demonstrated below, the embedded efficiency (which we expect to deliver through avoided cost efficiencies due to forecast workload growth) will help to offset upward cost pressures. As an organisation we have been actively involved in European gas benchmarking since 2004 through the Gas Transmission Benchmarking Initiative (GTBI). Participation in this initiative allows us to share and gain knowledge across Transmission System Operators, identifying and learning from best practices. This group has shown that we hold a leading position in terms of operation and maintenance. As demonstrated below 93% of our current cost base has been market tested via competitive tenders and/or benchmarked in the last four years. Proportion of our expenditure benchmarked / market tested Non-load related capex and maintenance Load related capex and connections System operation Network planning and support Business support million Offsetting upward cost pressures Other 7 IS capabilities 8 Resourcing 11 Asset condition 7 Real prices 16 Efficiencies /11 Upward cost pressures Efficiencies 2020/21? Want to know more? Refer to our How we will deliver and Efficiency and value for money annexes Benchmarked Market tested Not tested We are a long term business. The scale of asset replacement and system reinforcement needed gives us an opportunity to invest in the latest technology to deliver long-term value. We are currently incentivised to focus on the lowest cost choice from a capex and opex perspective. This may not always be the right approach as it does not consider future stakeholders needs. We have therefore developed a Whole Life Value process that focuses on all the different aspects of stakeholder needs on a systematic basis. This framework supports our investment and policy decisions, with the aim of creating an enduring value over the lifetime of our assets. m 24

27 Innovation Innovation is a fundamental principle of RIIO and will be an essential tool in meeting the challenge to facilitate decarbonisation of the energy industry, drive down the cost of our services and to continuously improve our processes. Innovation in all its forms (new technology, commercial innovation and new ways of working) has huge potential to drive our business forward and enhance delivery of stakeholder required outputs. Without innovation, a low-carbon future for the UK s economy is much less likely. Innovation already plays a crucial role in enabling us to meet the challenges we face. Over the 20 years since privatisation, our partnerships and industry experience have enabled us to adopt innovative practices. These have minimised the cost of our activities or brought about environmental, safety and reliability improvements. We are committed to being an innovative leader in energy management and this commitment is supported by our stakeholders. In order to foster an innovative culture, we have worked closely with a variety of different organisations to understand how they have maximised their potential for innovation. Identification & prioritisation of research areas Identify, monitor and act on external technological shifts Prioritise schemes that focus on driving value for stakeholders and mitigating future risk DELIVERY OF INNOVATION TO DRIVE PERFORMANCE Harnessing internal innovative capabilities Grow our innovative culture to build on historical successes Empower our staff to innovate, providing them with the time and tools to succeed Collaboration with external parties Leverage existing and new partnerships with research institutes and academia Collaborate and share best practice with the wider energy industry MANAGEMENT OF THE INNOVATION PROCESS In response to stakeholder feedback we will be developing innovative commercial arrangements to deal with the implications of new legislation. A key problem is the impact of planning; National Grid should be more innovative and should work together with the network users to overcome problems in this area. Stakeholder comment, November 2011 We will investigate innovative commercial solutions in order to create a more flexible and dynamic network. Commercial tools could encourage industry participants to minimise their impact on the system. Stakeholder comment, March 2011 We will also embrace innovation in striving for continuous improvement in the services we offer our customers. As recognised by our stakeholders, innovation will be crucial in meeting the challenges of the future and it will be vital that sufficient funding is made available. To make the most of the innovative opportunities available, we have developed a business case to support the full 1% of TO revenue available through the Network Innovation Allowance (NIA) funding mechanism. We will also seek funding through the Network Innovation Competition (NIC). Want to know more? Refer to our Innovation strategy annex? Gas Transmission s RIIO-T1 business plan 25

28 Managing uncertainty In light of the uncertainty associated with an eight year period and the possible level of change versus our forecasts, our plan contains some activities and investments which will be required under all future scenarios and others which will only be required under some. 10% 9% Our business plan is based on forecasts of output requirements and demand for network services over time, the associated cost of delivery and financing costs. Setting values in advance of the resolution of uncertainties and the eight year length of the control will mean that there will be a degree of uncertainty associated with the forecasts. Building on our existing risk management analysis, we have developed a risk model to better understand the risks that our business will face, how those risks might best be managed and to evaluate the relationship between uncertainty mechanisms and the required rate of return. We have proposed a number of mechanisms to manage this uncertainty and have maintained the principle that risks should be borne by the party best able to manage them. A simplified version of this model is available on our stakeholder engagement website, The results of our risk analysis are shown below. Our modelling suggests that we will be exposed to more risks during RIIO-T1 than during the previous price control period, i.e. the spread of possible returns is greater. We have proposed a package of uncertainty mechanisms that has the effect of reducing the spread of returns during the RIIO-T1 period to levels which are as close as possible to those that have prevailed during the current price control period. Since July 2011 we have discussed our proposed mechanisms with stakeholders. Stakeholders were supportive of the principle of utilising uncertainty mechanisms, although they noted that it is difficult to understand the implications of each one. The potential impact of the mechanisms on our revenue recovery is shown in the graph below. The orange line represents baseline funding assuming no new incremental revenue is triggered by uncertainty mechanisms. The black line represents baseline funding plus the signals for incremental capacity that we expect to be triggered during the period our best view. The blue shaded area on the graph depicts what we believe the credible range of incremental signals could look like. 8% 7% % % 4% TPCR4 Changes to incentive rate mechanism 8 year control & 50% incentive rate Change to revenue driver policy Industrial Emissions Directive uncertainty mechanism Asset Health uncertainty mechanism Other uncertainty mechanisms Change in gearing to 55% Debt risks RIIO m (2009/10 prices) / / / / / / / /21 26

29 The uncertainty mechanisms we propose are: Uncertainty mechanism Details Incremental Entry and Exit Provides funding for load growth triggered by customer signals. A generic methodology will be agreed at the start of the business plan period that will be used, along with a unit cost library (and subject to RPE uplifts and RPI indexation) to calculate an allowed revenue adjustment following receipt of an incremental capacity signal. Network Flexibility Following the identification of a requirement for action to be taken through scenario development, customer requirements or operational trends, the need case and potential solutions will be discussed with stakeholders. The outcome of this will be used to form the basis of a submission to Ofgem for funding for identified operational, commercial or physical solutions. Buybacks / Constraint Management This will provide funding to manage both the inherent level of risk on the transmission system and changes. Our proposals in this area will be submitted as part of our May 2012 SO incentive submission. Asset Health This provides for funding in the event of a low probability, high impact unexpected event such as a material safety notice from the original equipment manufacturer. Triggered at 10% of our baseline asset health expenditure. Industrial Emissions Directive This provides funding for the management of non-compliant NTS gas generators over and above what is in our business plan if the requirements of this directive differ once they are transposed into UK law EU and GB market facilitation This provides funding in the event that regulatory or legislative developments result in a change to our processes. Triggered at 10% of our baseline SO capex expenditure. Real Price Effects Steel price tracker with cap/collar and recovery outside of defined boundaries. Critical National Infrastructure In the event that the scope of government requirements in relation to site security differ, this uncertainty mechanism will trigger additional funding.? Want to know more? Refer to our Managing risk and uncertainty annex Gas Transmission s RIIO-T1 business plan 27

30 Financing our plan In 2010, Ofgem s Project Discovery estimated that up to 200 billion of investment might be required in the UK energy market by the end of the decade. While investors generally value our regulatory environment, particularly its transparency and record of regulatory consistency, some investors are understandably nervous about the introduction of RIIO as a new regulatory framework. It is not a given that we will automatically attract the equity required to fund our investments over the next decade in the face of competition for these funds. Investors are globally- and industry-mobile and we need to ensure we have a package that is sufficient to attract their investment. These are long term investments and these businesses need to be able to demonstrate that they can generate cash flow and pay the providers of capital over the historic investments on a long term sustainable basis. Investor comment, April 2011 In developing our financial package we have assessed our proposals against a number of filters including credit and equity metrics, the impact on consumer bills and compliance with Ofgem s financial policies. The resulting financial package is robust against the baseline business plan forecast and a credible range of plausible outturn scenarios. In addition, we have considered the evolving risk profile from the previous price control period to RIIO-T1. In assessing financeability, we have generally performed our review at the aggregate Gas Transmission level i.e. considering the TO and SO together. The SO form of control is relatively small in the context of Gas Transmission overall and financeability of the business would always be viewed at this aggregate level. Our proposal balances affordability for consumers and financeability. It should be noted that the combination of all our proposed measures is required to address the funding issues created by the scale of investment required over the RIIO-T1 period and to provide sufficient incentives to encourage longer-term investor participation, including equity injections. As a result, any deterioration in any one of the components is likely to require an offsetting movement in one of the others. Since July 2011 we have reflected on the implications of our previous proposals for the volatility of charges, a subject we know our customers are concerned about. We have developed a proposal that splits the capitalisation rate between one rate for baseline allowances and one for allowances funded through capex-intensive uncertainty mechanisms. We have tested this alternative proposal and found it to result in less volatility of, and greater predictability of, charges while also delivering a financeability solution that is more robust to changes in capex requirements. We have also obtained additional evidence with regard to our choice of dividend assumption, the impact that raising equity has on required returns, and on both the theoretical and real world relationship between risk and required equity returns. Having reviewed the additional evidence we believe our proposed cost of equity of 7.5% remains appropriate. 28

31 Cost of equity As combined TO and SO, our potential regulated return on equity (RORE) could be between 3.6% and 11.1% (real), although this will evolve as our SO incentive returns are the subject of ongoing discussions with stakeholders over the next few months. Estimates have been made for this in the chart to the right, which illustrates the plausible RORE range using a 50% efficiency rate. Our finance package can be summarised as: Cost of debt Ofgem s index (assumed) Notional gearing Notional resulting WACC Capitalisation rate baseline allowance 7.5% 3.2% 55% 5.1% 57% Return on Regulated Equity 11% 10% 9% 8% 7% 6% 5% RORE Analysis: Gas Transmission Capitalisation rate capex intensive uncertainty mechanisms 90% 4% bn, 09/10 prices Closing Regulatory Asset Value Core revenue 2013/ / / /17 Want to know more? Refer to our Finance annex 2017/ / /20? 2020/ % Cost performance 10% Cost of debt Shinkage (SO) Capacity buyback (SO) Tax trigger deadband Stakeholder engagement Customer satisfaction IQI Cost Return per WACC (7.5%) Gas Transmission s RIIO-T1 business plan 29

32 Impact on customer charges The following diagrams give a rough indication of our plan on locational NTS entry and exit capacity charges, which can only be illustrative at this stage. The diagrams provide an overview of the direction and magnitude of price changes at a number of key points on the network for both the peak investment year in our plan and the end of the RIIO-T1 period. The figures shown are in 09/10 prices. 2013/ / p/kwh/day p/kwh/day p/kwh/day p/kwh/day p/kwh/day p/kwh/day p/kwh/day p/kwh/day p/kwh/day p/kwh/day 2020/ p/kwh/day Entry charges Exit charges p/kwh/day p/kwh/day Transportation Models reflective of the network have been prepared for 2013/14, 2018/19 & 2020/21. Modelled supply and demand flows are consistent with National Grid NTS s 2011 Ten Year Statement. Revenue figures are based on our RIIO-T1 best view figures. An expansion factor of 4,344 /GWhkm has been used for all years. The figure has been updated form the current expansion factor to reflect the unit costs our plan is based on for RIIO-T1. Existing Annuitisation Factor of used for all years p/kwh/day p/kwh/day 30

33 Impact on consumer bills Based on Ofgem s Factsheet 97, Household energy bills explained, gas transmission services cost each household, on average, just over 18 per year in 2010/11. This is approximately 3% of the average annual household gas bill. During RIIO-T1, our business plan will initially increase the transmission element of the average bill to a high of just over in 2018/19 as our capital investment increases. After this peak, however, this will fall (reflecting our investment plan) to around by the end of the RIIO-T1 period in 2020/21. We believe this is a relatively modest price for connecting new sources of gas, allowing existing sources to expand their capabilities and renewing our ageing assets in a way that supports Great Britain s need for reliable, affordable and sustainable energy for the next 40 years or more. Gas Transmission element of average annual household bill / / / / / / / /21 Historical Spend New Investment Other Income Gas Transmission s RIIO-T1 business plan 31

34 Summary of key data million (09/10 prices) 2013/ / / / / / / /21 Total Load-related baseline capital expenditure Load-related uncertainty mechanisms ,337 Load-related revenue drivers from historical price controls Non load-related capital expenditure ,677 SO capital expenditure Total capital expenditure ,233 1, ,684 TO controllable operational costs SO controllable operational costs Network Innovation Allowance costs Total operating expenditure ,191 Total expenditure Total funded - baseline ,088 1,382 1, , ,070 Total funded uncertainty mechanisms ,337 Funded separately Closing Regulatory Asset Value 4,909 5,190 5,688 6,321 7,175 7,946 8,122 8,045 Core revenue 1,122 1,062 1,097 1,149 1,250 1,281 1,192 1,140 9,293 Any discrepancies between individual numbers and totals are due to rounding 32

35 Who we are National Grid Gas Transmission We own and operate the gas national transmission system in Great Britain. Gas Transmission System Today, our network consists of over 7,634 km of high pressure pipeline, 23 compressor stations and connections to third party independent systems and 8 distribution networks for onward transmission of gas to end consumers. We employ around 900 people. We estimate that at the end of the period we will have an additional (net) 803 km of pipeline, and 39 new compressor units. We anticipate that our plan will create almost 200 new jobs. Next steps for RIIO-T1 31 May SO incentive business plan submitted December RIIO-T1 final proposals published Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2 March Updated business plan submitted 26 July RIIO-T1 initial proposals published January Network decision on final proposals In Great Britain, we are used to our gas system working, safely, as a matter of course. It is easy to forget that this does not simply occur naturally. As we enter this period of change, it becomes more and more difficult to maintain the dependability we have all come to expect. Everyone in the country depends on safe, reliable, affordable energy we connect people to the energy that powers their lives and everyone will be affected by the country s success in reducing its carbon emissions. We will carry on listening to all of the people whose lives we affect. In our decisionmaking we will take our stakeholders views into account, as we play our part in ensuring that Britain has what it needs for the new age of energy. Gas Transmission s RIIO-T1 business plan 33

36 For more information and our full plan see For further information contact Pauline McCracken Transmission Price Control Manager National Grid House, Warwick, CV34 6DA National Grid plc 1-3 Strand, London WC2N 5EH, United Kingdom Registered in England and Wales No