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10 th SG Meeting, GRI SSE. GRI South South-East Region. Milano, 5 May 2011. Agenda. Agenda. 1. Opening. Approval of the Agenda Approval of the minutes of the 9th SG meeting. 2. Updates. Countries 3rd Package implementation Infrastructure projects.
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10th SG Meeting, GRI SSE GRI South South-East Region Milano, 5 May 2011
1. Opening • Approval of the Agenda • Approval of the minutes of the 9th SG meeting
2. Updates • Countries • 3rd Package implementation • Infrastructure projects
2. Summary of Coordination meeting with ACER • The elaboration of concrete, ambitious, realistic and consistent roadmaps should be our top-priority for the next 2 months • Their endorsement by all stakeholders, including MS, is essential • More focused on projects than on regions • When relevant, designation of a NRA to lead and report on each identified project should be promoted • Close monitoring, transparency and effectiveness should be continuously looking for in order to maintain stakeholders' confidence
Internal EU gas market • What do we want to achieve? • Internal EU gas market • How we want to achieve this? • First we need to enable functioning wholesale markets (“markets”), where they do not exist yet. • As second step we need to connect these markets better to move forward to an integrated market. Basic conditions need to be established in all countries No one size fits all solution possible
Overview of the MECO-S model for EU gas market integration MECO-S Model Pillar 1:Enable functioning wholesale markets Pillar 2:Tightlyconnect markets Pillar 3:Enable securesupply patterns Improve effectiveness by realizing economic pipeline investments Pillar 1: Structuring network access to the European gas grid in a way that enables functioning wholesale markets so that every European final customer is easily accessible from such a market. Pillar 2: Fostering short- and mid-term price alignment between the functioning wholesale markets by tightly connecting the markets through facilitating cross-market supply and trading and potentially implementing market coupling as far as the (at any time) given infrastructure allows. Pillar 3: Enabling the establishment of secure supply patterns to the functioning wholesale markets. Foundation: Improving the effectiveness of pillars 1 to 3 by making sure that economic investments in pipelines are realized.
Where do we have functioning wholesale markets yet? • Depending on the definition applied between 1 and 5 functioning gas markets exist in Europe today! • Shall we strive to create 25 functioning gas markets? • Will this foster competition in the retail markets? • Would the German gas market have developed the same if we had not reduced the number of zones (~20) by merging them? • Would the French gas market have developed the same if we had not reduced the number of zones (5) by merging them? Can markets be enabled without liquidity only via better connection?
Definition of“Functioning Wholesale Markets” • A functioning wholesale gas market is • a single price zone* that is • accessible to incumbents and new entrants on equal(i.e. non-discriminatory) terms and where • trading is liquid(i.e. vivid and resilient at the same time), so that it • creates reliable price signals in the • forward and spot markets • which are not distorted, even if substantial volumes are bought or sold in this market (in other words: no single transaction shall distort the market price) * This is to be interpreted in the economic way (i.e. one market price for the same (identical) product at the same time at the same place)
The question is, how can those member states that do not already profit from a functioning gas wholesale market be brought in a such a position? • The most important impediments to the emergence of a functioning wholesale market are: • a) Lack of market size (i.e. measured by consumption) • b) Improper market architecture • c) Lack of access to the market
The question is, how can those member states that do not already profit from a functioning gas wholesale market be brought in a such a position? • The MECO-S model addresses these issues by suggesting to: • a) Implement markets as integrated zones using one of the following market architectures: • Market areas, or • Trading regions • b) Make sure that every zone caters to a consumption of at least 20bcm • Member states with larger gas consumption can realize this within their own borders • Member states with smaller gas consumption should cooperate with other member states in this respect • c) Make sure that the zone has access to at least three different sources of gas • E.g. domestic production, EU import points, LNG terminals or connection to other functioning markets that fulfil the criterion • NB: The requirement that (sufficient) access to these capacities must be possible is handled inpillar 2 and the common foundation (i.e. investment).
How to enable functioning wholesale markets? • Different pictures all over Europe call for different approaches which are not mutually exclusive • If a country is capable of establishing a functioning market itself the establishment of one (or two, based on C/B analysis) zone within this country is important (e.g. GB, Germany, France, Spain) • If a country is not capable of establishing a functioning market itself (e.g. due to lack of liquidity or size) • Cross-border market areas (full merger) is one solution, or • Accession to a larger, already functioning market, or • Trading Regions - a single cross-border zone for wholesale markets with congestion-free interconnection to national end-user zones.
VP VP The Market Area Model Country A • Features: • One virtual point for wholesale trading • Fully integrated wholesale market • One balancing zone from import points to final customers • Full integration of DSO networks • Single set of balancing rules • Single balancing entity Market Area A National market area Final customers (A) Country A Country B Market Area AB Cross-border market area Symbols Virtual point of the market area serving as the sole marketplace of the market area Entry or exit contract Exit contract VP Final customers (A) Final customers (B)
VP VP The Trading Region Model Features: • One virtual point for wholesale trading • Fully integrated wholesale market • Trading region is basically kept free of imbalances • Final customers are balanced in national end user zones that may reflect national specifics • End user balancing may be done by national balancing entity • Congestion-free interconnection between trading region and end user zones through the common virtual point ( virtual exit to end user zone) Country A Country B Trading Region AB End userzone A End userzone B Final customers (A) Final customers (B) Legend and Symbols End user zone = National balancing zone for national final customers, no matter the system (distribution or transmission) they are connected to Trading Region AB = Cross-border entry/exit system including all nominated points on the transmission systems of countries A and B Entry or exit contract Exit contract Virtual point of the trading region serving as the sole marketplace of the trading region and all attached end user zones. Shifting of gas between trading region and end user zone is done by nominating a virtual exit on the VP.
What needs to be done in all approaches? • Prerequisite for merging market areas and creating trading regions: • Absence or at least limited physical congestion • As soon as we are talking about cross-border integration the following issues have to be analysed • Entry / Exit Tariffication • Redistribution of revenues and costs • Alignment of regulatory framework • Investments • TSO as well as NRA cooperation
Country C Country D VP VP Market Area CD Country A Market Area A VP Country E Country F Trading Region EF Country B End user zone E End user zone F Market Area B VP VP MECO-S Model: Architecture at Large Legend and Symbols Hub to Hub capacity product and potentially market coupling Virtual point.
Common position of European gas industry associations on multi-systemoperation of TSOs
The second step: connecting markets • Connecting markets means price alignment between functioning markets and thereby driving market efficiency and public welfare on a European scale • Connecting markets can happen at different timescales. • In the afternoon session we will discuss a measure for short-term trading.
4. Energy Work Plan 2012-2014 • Energy Council on February 4th: “we will have achieved an IEM by 2014” • Coordination meeting by Lead Regulators of ERI and GRI with ACER • European Commission requested a 3 year Road Map (The Energy Work Plan) aimed at achieving an IEM by 2014
4. Energy Work Plan 2012-2014 Questions to SG • Is it realistic to have one fully integrated market area in the region ? • In which MS of the region a fully functioning wholesale market can be established by 2014? • Alternatively, with which MS a closer integration would be necessary to achieve a functioning wholesale market ? What will be the impact of merging market areas (eliminating capacity booking on some IPs)? • Which pilot projects to start with in order to establish this closer integration?
4. Energy Work Plan 2012-2014 Questions to the SG • Who is involved in the pilot project? • Who is taking the lead in these pilot projects? Questions collected right here and in written till 20th May Communication – then a draft European Work Plan will be circulated in order to present it to the EC by end of June
5. Potential pilot projects • Potential pilot projects for creating functioning wholesale markets on a cross-border basis • IP Arnoldstein • Possible Trading regions in SSE ?
6. Polish Network Code - Update EFET letter on promotion of competition in the Polish Gas market
Balancing FG public consultation launched by ACER Deadline for providing comments and suggestions: 12 June 2011
Problem identification Lack of access to relevant information, flexible gas and network capacity reduces shippers’ ability to balance efficiently Fragmentation of balancing zones may create barriers to cross-border trade Some imbalance charges do not provide the right incentives to shippers and are potentially discriminatory Non-market based methods for TSO procurement of balancing services reduce market liquidity All of this results in TSOs doing most of the balancing instead of the market
Revised FG: Shipper and TSO roles and responsibilities TSO pro
Revised FG: Balancing periods TSO pro
EIP diagnosis & objectives • Diagnosis = potential lack of investment in infrastructure to implement the energy strategy • The "market" may not always finance the investments • Cross border investment decisions made at a national level • Promote investment in case of • Positive externalities • Regional benefit • Issue: filling the gap between market value (shippers’ willingness to pay) and cost
Regulators’ approach to investment • Developing infrastructure to the benefit of competition and market integration • Different situations • Market design (ex: merger of balancing zones): no need for market based procedure • Interconnectors: possibility of TPA exemption • Interconnections: market based mechanisms (open seasons) • A rational approach to infrastructure development • Priority to a sound use of existing infrastructure • Assess the need for new infrastructure (market test) • Investment agreed regarding its market value, but also security of supply, competition, etc.
Existing tools (1) • Ex-ante approach: open seasons • Value based methodology focused on shippers’ willingness to pay • Investment decision based on an economic test • When the collective (non commercial) value is higher than the market value: investment may be rejected while potentially desirable • Additional value of the infrastructure may be due to • Security of supply • Positive externalities • Benefit for competition and market integration • Challenge: addressing these dimensions when designing an open season
Existing tools (2) • Ex-post approach: tariff contribution to revenue allocation • Cost reflective entry/exit tariffs allow to cover the costs in a balanced way for cross-border infrastructures • Limits and risks • Cost based tariffs higher than the market value of the service proposed • Risk of underuse of the infrastructure during the asset’s life • Challenge: filling the gap between cost and value and allocating the risk of sunk cost
Main drivers for new infrastructure cost allocation as part of the TYNDP • Market integration • Identify where the European system lacks of capacity to guarantee a sufficient level of cross-border interconnection open to TPA • According to EWI-Study and ENTSOG’s TYNDP, the EU gas grid- in technical terms - is well developed but some (physical and potential) bottlenecks identified • Precondition to avoid inefficient network expansion is effective capacity management • Security of supply • TEN-E projects, the EEPR and the reverse flow projects to be included in the TYNDP • Need to simulate system’s reaction over longer periods based on different demand scenarios • Depending on the TYNDP results cost allocation is driven by • Open Season procedures and/or • Cost allocation rules according SOS regulation
Focus on cost allocation • Specific mechanism only justified when • Shippers’ willingness to pay is below the collective value of a cross border investment AND asymmetry of benefits between adjacent countries • Regional benefits of a national investment • Need for a sound diagnosis • Evaluation of externalities and respective national benefits • Identification of risks • Cross border cost allocation options • Cross-border subsidy or financial support from the benefitting country • EU subsidy if regional, community benefit Fill the gap between cost based tariffs and the market value of the services
Conclusions • Market based approach should remain the reference • Internalise externalities • Prevents from over-investments which could result in high sunk costs • Tariffs allow to cover costs in most cases • Main risk: underuse of a new built infrastructure • Cost allocation also relates to risk allocation and sunk cost coverage • EU support and cost/risk allocation have to be designed before the decision to invest is made and based on a sound methodology
10. AoB • EFET statement on capacity allocation in Hungary • IG meeting on implementation of SOS Regulation, beginning of December (risk assessment, preventive action plans, regional ten year network development statement GRIPs..)
Closure Thank you very much!
