1. Enabling MarketsInitial assessment of merging market areas & trading regionsGas Target Model Workshop London, 11 April 2011 Walter Boltz Chairman, CEER Gas Working Group

2. 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

3. 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 realising 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 realised.

4. 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?

5. 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.

6. 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)

7. 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.

8. 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

9. 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.

10. Common position of European gas industry associations on multi-systemoperation of TSOs

11. 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.

12. Thank you for your attention! www.energy-regulators.eu