10 th SG Meeting, GRI SSE Milano, 5 May 2011 GRI South South-East Region.

10th SG Meeting, GRI SSE

Milano, 5 May 2011

GRI South South-East Region

210th SG Meeting, Milan, 5 May 2011

Agenda

Agenda Topics Rapporteur

Arrival and registration

1.Opening- Approval of the agenda- Approval of minutes of the 9th SG meeting

Co-Chairs

2.Updates- Countries - Madrid Forum- ACER, SAP meeting, South Stream meeting

Co-Chairs

3. Gas Target Model- Creating functioning wholesale markets- Connecting markets- Enabling secure supply patterns

Co-Chairs


Agenda

Agenda Topics Rapporteur

4. Energy Work Plan 2012-2014 RCC

5. Potential pilot projects for creating functioning wholesale markets on a cross-border basis

Co-Chairs, SG

6. EFET letter on promotion of competition in the Polish Gas market

SG

7. Framework Guidelines on Balancing AEEG

8. European Infrastructure Package Co-Chairs

9. Infrastructure Updates TSOs

10. AoB SG


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


3. Gas Target model


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

Improve effectiveness by realizing economic pipeline investments

MECO-S Model

Pillar 1:Enable functioning wholesale markets

Pillar 2:Tightly

connect markets

Pillar 3:Enable secure

supply patterns

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.


The Market Area Model

• 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

Symbols

Virtual point of the market area serving as the sole marketplace of the market area

Entry or exit contract

Exit contract

Market Area A

Country A

Country A Country B

Market Area AB

Cross-border market

area

National market

area

VP

Final customers (A) Final customers (B)

VP

Final customers (A)

VP


The Trading Region Model

Country A Country B

Trading Region AB

End userzone A

End userzone B

Final customers (A) Final customers (B)

VP

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.

VP

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)


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


MECO-S Model: Architecture at Large

Legend and Symbols

Hub to Hub capacity product and potentially market coupling

Virtual point.VP

Country E Country F

Trading Region EF

End user zone E End user zone F

Country C Country D

Market Area CD

Market Area A

Country A

Market Area B

Country B

VP

VP

VP

VP


Common position of European gas industry associations on multi-system

operation 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



Questions to SG

1. Is it realistic to have one fully integrated market area in the region ?

2. In which MS of the region a fully functioning wholesale market can be established by 2014?

3. 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)?

4. Which pilot projects to start with in order to establish this closer integration?



Questions to the SG

5. Who is involved in the pilot project?

6. 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

1) IP Arnoldstein

2) Possible Trading regions in SSE ?


6. Polish Network Code - Update

EFET letter on promotion of competition in the Polish Gas market


7. Framework Guidelines on Balancing


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 proProblem

• Unbundled TSOs will be increasingly separate from the shippers trading gas. The balancing regime needs to promote shipper trading

ERGEG’s proposal in the August consultation document

• Target model: Where there is access to liquid intra-day markets, shippers take primary responsibility for balancing during the relevant balancing period and reduce the TSOs’ role as much as possible.

• Interim step: In absence of liquid short-term wholesale gas markets, TSOs can provide day-ahead profiles, and through residual balancing be responsible for balancing intra-day. TSOs may require shippers to keep inputs and offtakes in a certain range and may provide tolerances.

Changes resulting from the consultation

• Retain principles from consultation document


Revised FG: TSO information provision obligations

• TSO proProblem

• A lack of transparent and timely information availability reduces shippers’ ability to balance their portfolio efficiently

• Risks of discrimination may result from lack of transparency


• Target model: TSOs provide to each shipper, free of charge, its inputs onto the system and off-takes from the system at appropriate intervals during the balancing period, and also provide hourly the overall system balance position


• Retain requirements set out in IIA, but add a requirement on TSOs to provide forecast of offtakes volumes

• Reflects stakeholder feedback that in a daily balancing regime shippers need within-day updates of this information


Revised FG: Balancing periods

• TSO proProblem

• Differences in the definition of balancing periods may distort cross-border trade but different systems may have different physical requirements.


• Target model: A common European gas day with the possibility for within day constraints

• Interim step: Any period other than daily subject to NRA approval


• Harmonised daily balancing regime (as per CAM NC), no interim step • Option for within-day obligations, which need to be market based and not pose

undue barriers to new entry or cross-border trade • Within-day obligations are subject to NRA approval (and can be referred to

ACER for a decision)


Revised FG: TSO Procurement of balancing services

• TSO proProblem

• Non-market based procurement of balancing services in some systems reduces market liquidity and makes it difficult to set cost reflective imbalance charges


• Target model: TSOs to procure balancing services transparently in short term wholesale gas market or (subject to NRA approval) on balancing platforms

• Interim step: Exceptionally, tenders or bilateral contracts can be used. TSOs to release flexible gas where they do not need this


• TSOs to trade in short term wholesale gas market • Balancing platforms an interim step but must be established • Exceptionally, tenders or bilateral contracts can be used • TSOs to release flexible gas where they do not need this • Harmonisation of products, TSOs to rely as much as possible on short term trading


Revised FG: Imbalance charges

Problem

• Approaches to imbalance charges differ across Europe and are not always cost reflective. This may be a barrier to cross border trade, discriminatory and provide inefficient signals.


• Target model: Imbalance charge based on the cost of TSOs’ balancing actions, including an option for dual pricing of imbalance charges (i.e. where charges reflect whether the individual imbalance exacerbates or reduces the overall system imbalance)

• Interim Steps: Imbalance charges based on a cost proxy


• Better defined marginal Prices• Retain interim steps (imbalance charges based on a cost proxy) • Removal of references to dual prices


Revised FG: Cross-border cooperation

• TSO proProblem

• European gas market is currently highly fragmented – how can we ensure efficient cross-border flows?


• Target model:• Cross-border netting (individual network users to net their imbalances

between neighbouring markets through virtual bilateral trades)• TSO-led cross border balancing• Merge balancing zones where this is technically feasible and economically

reasonable• TSOs to implement OBAs


• Added a role for ACER in providing an opinion on market integration proposals• Added option for joint TSO balancing platforms where this interim step applies• Reflected that “gas target model” discussions also include market coupling



Changes resulting from the consultation process

Compliance • TSOs obliged to comply within 12

months of network code adoption

• NRAs can allow additional 12 months if TSOs are not implementing interim steps

• Obligation on TSOs to report yearly to ACER and NRAs on progress of and roadmap towards implementation

• NRA role to approve these reports, taking into account ACER opinion

Nomination procedures • The draft FG was silent on

nomination procedures

• Network code to set out principles to enable network users to participate effectively in the balancing regime, in line with other legal obligations

Revised FG: other issues


8. European Infrastructure Package


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


9. Infrastructure Updates


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!

10 th SG Meeting, GRI SSE Milano, 5 May 2011 GRI South South-East Region.

Documents

Transcript of 10 th SG Meeting, GRI SSE Milano, 5 May 2011 GRI South South-East Region.