Bilbao, 24th June 2014

Javier FlórezChairmanIberian Gas GroupEFET

Seminar:Institutional and organizational designs of natural gas hubs in Europe

IGG

European Federation of Energy Traders

1

IGG 2

INTRODUCING EFET

IBERIAN GAS GROUP -EFET

GAS HUB DEVELOPMENT IN EUROPE

FINAL CONCLUSIONS

Agenda

IGG 3

EFET Vision

We foresee sustainable energy markets throughout Europe,

in which traders efficiently intermediate in the value chain

on the basis of clear wholesale price signals,

thereby optimising supply and demand

and enhancing security of supply,

to the overall long-term benefit of the economy and of society.

EFET: The vision of Europe’s energy traders

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EFET

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EFET

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EFET: A wide variety of EFET Member Companies ...

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... all committed to the development of energy trad ing

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INTRODUCING EFET

IBERIAN GAS GROUP - EFET

GAS HUB DEVELOPMENT IN EUROPE

FINAL CONCLUSIONS

Agenda

IGG 9

The Iberian Gas Group EFET

The European Federation of Energy Traders (EFET) launched t he Iberian GasGroup (IGG) in March 2011.

In line with EFET principles and mission, the new IGG’s main o bjective is topromote gas trading in the region and to improve liquidity an d transparencywithin the Iberian gas market.

The companies currently participating in the IGG are: ALPIQ , AXPO, BP, EDFTRADING, EDP, ENDESA, ENEL, ENERGYA-VM, E-ON, GALP, GAS NAT URALFENOSA, GDF-SUEZ, IBERDROLA, MORGAN STANLEY, RWE, SHELL, S TATOILand TOTAL .

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The Iberian Gas Group EFET

From the beginning, IGG focused on those key features of whol esale gas marketsthat are fundamental for the development of trading in the Sp anish andPortuguese markets.

To this aim, IGG decided to create 4 Working Groups to analyze t he compatibilityof the current Spanish and Portuguese gas systems with the cr eation of a virtualhub.

IGG developed the Spanish Appendix to the EFET Standard Cont ract, in line withthe other Contracts, already existing in the main european g as Hubs

• The use of the AOC Appendix will increase the liqui dity of the market because it permits all counterparties to use a stan dard document, in line with other gas markets in Europe

• The Spanish Gas Appendix is available for all users as it may be downloaded for free: http://www.efet.org

IGG is now actively participating in the Working Group creat ed by the Ministry ofIndustry for the devolpment of the Iberian Organized Gas Mark et

• The Organised Gas Market is expected to be launched by Januar y 2015

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4 Working Groups in IGG, some conclusions (1/2)

Underground storage: Promote new poducts to increase the us e of the UGS, as wellas a secondary market of capacity

LNG Terminals: Promote some measures to increase the usage o f LNG terminals,adapt the stock of limits/obligations to the present circms tances, develop storageand loading products, enhance secondary market for capacit y

Interconnections: Remove “pancaking”, promote secondary capacity market andincentivize gas transits by making interconnection costs m ore attractive

This Group decided that the main aspect to be solved is the res olution ofcongestions

The market will be based on a single market area, and not many, suppresingexisting viability regions

The market doesn’t need more infrastructures to solve conge stions in thetransportation network. For new regulated infrastructure s a cost-benefit analysisshould be developed

The final aim is to eliminate the currently existing feasibi lity process

1.Gas Market

Structure

2.Interconnections

and gas storage

infrastructures

Gas

virt

ual H

UB

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4 Working Groups in IGG, some conclusions (2/2)

In order for TSOs to ensure that the system is kept within safe operational limits,they need to be able to buy and sell gas (as last resource suppl y)

Renomination within gas day (D) is very important for shippe rs to adjust their ownbalance positions: continuosly (starting 7 hours before th e end of D-1 and finishing3 hours before the end of D), with no feasibility analysis, wi th no lead time in orderto minimize the response time

In order to increase the hub liquidity, TSO need to provide wi th-in day balanceinformation to shippers. TSO’s variable incomes could be de termined according tothe quality of the information provided

Financial settlement for imbalancing shall be levied. The i mbalance charges shallbe reflective of the costs incurred by the TSO in buying gas (o r the revenuesreceived by the TSO in selling gas), with some intermediate s teps until enough hubliquidity is achieved and the shippers have accurate inform ation of their balance

Spain complies with most of the liquidity parameters of the G as Target Model, butthey will significantly improve if Portugal is added, creat ing the Iberian Gas Market.“Market Area” seems the best final model to achieve an Iberia n Gas Market

CAM, CMP, Balancing NC should be harmonized between countri es in the region

3.Daily

operationsin the gas

system

4.MIBGAS-SGRI

Gas

virt

ual H

UB

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2. Gas Target Model“Enabling functioning wholesale markets”

Spain comply with most of the liquidity parameters,

but they will significantly improve if Portugal is added

1. HHI < 2000

2. > 3 supply sources

3. Demand ≥ 20 bcm

4. Churn rate ≥ 8

5. RSI > 110% > 95 days per year

HHI

FR ES PT

IberiaFR ES PT

2000

FR PTES

20 bcm

Demand

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33

6

47

4.000

1.900

5.200

1.600

NEW

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INTRODUCING EFET

IBERIAN GAS GROUP -EFET

GAS HUB DEVELOPMENT IN EUROPE

FINAL CONCLUSIONS

Agenda

15IGG

Virtual hub in entry-exit system-

Physical hub

Mature, liquid hub with price transparencyLess mature or less liquid hub, with growing price transparencyFuture hub

Active exchange trading

Strong price linkWeaker or expected future price link

NBP

ZEE

TTF

NCG

Gaspool

AVTP

PSV

PEG-N-

PEG-SW

AOC

NordpoolGas

PEG-S-

European Gas Hub Development

Rationale for study

Each new hub tries to reinvent services to market, incurring unnecessary costs for them and for traders

1. Develop best practice model for creating a successful virtual trading point

2. Benchmark Europe’s existing hubs and recommend improvements

3. Work with local EFET Task Forces to apply best practice model at evolving

VTPs

EFET Hub Development Group Project

We are here

SpainTurkey(Greece)Poland

Local balancing markets also required but not all are shown

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Scoring mechanism

Responsible party What should be done Scoring mechanism

NRA Establish a consultation mechanism 1 if group set up and English language

TSO Entry-exit system established ½ for Entry Exit; 1 if a single VTP

TSO Title Transfer

TSO Cashout rules

TSO Accessible to non-physical traders 1 if trade without signup to physical rules

TSO Firmness of hub 0 if not firm; ½ if firmness “managed” by TSO; 1 if BUBD; 2 if fully market-based

TSO Credit arrangements non-punitive

NRA Resolve market structural issues (defined role for historical player) ½ for release etc; 1 if market maker

NRA Role of Hub operator 1 – role defined; 2 – gov’nce addressed

NRA Agree regulatory jurisdiction if cross border 0 if cross border and no agreement; 1 if not cross border or does have agreement

Market Establish a reference price at the hub for contract settlement 1 if price always available; ½ if deemed

Market Standardised contract 1 if specialised contract – EFET or equivalent (or standard is sufficient)

Market Price Reporting Agencies at the hub 1 if several’ ½ if only one PRA

Market Commercial / Voluntary market makers

Market Brokers 1 if voice or few ; 2 if systems and many

NRA Establishment of exchange 1 if exchange appointed and hub is liquid; ½ if exchange appointed and hub illiquid

Market Index becomes reliable and used as benchmark 1 if Market parties frequently requested

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Hub development scores (2014 Q1)

0

5

10

15

20

25

NB

PT

TF

Zee

-bea

chZ

TP

Gas

pool

PE

Gs

NC

GA

ustr

ian

VT

PP

SV

GT

F (

DK

)C

ZA

OC

UD

N (

TU

)G

RH

VP

(H

U)

Pol

and

SK

RO

Mib

gas

BU

Are

a D

Major

Illiquid

Future

Other

0

1

2

3

4

5

6

7

8

9

Major

Illiquid

Future

Other

02468

101214161820

Con

sulta

tion

Ent

ry-e

xit

Titl

e T

rans

fer

Cas

hout

rul

es

Pur

e tr

ader

s

Firm

ness

Cre

dit

Rol

e fo

r hi

stor

ic

Hub

Ope

rato

r

Cro

ss-b

orde

r

Ref

eren

ce p

rice

Sta

ndar

dise

d…

PR

As

Mar

ket m

aker

s

Bro

kers

Exc

hang

e

Inde

x

NRA

TSO

Market

Measures split between in sequence / out of sequence

0

5

10

15

20

25

EFET

ICIS

Source: ICIS for Tradability Index and maturity definitionsRaw scores by trading hub

Measures completed across all hubs

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-

NBP

ZEE

TTF

NCG

Gaspool

AVTP

PSV

PEG-N-

PEG-SW

AOC

NordpoolGas

PEG-S-

Regional Hubs and pricing zones

Suggestions for emergence of regional markets

a) Build on NC BAL implementation, which implies that every MS needs to have a local balancing market.

b) Make sure that capacity rights for Entry/Exit systems give fully firm access from one VTP to the next.

c) Promote the other conditions that will allow some forward trading to take place, even if liquidity is low.

d) Help market areas to merge where that is supported by market participants and/or TSOs

Facilitate hubs and allow prices to converge according to market demand

Possible areas of price convergence ?

IGG 19

INTRODUCING EFET

IBERIAN GAS GROUP -EFET

GAS HUB DEVELOPMENT IN EUROPE

FINAL CONCLUSIONS

Agenda

IGG 20

FINAL CONCLUSIONS FOR THE IBERIAN HUB

A change of model is needed. This new model needs t o be in line with the European markets harmonization process.

IGG offers its help on the market design process� It’s necessary to create a transition or evolution in the current gas system, in

order to create market reliability: Improving Infor mation> Reliability> Increased liquidity

� Such transition can be achieved through a range of options and transitional arrangements

� All actors must be involved in this process: market participants, TSOs and Regulators

We should all strive for the shared goal of: � A unique balance zone, with no feasibility analysis� Within a single Iberian "market area“.

A fair and efficiently organized market is key for a successful process

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European Federation of Energy Traders

Tel: +31 (0)20 5207970Email: secretariat@efet.org

www.efet.org

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Annex

� annex

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Next steps

� Study is known to be incomplete – must decide what criteria to refine (e.g.

information transparency?) and how often to update

� Draw up recommendations for markets in the order of interest to market

participants

� Offer support to EFET national / regional task forces and open consultation

programmes

� Most common “next steps” for illiquid hubs�Establish a consultation process accessible in English language

� Implement Entry-Exit regimes with a (preferably) single virtual trading point

�Ensure the VTP is firm – through market based rules, with a transparent reference cashout price

�Make sure the roles of TSO, hub operator, exchange etc are clearly defined with appropriate

governance arrangements

� Continue to work on other market-opening measures in addition to hub

design

24IGG