gas regulation outlook - gazprom export · 2013. 10. 15. · cmp (2013) shippers across europe •...

Gas Regulation Outlook

Alex Barnes, Head of Regulatory Affairs

European Energy Trading Summit, Barcelona, 27 September 2013

The Third Energy Package and the Gas Network Codes

Gazprom Marketing & Trading Limited 2

The Third Energy Package and the Gas Network Codes

Creating the Internal Energy Market in Gas

Principles in the Third Energy Package

Competition Level Playing Field Non-discrimination Market-mechanisms

Principles

Third Party Access (TPA)

to pipelines and

unbundling of production

and sale from

transportation

�Ensures market access

to all

Regulated Tariffs

�Ensures all market

players pay the same

tariffs

Independent National

Regulatory Agency

(NRA)

�Separates the market

from the politics

�Ensures national

Entry-Exit Systems

�Helps creation of

hubs for trading and

wholesale price setting

�Enables liquidity as

gas can enter anywhere

into the system and exit


to all

�Prevents vertically

integrated companies

from using their networks

to block competitors from

accessing their markets

�Market mechanisms

(end of first come, first

serve)

Physically

interconnecting

Europe

�Obliges TSOs to

develop a Ten Year

Network

Development Plan

(TYNDP) to connect to

other networks

�Ensures national

governments do not

discriminate between

national and other

companies

into the system and exit

anywhere - no more

contract paths

But different national rules regulating the

market are a trade barrier themselves

EU Network Codes: we are only half way


EU Network Codes: how well does the process work?

• ACER will have worked on Tariffs Framework Guideline for up to 23 months

• But the detailed drafting of the Network Code led by ENTSOG is only allowed 12 months

• After all the work, Commission has final say and can change drafting again prior to Comitology

• Comitology procedure can take a long time – and Member States can change it all yet again.

ACER defines main

principles, ENTSOG consults all Commission can


•Develops main principles FG

•17 months

ACER

•Writes draft NC

•12 months

ENTSOG

•Reviews draft NC

•5 months

ACER

•Comitology

•Unknown duration

Commission

principles,

Commission must

approve

ENTSOG consults all

the experts in the

industry

ACER can change

ENTSOG’s draft

Commission can

change ENTSOG’s

draft

The Network Codes provide the detail to market regulation and

eliminate trade barriers deriving from different national rules

CAM(2015)

Balancing(2016)

Tariffs(2017)

• CMP – Congestion Management Procedures Network Code

Harmonises rules on both sides of an Interconnection Point

ensuring unused capacity is offered to other shippers.

• CAM – Capacity Allocation mechanisms Network Code

Ensuring that rules to buy pipeline capacity are simplified,

harmonised and synchronised across Europe

• Balancing Network Code

Establishing an identical cross-border balancing market for


CMP(2013)

Establishing an identical cross-border balancing market for

shippers across Europe

• Tariffs Network Code

Ensuring that countries do not discriminate between cross-

border and domestic flows (e.g. by making one, usually cross-

border, pay for the other)

The interdependence of the Codes is key – but inconsistencies are already appearing

CAM NETWORK CODE


CAM NETWORK CODE

Capacity Allocation Mechanisms NC

Simplifies access to capacity and access to markets – but there are drawbacks

• Harmonised capacity products ensure there are no mismatches at cross border flows

– Yearly , quarterly, monthly, daily, within-day, interruptible

– But limited flexibility to book actual needs

• Synchronised capacity auctions allow shippers to buy capacity at once across multiple borders

– Harmonised Gas Day and different auctions

• Obligation to bundle all capacity

– Simplifies access to markets


– Simplifies access to markets

– Reduces flexibility in capacity to be offered

• Virtual Interconnection points

– Joins multiple interconnection points between same entry-exit zones into one virtual

interconnection point

– Practical implications where different TSOs are at the same VIP

– Issue of locational charging signals

CAM changes the way we buy capacity

• Short term booking services allow cross-border capacity profiling and minimisation of transportation

costs by booking capacity according to seasonal and market needs

• Annual products limit the ability to profile – this creates potential CMP issues for those wishing to book

longer term

• Booking behaviour will also be driven by perceptions of capacity scarcity and the pricing of capacity

(Tariffs)

No long

term


Q

Y

M

term

profiling!

CAM simplifies cross-border flows by bundling capacity

Buy exit

capacity

Germany

Buy entry

capacity

France

• Bundling of capacity lowers transaction costs for hub-to-hub trading

– Only need to buy capacity once

– Technical capacity on both sides of IP are matched following “lesser rule”

– Hub-to-hub trading becomes easier

BUT


• There may be different amounts of total capacity on each side due to different

technical features of grid and calculation methodologies

– Capacity at exit reflects flows and system design upstream of the IP

– Capacity at entry reflects flows and system design downstream of the IP

• Shippers may already have bookings of capacity at either entry or exit and do not

need bundled capacity

• Prohibition of secondary trading of unbundled capacity limits flexibility of shippers to

match capacity bookings to their needs

An example: CAM can be too rigid

Capacity bundling at Bacton

Before CAM NC:

Spare capacity was shared between pipelines

Entry

at NTS

Exit

at... Entry

at NTS

Exit

at...

After CAM NC:

Unused capacity cannot be shared by different

pipelines even if it is physically possible

�� CAM has reduced capacity

North Sea

North Sea


GBBBL

IUK

BBL

IUK

Spare capacity

Congestion

NL

BE

NL

BE

Interruptible

unbundled?

Bundling makes capacity mismatches more difficult to manage

Firm Exit Capacity

Booked Firm Exit

Capacity

Firm Entry

Capacity Bundled Capacity

Booked Firm Exit

Capacity

DE

Shipper can only

bundle this

capacityBefore CAM After CAM


• Capacity is sold on unbundled basis

• Mismatch between exit capacity from Market Zone

A and entry capacity into Market Zone B

• Shipper with exit capacity can deliver at border or

buy entry capacity (firm if available, interruptible or

mix of firm and interruptible)

• Un-booked capacity will be bundled where exit and

entry capacity can match

• Shipper with booked exit can book some available

unbundled firm entry capacity to bundle . . .

• . . .but then has to book bundled capacity he does not

need or interruptible

CMP NETWORK CODE


CMP NETWORK CODE

CMP: key points

• CMP NC part of unified EU network code, aiming to make capacity that is booked but underused

(contractual congestion) available to the market

• Applicable from 1st Oct 2013

• Applied via 4 mechanisms:

Oversubscription

and buy-back

Firm day-ahead

use-it-or-lose-it

(UIOLI)

Surrender of

contracted

capacity

Long-term UIOLI

Required by 1st Oct 2013 Optional, 1st Jul 2016 Required by 1st Oct 2013 Required by 1st Oct 2013


• Applies to all IPs between entry-exit zones in the EU, and can apply to IPs with a non-member state

• However, it is down to NRAs to determine how each state will go about implementation

Required by 1st Oct 2013 Optional, 1st Jul 2016 Required by 1st Oct 2013 Required by 1st Oct 2013

Day Ahead Use-It-Or-Lose-It

Restrictions of re-nomination rights

• Discriminates between different sources of flexibility – favours LNG and storage within a country over

pipeline gas

• Undermines movement of gas between market zones and hence weakens competition and security of

supply

• Undermines market based balancing

• A blunt instrument which harms “good” and “bad” shippers alike

• Offers capacity on a day ahead basis only.


Day Ahead Use it or Lose it is less efficient at managing congestion than

Overselling and Buyback

• Offers capacity on a day ahead basis only.

The problem with Overselling and Buy-Back being optional

FDA-UIOLI

• Germany and Austria have opted out of Overselling

& Buyback and chosen Day Ahead Use it or Lose it

• Poland is considering doing the same

• But other countries have followed CMP and are

developing Overselling & Buyback


OSBB

developing Overselling & Buyback

• By not harmonising CMP measures, BNetzA and E-

Control are making it more difficult to manage

congestion

BALANCING NETWORK CODE


BALANCING NETWORK CODE

• Daily balancing regimes are crucial for development of liquid wholesale markets and

should boost liquidity across EU gas markets

• EU Member States move towards daily balancing systems which facilitate

competitive wholesale gas trading and increase liquidity on within-day markets

• The role of TSOs in balancing will be reduced, leaving most balancing actions to the

market

• Harmonisation of balancing rules will improve cross-border trade and could lead to

Balancing Network Code: key points


• Harmonisation of balancing rules will improve cross-border trade and could lead to

merger of smaller gas markets

• Within day obligations are allowed under certain circumstances and may hamper

development of liquid wholesale markets

• Biggest adaptation costs in Eastern Europe which will need to fundamentally

restructure their balancing systems

• Value will be increasingly generated from traded wholesale markets and flexibility

(storage/ linepack/ LNG), but this also creates opportunities

• Shippers, ENTSOG and regulators had all agreed the text . . . .

• And then the EU Commission lawyers decided to redraft it. But how material are the changes?

Balancing Network Code: procedural issues


TARIFFS NETWORK CODE


TARIFFS NETWORK CODE

Key points and main issues

Framework Guidelines: key points (1/2)

Framework Guidelines Impact

Scope •Applies to all booked capacities existing and new With new rules coming into force, existing capacity holders

may be severely affected in the transition to the new tariff

structure

Capacity-

commodity split•Recovery of revenue 100% from capacity charges

Recovering all TSO costs through capacity charges means

that owning capacity but not using it becomes more

expensive (see also floating tariffs)

Duration of

regulatory period•4 years (expected)

Regulatory period does not seem to be harmonised which

leads to unsynchronised tariff corrections

Floating tariffs

•Shippers book capacity knowing that payable price may

change in future to correct for under or over-recoveries of

TSO revenues

Increases risk on long-term capacity holders


Cost allocation

methodologies

•Four methodologies. Only one per Member State,

applicable to all TSOs and points

ACER does not know how proposals differ from what is place

already, and therefore impact is unclear

Entry-exit split•50:50 entry:exit split for all connections both cross-border

and domestic

Can lead to unintended outcomes depending on nature of

network

Pricing of

products

- CAM points

(see next slides)

Average Yearly = PR

Pricing of products will drive booking behaviour

Average

Quarterly/Monthly= (P

R/365) * days in product

Average Daily ≤ PR

/365 days (can be zero)

Average Within-day ≤ PR

/8760 hours (can be zero)

Framework Guidelines: key points (2/2)

Framework Guidelines Impact

Multipliers for

capacity

No congestion IP Congested IP Multipliers will drive booking behaviour by making shorter

term products more or less expensive than longer duration

products

Seasonal factors encourage a flatter usage of pipeline

capacity throughout the year

Quarterly/Monthly 1 ≤ m ≤ 1.5 0.5 ≤ m ≤ 1

Daily/Within-day 1 ≤ m ≤ 1.5 -

Seasonal factors

(in addition to

multiplier m)

•‘s’ only applied if it improves efficient use of network and

cost-reflectivity

•No range limit, but annual mean = 0.5 < s < 1.5

•Annual mean of sm = 0.5 ≤ sm ≤ 1.5

Interruptible

capacity•Priced according to probability of interruption Specific methodology to be provided in NC


Virtual reverse

flow•Priced at marginal cost (≈0)

Treats Virtual Reverse flow differently from other

interruptible capacity

Connections with

storage•Unclear for now

Limits to price

increases

•25% cap to increase but only for first regulatory period. No

provisions to allow or forbid the return of capacity due to

price hike

25% increase is too large a limit, mitigating measures unclear

Incremental

capacity (Y/N)

•Two kinds, through an Open Season for complex projects

involving multiple TSOs and IPs; through CAM auctions for

single IP projects

•Existing capacity holders also contribute to project

Proposals need considerable development to be workable

Floating tariffs will make it difficult for shippers to commit to

long term bookings

Floating tariffs mean that existing capacity holders can be penalised

for changes beyond their control that create under-recoveries

Desired annual

revenue: €100

Over-recovery

to compensate

for previous

year

How willing will shippers be to book capacity more

than one year ahead?

• In this example expected volumes are 10, actual volumes are 9

• Long-term capacity holder is penalised

the next year because there was an

under-recovery in the previous year


Y1

Y2Under-recovery

of €10

Tariff is €10

Revenue is €90

Tariff is €12.2*

Revenue is €110

* Assumes TSO only expects to sell 9 units again

Tariff increase of 22%!

Income will stay the same, but collection of funds will

change at various points

• Income = €100

• Domestic shipper pays: €20/unit

• Cross-border shipper pays: €30/unit

Entry-exit split and domestic and cross-border split will

affect long-term existing capacity holders

New Tariffs NC changes cost recovery rules

• Income = €100

• Domestic shipper pays: €25/unit

• Cross-border shipper pays: €25unit


10 x 2

20 x 2

10 x 4

15 x 2

15 x 2

10 x 4

Entry

Exit

Domestic

exit

Entry

Exit

Domestic

exit

Incremental Capacity: a market based approach to trigger new

capacity

Shippers need guarantees:

• Certainty of access: procedure must allow shippers to book simultaneously capacity at

interconnection points and drop-off points to domestic market across entire project

• Certainty of costs: shippers must be certain of long-term costs

TSOs face problems if project very large:

• Ability to obtain finance

• Ability to socialise cost of under-recovery by small TSO

Domestic exit

2 bcma


EEZ 1 EEZ 2 EEZ 3Entry 9

bcma

Entry 10

bcma

Entry

6bcma

2 bcma

Domestic exit

3 bcma

Domestic exit

1 bcma

Domestic exit

3 bcm

Domestic exit

1 bcma

Incremental Capacity: Proposed Open Season approach for large

projects

Phase I: Identification of demand1. Shipper requests for new Capacity to TSO directly or through

TYNDP

2. Shipper announces intention to develop project as

independent TSO or even a consortium of TSOs

3. National TSOs announce intention to develop project as per

TYNDP

Phase II: Non-binding OS1. Project developer/TSO set up Open Season

2. Shippers submit Letter of Intent with volumes per IP

and domestic point

3. National TSOs announce intention to develop project

as per TYNDP

Phase IV: Final Open Season phase1. NRAs, Commission, ACER confirm regulatory treatment of

project as part of binding OS conditions

2. Project developer set up final OS, and publish terms


Phase III: Initial Project Scoping Phase1. Project developer/TSO performs initial design

studies, calculating costs and demand forecasts

2. Interested shippers and project developers

coordinate on project to minimise mismatches and

risks

3. NRAs confirm regulatory treatment of project

2. Project developer set up final OS, and publish terms

3. Shippers submit binding offers in OS

4. Capacity is allocated as follows

a. If economic test is not met, project developers should

allow shippers to up their bids

b. If economic test is met, capacity is allocated to shippers

whose offer has greatest Net Present Value (quantity

booked x time period x tariff, then discounted to take

account of the time value of money) � gives priority to

shippers who commit most to project

Project FID

FINANCIAL REGULATION


FINANCIAL REGULATION

Financial Regulation – a smorgasbord of acronyms

MiFID/MiFIR EMIR REMIT MAR/CSMAD

Licensing

Registrationscheme

Mandatory Clearing of OTC derivatives

Financial Instr. and services

OTC Derivatives(Reg Standards)

Disclosure RequirementsPower&Gas Emissions

Gas & PowerSpot/Forward/Capacity

FIs and other Commodities

Spot/Derivatives

Emissions as FIs


Collateral & Margin Requirements

Capital Reqs

Trade Reporting Requirements

Mandatory Platform Trading

Prohibition of insider dealing and market manipulation

Pre/Post Trade transparency

Market monitoring

Investor Protection

Position Limits& Reporting

Collateral Requirements

Financial rules are increasingly impacting energy commodity trading

Fin.NRAs

EMIR Mandatory

Clearing for OTC Derivatives

MAR/DInsider Trading

Market

Manipulation

Authorities

Guidelines

National

Supervision,

Enforcement, Energy Trading

ESMA

European FinancialLegislation

Antitrust

MIFIDRegulation for

Financial Instruments

CRDRegulatory Capital Reqs for Financial

Players

FTTFinancial

Transaction Tax

PRAsRules on

benchmark setting


REMITSector-specific Market

Integrity & Transparency Regime

Third EnergyPackage

Fundamental Data disclosure obligation/

Record keeping

Authorities

Guidelines

Enforcement,

Sanctioning

EnerNRAs

ACER

Energy Trading

European Energy Legislation

Antitrust

Authorities

Legislation in force Legislation and Regulation under debate/future implementation

FG/NCACER guidelines to achieve the

single Energy Market

CONCLUSIONS


CONCLUSIONS

Progress is being made – but some way to go

• Main elements of CAM and CMP are helpful . . .

– Capacity auctions

– Overselling and Buyback

• But poor design is limiting the potential gains

– Bundling

– Day Ahead Use it or Lose it

• Design of the Tariff Framework will be key


– It will drive capacity booking behaviour and influence gas flows

– Potential for major impacts on existing bookings and those made in the next 2 years

– Still not clear what are the problems which regulators want to solve . . .

– . . . And therefore not clear if the proposals are fit for purpose

• Process is cumbersome

– Market participants have input but this can be ignored at later stages in process

– Line changes at later stages in the process can undermine the coherence of the codes.

– Need for balance between harmonisation and ability to take account of local circumstances

gas regulation outlook - gazprom export · 2013. 10. 15. · cmp (2013) shippers across europe •...

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