Long-term Security of Gas Supply in a Liberalized

Market Jean-Paul PINON

Director Gas Market, CREG Co-chairman of the Gas Working Group,

CEER

UNEC Round Table – Genève 20/01/2004

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Security of supply (SoS) framework

PEAK VO LUM E

CO M M O DITYavailab ility o f g ase.g. back-up contracts

PEAK VO LUM E

CAPACITYavailab ility o f transpo rte.g. meshed distribution grid

M ICRO -L EVELdo w n stream to consum ers

PEAK VO LUM E

CO M M O DITYavailab ility o f g as

e.g. storage gas

PEAK VO LUM E

CAPACITYavailab ility o f transpo rt

e.g. interconnection, alternative routes

M ACRO -L EVELe.g . at a co untry o r EU-scale

SECURITY O F NATURAL G AS SUPPLY

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Risk Management Tools

Most countries manage their SoS combining : Network sizing based on long term

planning Storage Diversification of supplies Interruptible contracts and virtual

storage Booking of additional transportation

capacities. Fewer countries (can) rely presently on:

Utilisation of LNG terminals Excess of production capacity Purchase on the Spot Market Buy back mechanisms of firm capacity

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Non firm supply contracts : market survey in Belgium in

2001Supply contracts in 2000 (% of industrial customers) :

52% non firm21% firm27% firm and non firm

For non firm supply contracts :76% the supplier has the right to interrupt24% the customer has the right to interrupt

Why do customers choose a non firm supply contract :

62% ‘bi-fuel’ equipment this investment is in 56% of the cases not only made for hedging against the interruption risk but also for arbitrage

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Non firm supply contracts : market survey in Belgium in

2001Modal frequency of interruptions:

once per yearNotice (modal period) :

1/3rd 1 hour1/3rd 1 day1/3rd 1 week

Price reduction compared to firm supply :the price reduction required by the ‘modal’ customer is lower than 25%.

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Supply

Supply

Supply

Supply

contractual flows physical flows

areas supplied from one source

Minimizing transport costs

by swapping

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YEAR 2000YEAR 2000source : GTE, July 03

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YEAR 2005YEAR 2005source : GTE, July 03

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YEAR 2010YEAR 2010source : GTE, July 03

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Fixing security of supply ( SoS) levels in an open

market Collective level of SoS

=

sum of individual levels of SoS + corrective PSO (e.g. PSOs for PLR services)

Individual level of SoS = PSO (e.g. 1 in 20)

Individual level of SoS = negotiated

households large consumers

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Top-up

In a liberalized market there is a real risk that suppliers take a chance on weather conditions and do not book enough storage.

“Top-up” refers to public service obligations guaranteeing that enough physical storage capacity and/or gas in storage will be available.

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Top-upComplex system : monitoring both the available infrastructure and the

inventory levels throughout the year calculation of the amount of top-up storage: taking into

account the benefits of virtual storage, the legitimate trade-off between additional transport capacity and storage, etc

who is in charge of top-up storage: centralizing the responsibility in one supplier of last resort (TSO, storage operator or a specific body?) or imposing a level of storage to every supplier or combining both methods ;

targeting the costs: the costs incurred by the centralized body should be covered by a legal fund, preferably fed by those who are responsible for a lack of storage.

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Belgian casemarket demand for infrastructure

servicessupply portfolio

network simulations

pre-feasibility studies

draft indicative plan for gas supply in Belgium, with an investment program for the next 10 years

consultation of interested parties

proposal by the CREG

approval by the Minister

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Financing new infrastructure

World Energy Investment Outlook 2003, published by IEA: to be taken with caveats!

distinguish regulated business (network activity) from competitive activities (production)

in regulated business: fundamental difference between cost-plus tariffs and price-cap regulation

in production: no need for industry-specific incentives for investment, besides the acceptance of long term take-or-pay contracts