Market Coupling PEG Nord / PEG SudSouth Gas Regional Initiative

11th July 2011Madrid

A need for a large French hub

• French hubs under fast development

• Market participants almost unanimous:– Need for a single French hub – In the short term:

• Need for solutions to better connect market zones by optimizing capacity utilization

• Need to increase market liquidity and access to zone Sud

CONTEXT

Current situation• PEG Sud less liquid than PEG Nord

76%

19%5%

Spot Volumes - Geographical Distribution (% ) Year 2010

Spot PEG Nord Spot PEG SudSpot PEG TIGF

0

200

400

600

800

1 000

1 200

1 400

9/2009

10/2009

11/2009

12/2009

1/2010

2/2010

3/2010

4/2010

5/2010

6/2010

7/2010

8/2010

9/2010

10/2010

11/2010

12/2010

1/2011

2/2011

GWh/

mon

th

Day-Ahead traded volume on Powernext PEG Nord - PEG Sud

PEG NORD Total Traded Volume (DA) (MWh/day)

PEG SUD Total Traded Volume (DA) (MWh/day)

Spread difference vs. regulated tariff

• Regulated tariff is higher than the spread value

-1,20

-1,00

-0,80

-0,60

-0,40

-0,20

0,00

0,20

0,40

0,60

0,80

2009

-09-

24

2009

-10-

22

2009

-11-

19

2009

-12-

17

2010

-01-

19

2010

-02-

16

2010

-03-

16

2010

-04-

15

2010

-05-

14

2010

-06-

14

2010

-07-

12

2010

-08-

09

2010

-09-

07

2010

-10-

05

2010

-11-

02

2010

-11-

30

2010

-12-

30

2011

-01-

28

2011

-02-

25

Spread EOD (PEG Sud - PEG Nord) EUR/MWh North to South Regulated tariff

Different options to create a single Hub

• Full zone merging– Either via significant investments– Or via a combination of investments (including reinforcement of the

core network on North and South market areas) and contractual arrangements (such as flow commitments) A mid to long term option (2016) due to the necessary investments

• Enhanced connection of existing zones– Via market coupling between PEG Nord and PEG Sud, thanks to a pilot

project initiated by Powernext and GRTgaz

MARKET COUPLING EXPERIMENTATIONPEG NORD / PEG SUD

A market coupling project suitable for gas business

• Continuous trading of gas : main differences between gas and electricity– Gas supply is far more flexible than in electricity as it is

storable• No need for production plant call in advance as in electricity;

access to storage, LNG terminals, etc.• Daily balancing regime in France

no need for auctions: continuous trading of gas is the standard organization of the market and better adapted to its needs

Main design issues

• One single French hub as a long term objectiveIn the short term, better connection of markets and optimization of capacity utilization

Easy and flexible mechanism that can be implemented rapidly …

… that makes available to the market unsold capacities at market price …

…and keep gas flexibilities

Pilot project Market coupling PEG Nord/ PEG Sud

Need

Context and

constraints

Questions

Solution

Design a market coupling mechanism adapted to gas :- Capacity dedicated to the pilot project ?- Mechanism for allocating capacity ?- Products to be marketed ?

Capacity dedicated to the pilot project

• For this experimentation, it was decided to dedicate 10 GWh/d of day-ahead firm capacity in both directions (5% of total firm capacity)

– This capacity was unsold after the Open Subscription Period for annual capacity, it will not be made available through any other short term product (monthly, daily) other than market coupling

– The mechanism does not rely on sold unused capacity (no restriction of re-nomination rights)

Mechanism for capacity allocation

• 3 mechanisms were studied and discussed in order to allocate the available capacity:1. Through an explicit blind auction of capacities on an ad-hoc platform2. Through a blind auction of gas molecule, combined with implicit

allocation of capacities3. Through a random time non blind auction : in a defined time window,

all market participants can disclose their needs (continuous trading) which will be matched with available capacities at a random time

• The third mechanism has been chosen because it can be integrated within continuous trading, which is the standard organization for the gas market

Products to be marketed• Capacity rights or spread products?

– Trading capacity rights needs property transfer while trading spread products does not

• Spread products are:– Easier to trade and manage for participants (Trayport technology –

standard in the gas sector)– Easier to implement for GRTgaz and Powernext– More flexible (participants can valuate all their flexibility means in

spreads: storage, transport, etc.)– Identical to capacity rights on Day-Ahead products as there are no

maintenance risks

Capacities are made available by GRTgaz through spread products on the Powernext screen (launched on 25th May 2011)

• Example of an order book without spread products

Products to be marketed

Qty Bid Ask Qty Qty Bid Ask Qty

+ 750 24,050 24,200 1 000 1 000 24,250 24,600 1 0001 000 24,000 24,250 250 500 24,200 24,700 2 000

SPOT

PEG Nord PEG Sud

DA

• Example of spread products

Qty Bid Ask Qty Qty Bid Ask Qty Qty Bid Ask Qty

+ 750 24,050 24,200 1 000 1 000 0,050 0,550 750 1 000 24,250 24,600 1 0001 000 24,000 24,250 250 500 24,200 24,700 2 000

PEG Sud / PEG Nord

DA

SPOT

PEG Nord PEG Sud

Products to be marketed

Implicit need to buya 1 000 MWh gas flow from North to South

at 0,050€/MWh

Products to be marketed

• Example of spread products

Qty Bid Ask Qty Qty Bid Ask Qty Qty Bid Ask Qty

+ 750 24,050 24,200 1 000 1 000 0,050 0,550 750 1 000 24,250 24,600 1 0001 000 24,000 24,250 250 500 24,200 24,700 2 000

PEG Sud / PEG Nord

DA

SPOT

PEG Nord PEG Sud

Implicit need to sella 750 MWh gas flow from North to South

at 0,550€/MWh

Products to be marketed• Example of spread products

– Each participant can valuate its capacity or flexibility mean to flow gas between North and South zones

– Spread products can increase liquidity on underlying markets

Qty Bid Ask Qty Qty Bid Ask Qty Qty Bid Ask Qty

+ 750 24,050 24,200 1 000 1 750 0,300 0,350 2 000 750 24,350 24,550 1 0001 000 24,000 24,250 250 750 0,150 0,550 750 1 000 24,250 24,600 1 0001 000 23,900 24,300 1 000 1 000 0,050 500 24,200 24,700 2 000

SPOT

PEG Nord PEG SudPEG Sud / PEG Nord

DA

Implied price generated by the combination of the sell of the spread

and the sell of the PEG Nord

Market coupling mechanism• One window during the core period of Powernext of 15 minutes when matching of GRTgaz

capacities and best orders happens– This mechanism is equivalent to an implicit auction embedded into the continuous trading platform

without implying any change in the market participants habits

Qty Bid Ask Qty Qty Bid Ask Qty Qty Bid Ask Qty

+ 750 24,050 24,150 1 000 1 500 0,250 0,350 2 000 1 000 24,350 24,500 1 0001 000 24,000 24,250 250 1 000 0,200 0,550 750 750 24,300 24,600 1 0001 000 24,000 24,350 1 000 750 0,150 500 24,200 24,700 2 000

PEG Sud / PEG Nord

DA

SPOT

PEG Nord PEG Sud

Proposal to buy a 1 500 MWh gas flow from North to South at 0,250€/MWh:

GRTgaz agrees to sell the corresponding quantity

Market coupling mechanism

• Automatic matching of GRTgaz available capacities– Corresponds to selling North to South (or South to North) gas flows at

a decreasing market price according to the order book– Allows to match offer and demand between both virtual trading points– Should facilitate price convergence (to be confirmed by the

experimentation)– Should improve the global liquidity of both market zones (to be

confirmed by the experimentation)

• A scalable and flexible mechanism– With more capacities available in the mechanism, time window could

widen or be multiplied

Conclusions

• It is possible to design a market coupling mechanism, which is suitable to the specific organization of the gas market and of gas exchanges (continuous trading).

• A pilot market coupling has been successfully implemented between PEG Nord and PEG Sud on 1st July 2011: this should help enhancing liquidity, fostering price convergence and optimizing capacity utilization

• Market coupling is viewed as an interim step before merging existing market zones

BACK UP

Project planning

January February March April May June July August September2011

GRTgaz starts its interventions on Powernext spread contracts

CRE’s deliberation on market coupling project

Launch of PegSud/PegNord spread contracts on Powernext

Assessment of the coupling

mechanism and improvements